THE CAP AFTER 2020

Alan Matthews

Professor Emeritus of European Agricultural Policy

Trinity College Dublin, Ireland

alan.matthews@tcd.ie

The next CAP reform – already?

• CAP2013 is still being phased in

• 2015 first year implementation new

Basic Payment Scheme

• 2015 approval of majority of Rural

Development Programmes

• 2015 abolition of milk quotas

• 2017 abolition of sugar quotas

• 2018 latest date for redrawing of

Areas of Natural Constraints

• 2019 End-date for countries

transitioning from historic model of

direct payments

CAP built-in agenda 2015-2020

• Juncker’s mission letter to incoming Commissioner

• charged him with “reviewing the potential for further simplification in

the areas of direct payments and in particular as regards greening,

rural development, quality policy and the fruit and vegetables

scheme.”

• Other priorities specifically mentioned included renewing efforts in

the agricultural sector to contribute to energy efficiency and

emissions reductions

• Contributing to the 2016 review of the MFF by identifying ways of

further increasing the focus of the CAP on jobs, growth, investment

and competitiveness.

• Hogan’s confirmation hearing before the Parliament

• Simplification and subsidiarity strategy

• CAP mid-term review “once there is sufficient data”

CAP built-in agenda 2015-2020

• 2016 review of experience with EFA’s in first year to assess if there is a noticeable reduction in production

• 2017 evaluation of EFAs before end-March accompanied, where appropriate, by a proposal for a legislative act to increase the arable area covered by EFAs from 5% to 7%. • Hogan commitment to widen this review to cover other aspects of

simplification of direct payments

• End 2016 mid-term review of the MFF – ‘revision clause’ • Will determine, inter alia, duration of next MFF

• End 2018 first report on performance of CAP under the common monitoring and evaluation framework

• End 2017 Commission must present proposal for new MFF – will propose CAP budget for period after 2020

Outline

• Context for the CAP 2020 proposals

• Issues for the next CAP reform

• Future of direct payments

• Future for market crisis and risk management measures

• Future for greening

• A longer-term question – drawing the line between what we require

farmers to do and what we compensate them for doing

• Soils

• Climate

• Summing up - another CAP reform in 2020?

CONTEXT FOR THE CAP

AFTER 2020

The outlook for EU farm income?

Trends in in EU agricultural income per work unit, Indicator A

(2005=100) Source: Eurostat

The last reform took place during a period of

relatively favourable farm income

development – the next one might not

Future farm incomes determined by terms

of trade and productivity growth

Source: OECD-FAO Agricultural Outlook 2014-2023, 2014

Changing agricultural competitiveness EU farm competitiveness

adversely affected by

higher energy prices

compared to US

Slowing productivity growth

Source: http://capreform.eu/more-thoughts-on-the-european-innovation-partnership-for-agriculture/

Overall productivity growth is difficult

to measure, but appears to be flat in

recent years

Agricultural competitiveness very influenced by

exchange rate movements

Rising line implies stronger euro

Falling line implies weaker euro

EU farmers now largely

producing at world market

prices except for some

livestock products

… but tariffs on agrifood imports still high (2012)

Product group US

MFN applied

EU

MFN applied

Animal products 2.2 20.4

Dairy products 19.9 52.9

Fruits and vegetables 4.7 10.7

Coffee, tea 3.3 6.2

Cereals and preps. 3.1 17.1

Oilseeds, fats & oils 4.8 5,6

Sugars and confectionary 14.4 32,1

Beverages & tobacco 14.0 19.9

Other agric. products 1.1 4.3

Agrifood (simple) average 3.4 13.2

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Source: WTO World Tariff Profiles

Link to world markets means EU price volatility

will be higher in future than in the past

Structural change is ongoing and production is

increasingly concentrated

For more, see http://capreform.eu/family-farming-and-the-role-of-policy-in-the-eu/

Implications of the greying of European farmers

Source: http://capreform.eu/the-greying-of-european-farmers/

Diet and health issues becoming more important

Obesity growth rates are slowing, but remain high and with large social

disparities, OECD 2014

Market power in the food chain disputed

Source: http://capreform.eu/farmers-share-of-food-chain-value-added/

Social attitudes increasingly polarised

ISSUES FOR THE CAP

AFTER 2020

The legitimacy of direct payments

Source: DG AGRI (2010-2013 average)

Can direct payments be defended after 2020?

• Recall history – Justified (by economists) as an

adjustment mechanism, therefore transitional measure

• Introduced first, but then abandoned, by US

• Payment to farmers with very unclear rationale – no

production required, not a targeted payment

• Justified as basic income support – but look at distribution

Distribution of direct payments

Source: DG AGRI

Can direct payments be defended after 2020?

• Justified as income stabilisation – but encourages

specialisation (monoculture) and crowds out private

alternatives

• Capitalisation into land values reduces value of support to

new and expanding farmers

• Adverse effects on generational renewal

• Compensation for higher standards relative to imports –

but no clear relationship (compare to ANC and AECM

payments)

• Potential incompatibility with WTO Green Box

• Key message: The 2013 ‘settlement’ re direct payments

is hardly a stable one, needs to be re-opened

Managing risk and crises in agriculture

• Part of market measures which also includes competition in the food supply chain issues

• The current tool box • Safety net intervention for some products

• Private storage aid

• Export subsidies (in situations of market disturbance)

• Tariff policy in cereals, fruits and vegetables

• Promotion policy, market withdrawal and free distribution

• Pillar 2 risk management toolkit (voluntary)

• Funded by crisis reserve (€400m annually at 2011 prices)

• National income support under state aid policy

• Risk management – reduction, mitigation and coping • Public action crowds out private efforts, e.g. we now see the

development of risk-sharing contracts in the dairy sector

Managing risk and crises in agriculture

• Issues are to do with scale and scope of measures

• Scale • Are budgeted resources sufficient?

• Can budget flexibility be increased? Within the principle established that crisis management measures are financed from the agricultural (direct payments) budget?

• Scope • Heightened need for risk management if Pillar 1 direct payments

reduced and tariffs are lowered

• Supply management (and increasingly intervention/storage policies) not effective in globalised market (dairy vs fruit and veg)

• Risk management at EU level benefits MS very unevenly; hence ‘unusual’ decision to place the toolkit in Pillar 2

Key message: Use this period of relative calm to promote market and private action alternatives

How best to pursue greening?

• Despite areas of improvement, environmental problems due to agricultural practices will still be high on agenda in 2020

• Sustainability seen in opposition to growth and jobs agenda • “The right test of the effectiveness of greening measures is their

impacts on … long-term productivity, and thereby food security, and not short-term production” (Buckwell, 2015)

• Environmental objectives pursued through: • Regulation (Nitrates, Water Framework Directive, pesticides etc).

• Direct payments in Pillar 1 (cross-compliance and green payment)

• Voluntary AECMs in Pillar 2

• Options in future reform • Extend Pillar 1 green payment approach further (larger share of direct

payment ceiling, additional practices required, the ‘Deß’ proposal)

• Revert to Pillar 2 approach by transferring green payment into Pillar 2 for additional AECM measures

• Use the 30% (or more) budget for green payment for new environmental fund to be managed by DG ENVI

How best to pursue greening?

• Objections to Pillar 1 approach (green payment)

• Very weak green measures with very limited environmental impacts

because they need to be ‘simple, annual, generalisable’

• No link between payment made to individual farms and ecosystem

services rendered

• No encouragement to manage the land in ways that would

maximise environmental outcomes

• Poor perception by farmers (regulatory burden rather than contract

for services provided)

• Requires continued high Pillar 1 payment to ensure compliance

How best to pursue greening?

• Objections to Pillar 2 approach

• Voluntary approach (even if mandatory for MS) means low take-up

in regions with most intensive agriculture

• High transactions costs to deliver payments to farmers

• Past AECMs have been criticised for lack of environmental

effectiveness

• Dislike by MS of co-financing requirement under Pillar 2 compared

to Pillar 1

• Risk to enforcement of cross-compliance measures if Pillar 1

payments reduced

How best to pursue greening?

• Key messages

• Environmental damage to be controlled by regulation under

polluter pays principle (see next slide)

• Incorporate GAEC standards into statutory instruments

• Explore greater scope for market mechanisms to reduce compliance

costs

• Contractual payments for environmental/ecological services in

Pillar 2 under provider gets principle (see next slide)

• Move away from shallow schemes with flat rate payments to more

differentiated schemes despite higher transactions costs (results-

based approaches

• More emphasis on group schemes

• Explore use of market mechanisms to improve cost-effectiveness of

policy instruments (tradable EFAs?)

Farmers, property rights and the environment

• Polluter pays approach • Social costs of all negative externalities should be fully internalised.

Studies show that the costs imposed on society by these negative externalities, including water pollution, loss of excess nitrogen, soil erosion, pesticide use, air pollution and greenhouse gas emissions, can be substantial

• Provider gets principle • Important role for payments which compensate farmers for

providing services which society values but for which markets do not exist.

• Reference level or base line represents the demarcation between environmental requirements with compliance costs falling on the farmer and those measures that offer farmers a remuneration for environmental commitments.

Farmers, property rights and the environment

• According to Commission:

• “the reference level is represented by mandatory environmental

standards, resulting from environmental legislation or cross-

compliance requirements. Beyond this reference level, agri-

environment payments can be applied.”

• Two problems:

• In the absence of Pillar 1 payments, some cross-compliance

conditions (GAECs) would become difficult to enforce because they

have no statutory basis

• How are the SMR’s (the legal obligations) shifting over time? How

should they shift over time? Two case studies

• Avoiding further soil degradation

• Reducing greenhouse gas emissions

Managing our soils

• The main threats to soils:

• erosion, organic matter decline, contamination, salinisation,

compaction, soil biodiversity loss, sealing, landslides and flooding

• Maintaining soil organic matter (SOM) should be in the

interests of farmers themselves, but deteriorating status

suggests a case for public intervention

Source: Hedlund 2015 http://users.unimi.it/ricicla/Lezioni/convegno_18-06-15/1-Hedlund.pdf

Managing our soils

• The main threats to soils:

• erosion, organic matter decline, contamination, salinisation, compaction, soil biodiversity loss, sealing, landslides and flooding

• Maintaining soil organic matter (SOM) should be in the interests of farmers themselves, but deteriorating status suggests a case for public intervention

• Commission withdrew the Soil Framework Directive in April 2014 due to blocking minority in the Council for the previous 8 years

• Commission now reflecting on best way forward but remains committed to objective of soil protection

• Key message: Need to consider soil carbon sequestration as part of climate policy gives added urgency to greater focus on soils in next CAP reform

Climate policy and agriculture

• More stringent emissions targets to 2030 will focus more

attention on need to reduce agricultural emissions

• Supply-side versus demand-driven reductions

• Changing diets and reducing food waste

• Increasing efficiency – “sustainable intensification”

• Substituting for fossil fuel energy emissions – bioenergy

• Carbon sequestration in soils, forests and other woodlands

• Policy design to incentivise emission reductions

• CAP 2013 Pillar 2 policies extremely weak

• Incorporating LULUCF sector into the EU climate policy framework

• Applying the polluter pays/provider gets principles to agricultural

emissions

Treatment of agricultural emissions

internationally

• Voluntary incentive schemes

• United States, EU countries

• Inclusion in compliance offset schemes

• California’s mandatory cap-and-trade, offsets can amount to 8% of

the allowance, including agricultural projects in US, Canada and

Mexico

• Australia 2011 Clean Energy Bill, those liable can cover up to 5% of

their obligations with domestic agricultural and forestry credits

certified by the Carbon Farming Initiative

• Canada: included ‘cropland management’ under KP Article 3.4

• US: land use offsets were proposed in failed Waxman-Markey cap-

and-trade bill

• Voluntary offset schemes operate in various EU countries

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Treatment of agricultural emissions

internationally

• Inclusion in carbon levy/cap-and-trade scheme

• New Zealand had proposed in include agriculture in its

ETS from Jan 2015, with compliance obligations set at

processor and fertiliser supplier level

• Withdrew the proposal in 2013

• The Government indicated biological emissions from

agriculture will only incur surrender obligations if there

are technologies available to reduce these emissions

and its international competitors are taking sufficient

action on their emissions. Agricultural producers are still

required to report on their emissions.

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Implications of climate policy for the CAP

• Cost-efficient emissions reduction policy requires coverage of agricultural and land use emissions

• This is not guaranteed under current design of climate policy (ETS/non-ETS) due to very different importance in MS emissions profiles

• Also LULUCF not included in climate policy up to 2020

• New framework for LULUCF after 2020

• Include as a separate pillar

• Include as part of separate Agriculture, Forestry and Other Land Use pillar

• Include as part of the non-ETS sector

• Greater focus on sequestration services, especially soils, needed in AECM measures

• Needs advances in monitoring, reporting and verification (MRV)

• Key message: 2013 reform paid lip service to climate policy. Adjustment to climate policy can be key driver for next reform

ANOTHER CAP REFORM?

Another CAP reform in 2020?

• Don’t hold your breath!

• Extensive evidence of reform ‘fatigue’

• Focus now on growth and jobs agenda at the expense of sustainability?

• Lack of evidence on impact of CAP2013 reform when preparing next CAP proposals

• The awkward timetable given EP elections and new Commission in 2019 (Matthews, 2015)

• 2020 changes most likely to be minor tweaks

• But……….