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Image: Natural Resources & Environment

Policy Instruments for Protecting Environmental Quality

Environmental quality is a public good. This means that it has characteristics making it unprofitable for the private sector to provide at socially optimal levels. Government can promote the "production" of environmental quality through various policy instruments, ranging from fully voluntary to regulatory:

These instruments are widely used in Federal conservation and environmental policies.

A survey of public policy tools for addressing environmental effects of agriculture
Policy tool Participation Government role Selected U.S. programs
Educational/
Technical Assistance
Voluntary Provide farmers with information and training to plan and implement practices Conservation Technical Assistance, Cooperative Extension Program
Government Labeling Standards for Private Goods Voluntary,
but standard must be met for certification
Government sets standards, which must be met for certification, typically involving voluntary "eco-labeling" guidelines Organic certification

Incentive Policies: Long-Term Contracts

Voluntary Payments for retiring land from crop production for 10 years or longer Conservation Reserve Program—General Signup
Payments for partial-field practices, e.g., grass waterways, filter strips Conservation Reserve Program—Continuous Signup
Incentive Policies: Financial Assistance Voluntary Payments to offset the cost of adopting specified best management practices. Payments may originate from an environmental credit trading program. Environmental Quality Incentives Program;
Conservation Stewardship Program
Incentive Policies: Easements Voluntary Assist States and other eligible entities to fund easements to restrict non-agricultural use of agricultural land Agricultural Conservation Easement Program
Long-term or permanent easements to restore and protect wetlands Agricultural Conservation Easement Program
Environmental Taxes Involuntary, but payment amount depends on behavior Per-unit charges for failure to meet environmental goals None at the Federal level
Compliance Mechanisms Involuntary,
after opt-in to Farm Programs
Sets standards for environmental performance and determines whether requirements are met before releasing payments Highly Erodible Land Conservation (Conservation Compliance and Sodbuster)
Wetlands Conservation (Swampbuster)
Sodsaver
Regulatory Requirements Involuntary Producers subject to regulations if voluntary measures do not achieve environmental goals Coastal Zone Management Act Reauthorization Amendments
Operations may be subject to effluent discharge permits Clean Water Act (animal feeding operations)
Use restrictions and bans on certain pesticides Federal Insecticide, Fungicide and Rodenticide Act
Farmers may not "take" a member of a listed species; Agencies must protect and restore species and their habitats Endangered Species Act
Source: Claassen et al., Agri-Environmental Policy at the Crossroads: Guideposts on a Changing Landscape, AER-794, ERS, USDA. Updated April 2014.

Economic Policy Instruments

Education is a broad category of instruments aimed at developing an information base and improving conservation practices and program delivery. Research and data development provides information on the economic, productivity, and environmental performance of production and conservation practices. Extension and technical assistance transfer this information to farmers through education materials, demonstration projects, and face-to-face meetings. In USDA, these activities are undertaken by the Agricultural Research Service (ARS), National Institute of Food and Agriculture, the Economic Research Service, the Agricultural Marketing Service, the Forest Service, and the Natural Resources Conservation Service. 

Education alone is insufficient for protecting environmental quality through conservation, principally because most environmental benefits occur off the farm. Education is more effective for improving onfarm productivity because the farmer can realize an economic gain. Education can, however, be an effective tool for improving environmental quality under certain conditions:

  • the actions that improve environmental quality also increase profitability,
  • producers have strong altruistic or stewardship motives, and/or
  • the onfarm costs of environmental impairments are shown to be sufficiently large.

For example, conservation tillage increases net returns for some producers while reducing soil erosion and improving water quality. Other practices that can increase profitability and environmental quality include nutrient management and irrigation water management. Practices that improve environmental quality without boosting profits—such as filter strips, cover crops, and enhanced wildlife habitat—would be less likely to be adopted voluntarily without financial assistance.

Education’s greatest value is as a component of an environmental improvement policy that relies on other tools such as financial incentives and direct regulation. USDA's Area Studies Project demonstrated that education influences which conservation practices a farmer adopts in order to meet the requirements of program provisions such as conservation compliance. By alerting producers to their own pollutant discharge and providing the information needed to implement abatement practices efficiently, overall pollution control can be attained at lower cost with education. USDA coordinates technical assistance with financial incentives it provides for implementing conservation practices through programs such as the Environmental Quality Incentives Program, Conservation Stewardship Program, and Conservation Reserve Program. USDA also provides technical assistance to help farmers comply with Highly Erodible Land and Wetland Conservation Compliance Provisions and environmental regulations such as the Clean Water Act.

Government labeling standards for private goods help create efficient private markets for goods produced with environmentally sound practices.  National certification standards increase the informational value associated with specialized labels (e.g., labels for organic produce or other "eco-labels").  If enough consumers are willing to pay more for products grown in an "environmentally friendly" manner, then more producers will switch to these production practices.  Participation is voluntary, but producers must meet minimum standards to use specific labels. USDA has set uniform national standards defining the term "organic" for both bulk and processed products.

Financial incentive-based policies can provide payments to farmers to encourage environmentally beneficial activities or tax farmers to discourage harmful activities. Ideally, incentives would be based on environmental outcomes. For example, financial assistance for an erosion control practice could be based on the amount that erosion is reduced. Such performance-based incentives are the most economically efficient. However, because of difficulties in measuring environmental outcomes from conservation and production practices, incentives are almost always based on specific practices. Both positive and negative incentives create an opportunity cost of engaging in environmentally harmful activities. Therefore, both can be designed to produce an identical environmental outcome, though the distribution of economic welfare between farmers and taxpayers will differ for each approach. In practice, only positive incentives have been used by Federal conservation programs to induce the voluntary adoption of conservation practices.

  • Cost-share and incentive payments reward farmers for voluntarily adopting and implementing desirable conservation practices or land uses. USDA cost-share payments are typically 50 to 75 percent of the cost of the practices and are generally used for structural practices such as terraces or vegetative buffer strips. Incentive payments are not necessarily based on costs, but are set at a level deemed necessary to get farmers to adopt a practice. Typically, incentive payments are used to encourage management practices such as nutrient management, conservation tillage, or integrated pest management. In some programs, incentive payments are used to purchase easements that reduce pressure to convert farmland to less environmentally desirable uses. Cost sharing and incentive payments for conservation measures on working lands are available to farmers through the USDA’s Environmental Quality Incentives Program (EQIP) and the Conservation Stewardship Program (CSP). The Agricultural Conservation Easement Program (ACEP) provides matching funds for the purchase of development rights to keep productive cropland and rangeland in agricultural uses. 
  • Long-term contracts or rental payments are made to farmers for voluntarily retiring land from production. USDA currently offers contracts for 10 years or more for whole-field retirements through the Conservation Reserve Program–General signup, and partial-field retirements for grass filter strips and riparian areas through the Conservation Reserve Program–Continuous signup and the Agricultural Conservation Easement Program (ACEP). Land retirement payments are generally more expensive on a per-acre basis than payments for conservation practices on working lands, but can produce large environmental benefits that are generally long-term. Land retirement may therefore be most effective when any type of crop production is generally incompatible with environmental goals.
  • Long-term or permanent easements are another tool USDA uses to achieve long-term conservation goals. USDA assists States and other eligible entities to fund easements to restrict conversion to non-agricultural use of agricultural land through the Agricultural Conservation Easement Program (ACEP). ACEP also funds long-term or permanent easements to restore or protect wetlands or native grasslands.
  • Environmental credit trading is an approach for reducing pollutant discharges that uses market forces to allocate pollution control costs effectively among different pollution sources. Traditional pollution control programs often require individual sources of pollution to meet a particular discharge limit, or to install a specific type of pollution control technology.  Because individual pollution sources are not the same, the cost each one faces in meeting similar discharge goals is often very different. In a "typical" credit trading program a regulatory agency issues an abatement "allowance" to all regulated dischargers. The total number of credits is equal to a discharge cap set to achieve an environmental quality goal. A discharger is required to have enough abatement "credits" to cover what it discharges over the course of a year. If a firm does not have enough credits to cover its discharges, it must either purchase credits from others firms, or reduce excess emissions.  By allowing the trading of credits, low-cost firms may find it to their advantage to reduce emissions below their allowances and sell the excess credits. High-cost firms will try to purchase credits from low cost firms as long as the price of a credit is less than the marginal cost of pollution control. Society benefits because pollution reduction goals are achieved at a lower total cost than if all dischargers were required to actually reduce their own discharges.

Agriculture is generally believed to be able to reduce pollution at a lower cost than most sources typically regulated by U.S. pollution control laws (factories and municipal water treatment plants, or point sources), for those pollutants common to both, such as nutrients. Farmers might be allowed to participate in a trading program in order to provide a source of "cheap" credits that point sources can purchase to meet their discharge requirements. For example, farmers might produce nitrogen credits by reducing nitrogen runoff using a comprehensive nutrient management plan. If point sources are willing to pay more for emissions credits than it costs farmers to produce them (by cutting nutrient loss in this case) then a trade can be made that allows farmers to benefit financially. Point sources also benefit because they pay less for pollution control than if they had to do it themselves. Farmers would continue receiving these payments for as long as they maintained the practices. A major challenge for agriculture participating in trading programs is the accurate measurement of pollution abatement (needed to assign credits) associated with implementing conservation practices. For a more detailed discussion of trading, see EPA’s "Water Quality Trading Assessment Handbook."

  • Mitigation banking is a market mechanism similar to emissions trading.  When a regulation restricts the conversion of sensitive wildlife habitat to other uses, development may be allowed if the developer offsets the lost ecosystem services by restoring habitat elsewhere. The demand for restoration creates an economic incentive for landowners to restore habitat and sell mitigation "credits" to developers. The number of credits produced is determined by a designated review board. Credit prices are determined by negotiation between buyer and seller. Wetland mitigation banking PDF icon (16x16), in response to Section 404 of the Clean Water Act, and conservation banking PDF icon (16x16), in response to the Endangered Species Act, are the two primary examples of this approach. Agriculture is in a position to provide restored habitat under either policy.

Compliance mechanisms require a basic level of environmental compliance as a condition of eligibility for other agriculture programs. This tool shares characteristics with both government standards for private goods/actions and economic incentives. It is similar to the former in that the government establishes a set of approved practices, except that here compliance is linked to a direct economic payment, including subsidies for federal crop insurance. Because existing programs are used for leverage, compliance mechanisms require no new budget outlay for producer payments, although considerable technical assistance is needed to develop conservation compliance plans. Enacted at a time when farm income support programs were more closely tied to production, compliance mechanisms were used to remove apparent inconsistencies between signals for more intensive production (from the income support programs) and conservation programs. Existing compliance mechanisms include the Highly Erodible Land Conservation (Sodbuster and Conservation Compliance), Wetland Conservation (Swampbuster), and Sodsaver (tied only to crop insurance and non-insured crop disaster) provisions.

Regulatory requirements lie at the other end of the policy spectrum from voluntary participation. Rather than attempting to facilitate or encourage improved environmental performance, policymakers can simply require it. Regulations can ban the use of a particular input or practice deemed a significant threat to public safety or the environment, or can require the use of a beneficial practice. The ban on the production and application of the chemical DDT (through the Federal Insecticide, Fungicide, and Rodenticide Act) is an example of the former. The Clean Water Act regulations requiring the implementation of a Comprehensive Nutrient Management Plan by concentrated animal feeding operations (CAFOs) is an example of the latter. Regulatory policies that can affect agriculture include the Coastal Zone Management Act Reauthorization Amendments (for polluted runoff), the Clean Water Act (for polluted runoff), the Federal Insecticide, Fungicide, and Rodenticide Act (for pesticide use), the Clean Air Act (for airborne particulates), and the Endangered Species Act (for wildlife habitat). 

Application of Policy Instruments to U.S Conservation Problems

Three broad groupings organize the instruments: involuntary measures that are, to varying degrees, coercive; voluntary measures providing varying amounts of financial incentive; and facilitative measures that rely primarily on information. Instruments are arrayed from left to right in the chart in order of decreasing level of direct control the instrument has on producer decisions. In other words, the more closely prescribed the producer actions, the farther left a particular instrument falls on the continuum.

The evolution of environmental concerns is echoed in the rows of the matrix, with the initial concerns about soil productivity losses from erosion occurring in the top rows, and more recent concerns (such as nitrogen leaching and manure management) appearing in the bottom rows. The approximate dates that specific policies were first applied to an environmental concern are indicated in the body of the matrix. Some of the programs listed have been phased out or combined with other programs. For example, the functions of the Wildlife Habitat Incentive Program were taken over by EQIP in 2014.

Policymakers have at their disposal policy instruments that can induce changes in agricultural practices and technologies that lead to more sustainable agro-environmental systems. No general statement can be made about which policy instruments meet program goals in the most efficient or cost-effective manner. And within each broad policy tool grouping, implementation decisions can have significant impacts on program costs and environmental impacts.

In addition, the characteristics of agriculture’s impacts on environmental resources vary widely across regions and resource bases. The choice of policy instruments depends on the nature of the resource issue or problem, the information available to the administering agency on the linkages between farming activities and the environmental resources, farm economics, and societal decisions about who should bear the costs of providing more sustainable production systems.

Matrix of Federal agricultural conservation/environmental policy instruments and problems
  Participation
  Involuntary Voluntary Facilitative
  Regulation Conservation Compliance Land Retirement Cost Sharing Incentive Payments Trading/ Banking/ Bonding* Labeling Education/ Technical Assistance
Problem: Instrument
Erosion: soil productivity   Sodbuster/
compliance (1985)
Soil Bank (1956-60)
CRP (1985)
ACP (1936-96)
EQIP (1996)
CSP (2002)
EQIP (1996)
    CTA (1936)
CEP (1914)
Erosion: sedimentation CZARA (1990) Sodbuster/
compliance (1990)
CRP (1990) ACP (1936-96)
EQIP(1996)
WQIP (1990-96)
EQIP (1996)
CSP (2002)
    CTA (1936)
CEP (1914)
Erosion: airborne dust Clean Air Act Sodbuster/
compliance (1990)
CRP (1996) ACP (1936-96) EQIP (1996) WQIP(1990-96)
EQIP (1996)
CSP (2002)
    CTA (1936)
CEP (1914)
Greenhouse gases     CRP (1996) EQIP (1996) EQIP (1996)     CTA (1936)
CEP (1914)
Wetlands CWA Section 404 (1972) Swampbuster (1985)

Water Bank (1970-95)
CRP (1988)
WRP (1990-2014)
EWRP (1993)
ACEP (2014)

    CWA (1990)   CTA (1936)
CEP (1914)
Water quality: nutrients CWA Section 402 (2003)   CRP (1996) EQIP (1996) WQIP (1990-96)
EQIP (1996)
CSP (2002)
CWA (1990) OFPA (1990) CTA (1936)
CEP (1914)
Water quality: pesticides FIFRA (1947)
CZARA (1990)
  CRP (1996) EQIP (1996) WQIP (1990-96)
EQIP (1996)
CSP (2002)
  OFPA (1990) CTA (1936)
CEP (1914)
Water quantity       ACP (1936-96)
EQIP (1996)
CSP (2002)     CTA (1936)
CEP (1914)
Wildlife habitat ESA (1973)   CRP (1996)
GRP (2002)
WHIP (1996-2014) EQIP (1996)
CSP (2002)
ESA (2003) OFPA (1990) CTA (1936)
CEP (1914)
Acronyms:
ACEP—Agricultural Conservation Easement Program, ACP—Agricultural Conservation Program, CEP—Cooperative Extension Program, CRP—Conservation Reserve Program, CSP—Conservation Stewardship Program, CTA—Conservation Technical Assistance, CWA—Clean Water Act, CZARA—Coastal Zone Act Reauthorization Amendments, EQIP—Environmental Quality Incentives Program, ESA—Endangered Species Act, EWRP—Emergency Wetland Reserve Program, FIFRA—Federal Insecticide, Fungicide, and Rodenticide Act, OFPA — Organic Food Production Act, WHIP—Wildlife Habitat Incentives Program, WQIP—Water Quality Improvement Program, WRP—Wetland Reserve Program.
*Trading relies on regulatory measures to create a market. However, agriculture’s participation is currently voluntary.

Last updated: Monday, April 28, 2014

For more information contact: Marc Ribaudo