Evaluating greening farm policies: A structural model for assessing agri-environmental subsidies

One quarter of the agricultural area in the European Union is registered in agrienvironmental programs. Despite the prevalence of such programs and increasing demands for environmental quality in the European Union, ex-post assessments of program benefits are rare. This study uses a structural econometric model to evaluate the impacts of agri-environmental payments provided through the Finnish Agri-Environmental Program, whose primary goal is to reduce nutrient pollution from agricultural land. Drawing on a representative sample of individual grain farms, the research quantifies the effects of agri-environmental payments on farmers' decisions on the use of agri-chemical inputs and on the allocation of land to grain production and set-aside (fallow) over the period 1996–2005. The effects of program payments are ascertained based on exogenous variation in payment rates across regions and over time. We find that the agri-environmental payments have reduced fertilizer inputs but that this impact has been modest. In terms of land allocation, the impact has been counterproductive in that the payments have slightly increased the grain area and reduced set-aside. To quantify the impact of agri-environmental payments on nutrient loading – the environmental outcome of interest – we then combine the predicted land allocation and fertilizer use with environmental production functions. Overall, we estimate that the payments have reduced the damage costs associated with nutrient pollution from grain farming by 11 to 12 percent.