Green Payments in U.S. and European Union Agricultural Policy
Released: 2005-11-22T00:00:00

What Are Green Payments?

Green payments generally are defined as payments to agricultural producers for providingenvironmental services on working farms . They are designed to encourage producers to providemore environmental services than they might otherwise provide in the absence of the payments, (1) and they are not connected toa producer's level of production.

In the United States, the term "green payments" refers to agricultural programs with primarilyenvironmental goals. Although all U.S. "green payments" programs focus on the environment, thetypes of payments range from cost-sharing for specific conservation practices to incentives forwhole-farm management of environmental resources and rewards for "good actors" for pastenvironmental stewardship. This discussion will review U.S. green payments within the context ofmodern U.S. agri-environmental policy, which is evolving from programs focusing primarily on landretirement to programs encouraging sound environmental management on working farms.

The European Union (EU) views green payments more broadly than does the United States,using them to achieve socioeconomic and rural development goals as well as environmental goals.The EU makes agri-environmental (green) payments to farmers within the framework of its ruraldevelopment policy, which encompasses not only environmental activities but also investments tomodernize farms, programs to help young farmers get established or promote early retirement,assistance with processing and marketing farm products, and programs to promote the non-farm ruraleconomy such as agri-tourism or preservation of cultural heritage. This discussion of EU greenpayments will focus primarily on agri-environmental measures that compensate farmers who takemeasures to enhance the environmental benefits from farming, but not other aspects of the EU's ruraldevelopment policy.

The following review of green payments and agri-environmental policy in the United Statesand the European Union shows that they have become an important aspect of agricultural policy(although green payments are only one tool of agri-environmental programs). (2) Forces at work in the globaleconomy could tend to increase the role of green payments as a component of agricultural support. For example, in multilateral agricultural trade negotiations, pressures are mounting to curtail trade-and production-distorting support for domestic agriculture. (3) Green payments are thought by many to be less trade- andproduction-distorting than other forms of domestic support for agriculture. (4) In the future, U.S. producersand policymakers may focus more attention on the role of green payment programs in agriculturalpolicy as a vehicle for supporting agriculture and rural areas that would be less susceptible to cutsresulting from multilateral trade negotiations.

U.S. Agri-Environmental Policy

The United States has implemented agri-environmental policies since the 1930s, when theDust Bowl spurred Congress to enact laws providing financial, technical, and educational assistanceto farmers to encourage the adoption of soil conservation practices. All assistance is provided tovoluntary participants, as is designed to benefit individual farms. Today, the United States employstwo main types of agri-environmental policy tools: mandatory cross-compliance mechanisms forthose producers who receive federal farm program benefits and voluntary incentives. Voluntaryincentives have been dominant in U.S. agri-environmental policy, and are viewed by most agricultureinterests as being central to efforts to improve the environmental performance of producers. The fewregulatory federal laws affecting agriculture include the use of restrictions and bans on certainpesticides, but these have been fairly limited in number and are not a topic of this report. (5)

Cross-Compliance Mechanisms

In general, U.S. agri-environmental programs include few compulsory environmentalrequirements when compared to EU programs. U.S. cross-compliance programs aim to discouragefarmers from converting wetlands into farmland and from farming highly erodible land (unless theland is protected by implementing an approved conservation plan from excessive soil erosion). Aproducer must comply with these programs to receive federal commodity price and income support,to participate in federal voluntary conservation programs, and to be eligible for federal agricultureloans or loan-related guarantees and other agriculture-related federal benefits. (6) Farmers who do not complymay still farm, but are ineligible for these substantial government benefits. It is estimated that about50% of the country's 2 million farmers currently receive federal farm program benefits; those whodo not receive these benefits are not affected by cross compliance, as currently designed.

U.S. cross-compliance mechanisms, first enacted in the Food Security Act of 1985 ( P.L.99-198 ), include Highly Erodible Land Conservation (also known as "Conservation Compliance"and "Sodbuster") and Wetland Conservation (called "Swampbuster"). (7) Land is defined by the NaturalResources Conservation Service as "highly erodible" when it may erode at (or at more than) eighttimes the "soil loss tolerance level" (this is the rate at which soil can erode without losing itsproductivity over time). Much of this highly erodible land is located in the Great Plains states.

Conservation Compliance. Under this program,farmers producing agricultural commodities on highly erodible land that was cropped from 1981 to1985 must implement an approved conservation plan. The plan must provide for a 75% reductionin erosion as compared to the land's previous erosion rates. Almost all affected producers arecurrently considered to be in compliance.

Sodbuster. Under this program, producers whoplow erosion-prone grasslands (that were not cropped from 1981 to 1985) must implement aconservation plan that holds erosion to no more than the soil loss tolerance level.

Swampbuster. Under this program, producersconverting a wetland area to cropland may lose eligibility for several federal farm program benefits,although there are many exceptions in statute (such as wetland conversions that have little effect onwetland functions). (8)

Voluntary Agri-Environmental Programs

The majority of U.S. agri-environmental programs are voluntary in nature and are funded bymandatory spending through the Commodity Credit Corporation (CCC). They are known as either"farm bill" programs or "Title II programs" because they are authorized by the farm bill, a multi-yearact authorizing federal commodity, farm support, and agricultural conservation programs, as wellas other farm sector-related provisions, and these provisions were in Title II of the most recent farmbill. (9) U.S. voluntaryagri-environmental programs have evolved from emphasizing land retirement to encouraging theadoption of best management practices on working farmland. The following paragraphs describeselected and larger U.S. voluntary agri-environmental programs in the order they were enacted. Table 1 , below after these short descriptions, conveys some sense of the scale of each program. Foradditional basic information on these and the numerous other smaller conservation programs, see CRS Report RL32940 , Agriculture Conservation Programs: A Scorecard , by Jeffrey Zinn and[author name scrubbed], and for additional information on the history of funding for these programs, see CRS Report RS22243 , Mandatory Funding for Agriculture Conservation Programs , by Jeffrey Zinn.

Land Retirement Programs. These programsinvolve retiring land from crop production under the terms and conditions of the program contractin exchange for annual payments. They are precursors to "green payments" programs in that theyare the first modern voluntary agricultural programs to base eligibility, in part or in whole, on anability to provide environmental benefits.

Conservation Reserve Program (CRP) (1985). CRP,administered by the Farm Service Agency, is the largest private land retirement program, with anenrollment ceiling of 39.2 million acres, and the largest "farm bill" agri-environmental program interms of annual spending (CBO estimates the program to cost more than $2.0 billion annuallystarting in FY2005). (10) Farmers may submit bids to "enroll" land in CRP for 10-15 years. The CRP's original aim was notonly to reduce soil erosion but also to protect soil productivity, control surplus production, andstabilize land prices (which were declining in the mid 1980s). CRP now has a broaderenvironmental focus. Since 1990, FSA has evaluated bids to enroll land in CRP based on anEnvironmental Benefits Index (EBI) score, which reflects the impact enrollment would have onvarious environmental measures (ground water and surface water quality, wind erosion, wildlifehabitat, etc). (11) CRPalso includes a number of subprograms, the most visible of which is the Conservation ReserveEnhancement Program or CREP. CREPs are developed by states who contribute additional fundsso that higher payments can be offered to retire additional land in environmentally sensitivewatersheds. (12)

Wetlands Reserve Program (WRP) (1990). WRP,administered by the Natural Resources Conservation Service (NRCS), provides long-term protectionto agricultural wetlands by requiring participants to implement approved wetland restoration andprotection plans. Most lands enrolled in WRP are flood-prone agricultural lands. Because the goalis long-term wetland restoration, most land is enrolled under a permanent easement or a 30-yeareasement. (Land may also be enrolled for ten years without any easement.) The 2002 farm bill setan enrollment limit of 2.275 million acres, with a goal of enrolling 250,000 acres in any given year.

Working Lands Programs. New programs forworking farms were created, in part, because land retirement programs did not address many of theenvironmental problems stemming from ongoing agricultural production. These programs providepayments to farmers for increased environmental services on working lands ("green payments"). Below is a description of four of the largest working lands programs, all administered by NRCS. The newest of these, the Conservation Security Program, targets environmental problems on farms,while the others aim to create habitat or preserve especially valuable farmland. These programs havebeen very popular with farmers. While they each received substantial funding increases in the 2002farm bill, requests to participate have continued to far outpace available funding, resulting in a largebacklog.

Environmental Quality Incentives Program (EQIP)(1996). EQIP has been described as the first major U.S. "green payments"program specifically designed to pay farmers for environmental benefits while allowing continuedagricultural production. (13) It is also the second-largest agri-environmental program in termsof funding ($1.017 billion in FY2006). EQIP provides cost-sharing and technical assistance forimplementing specific conservation measures (such as installing buffer strips near streams) toremedy environmental problems on farms and may also provide incentive payments, all toencourage producers to adopt certain practices, so producers can keep lands in production rather thanretiring them. NRCS distributes funds at the national level based on national environmentalpriorities, including reduction of nonpoint source pollution, reduction of air pollution and controlof soil erosion. Each state determines how to allocate the funds it receives, based on its ownenvironmental priorities. EQIP is the only large conservation program targeted to livestockproduction, as 60% of the funds each year must be spent on practices that address associatedproblems, such as waste management. (14)

Wildlife Habitat Incentives Program (WHIP) (1996). WHIP provides cost-sharing to landowners to develop or restore wildlife habitat on their agriculturaloperations. In exchange, landowners voluntarily limit incompatible activities on the land. WHIPtargets at-risk species, declining habitats, and conservation practices that are ineligible for otheragricultural conservation program funds (e.g., fish passages). Agreements range from 5 years to 15years or more in duration. Funding is distributed to states; each state ranks applications fromlandowners and sets local wildlife habitat priorities. State ranking criteria include items such asproximity to protected wildlife habitat, projected longevity of habitat created, and cost per acre.

Farm and Ranch Lands Protection Program (FRPP)(1996). FRPP helps farmers keep their land in production by providingmatching funds to state, tribal, local, or non-governmental organizations that have existing farmlandprotection programs to purchase permanent conservation easements from willing sellers. Theeasements usually restrict non-farm development and subdivisions on the land, although thelandowner retains the right to farm the land. The landowner must also implement a conservationplan to reduce soil erosion on any highly erodible land. NRCS state officials decide whichapplications to fund, and each state has an FRPP plan detailing the degree of development pressure,acreage of land to be protected, acreage of land lost, and other program indicators.

Grasslands Reserve Program (GRP) (2002). The GRPtargets grasslands containing forbs (15) or shrubs, especially areas that historically have been grasslandsand have potential to provide habitat for animal or plant populations of significant ecological value. GRP also targets grasslands threatened with conversion to other uses. GRP offers landowners achoice of easements (lasting 30 years or permanently) or rental agreements (lasting 10 to 30 years). In exchange, landowners protect and, if necessary, restore grasslands in accordance with an NRCSrestoration agreement. GRP has a total funding limit of $254 million and a total enrollment limitof 2 million acres between FY2003 and FY2007.

Conservation Security Program (CSP) (2002). CSPrewards producers who proactively conserve environmental resources across their entire agriculturaloperation, and encourages them to integrate whole-farm planning. This is in contrast to EQIP, whichhelps producers address existing environmental problems. This contrast has caused some analyststo characterize CSP as the most comprehensive U.S. "green payments" program. The eligibilitycriteria for CSP reward a producer's historic record of conservation and provide incentives to domore conservation in the future. It uses a three-tiered system that rewards increased levels ofconservation on enrolled lands with increased payments. For the lowest level -- protecting onenatural resource on part of their operation -- producers may earn up to $20,000 annually, while forthe highest level -- protecting all natural resources on all of their operation -- producers may earn upto $45,000 annually.

Although CSP was designed to be a true entitlement and widely available for many types ofagricultural operations, the Bush Administration is implementing the program with additionaleligibility criteria designed to reward only the highest levels of conservation, and only in designatedwatersheds (which change from year to year). Congress has contributed to the limitations byrepeatedly reprogramming funds that had been destined for CSP to other purposes such as disasterrelief, according to the Congressional Budget Office. The first signup was held in FY2004, and CSPsupporters see a large potential for this program if adequate funding is made available. (16)

Outlook for U.S. Financing of Agri-Environmental Measures

The U.S. voluntary agri-environmental programs noted above -- the so-called "farm bill"programs -- received dramatic increases in funding authority in the 2002 farm bill. At the time ofenactment, the Congressional Budget Office (CBO) estimated the 2002 farm bill would increaseoverall spending for conservation and environmental programs by 80%. (17) These increases have notbeen fully realized, however, because some of the increases authorized in the 2002 farm bill weresubsequently cut in annual appropriations. (18) Additional reductions can be anticipated as Congress and theAdministration respond to budget pressures, including the costs of the war in Iraq and HurricaneKatrina at home, and projected deficits. For more information on the authorized amounts for theseprograms annually since FY2003, and reductions proposed by the administration or enacted byCongress, see CRS Report RS22243 , Mandatory Funding for Agriculture Conservation Programs ,by Jeffrey Zinn.

Table 1. Measures of Selected U.S. Agri-EnvironmentPrograms

EU Agri-Environmental Policy

In the EU, the relationship between agriculture, the environment, and development of ruralareas has found expression in the concept of multifunctionality. Farmers are viewed as producingnot only food and agricultural products, but also positive environmental and other benefits(externalities). Agri-environmental policy focuses mainly, but not exclusively, on promotingpositive externalities associated with agricultural production. These include, among others,landscape, rural amenities, and cultural heritage. The premise underlying agri-environmental policyis that these externalities are public goods that are undervalued by the market and therefore requiresocial or public funding to induce farmers to produce them. More broadly, the EU maintains thatsupport of commodity production and farm incomes that also engenders these positive externalitiesis also justified. Critics of the concept argue that multifunctionality is intended to justify substantialincome support for farmers and that support for the public goods produced by agriculture should bespecifically targeted. In addition to meeting desirable social goals, EU agricultural policymakersview shifting funds from commodity support to rural development, including agri-environmentalprograms, as being more compatible with multilateral efforts in the World Trade Organization(WTO) to curb domestic support, while maintaining support that is not, or is at most minimally,trade-distorting. (19)

Since 1985, agri-environmental (green) payments as defined above have been available toEU farmers. Successive reforms of the EU's Common Agricultural Policy (CAP) in 1992, 2000, and2003 have placed increasing emphasis on green payments to meet farm policy and social objectives. In the process, agri-environmental measures have become more integrally a part of the CAP.

General EU Environmental Policy and Agriculture

Beginning in the 1970s, the EU issued a number of directives outlining measures to deal withwater pollution, nitrates, pesticides, and habitats and wild birds. Although these initiatives wereimportant to agriculture, they were taken as part of the EU's general environmental policy, outsidethe framework of the CAP.

These environmental regulations, as of January 1, 2005, became the basis of so-called"statutory environmental management requirements" with which EU farmers must comply in orderto be eligible for direct income support under the recently reformed CAP (discussed below). Thesegeneral environmental regulations cover the following.

Water Protection. A series of directives enumerateundesirable or dangerous substances and establish standards for protecting water sources and/orsafeguard water quality. (20)

Nitrates. The nitrate directive aims to reducewater pollution caused by nitrates from agricultural sources by requiring member states to implementaction programs in areas identified as being vulnerable to pollution. Among other requirements, thedirective limits the application of manure to 170 kg of nitrogen per hectare. (21)

Pesticides. A number of directives, issued from1976 to the early 1990s, aim to reduce the public health risks associated with the use of plantprotection products. These directives establish and regulate maximum residue limits (MRLs) ofpesticides for various products, including fruits and vegetables, cereals, and livestock products. (22) Other directives deal withharmonization of various national regulations concerning conditions, arrangements, and proceduresrelated to the classification, packaging and labeling of pesticides, and with registration and controlof sales of pesticides.

Habitats and Wild Birds (The Natura Network). These directives aim to protect natural habitats of wild fauna and flora and to protect wild birds intheir habitats. (23) Member states have to take the necessary measures to achieve these aims and to notify protectedareas to the European Commission. Most of the designated areas are in agricultural or wooded areascreated and maintained by farming or other human activity.

Agri-Environmental Programs in the CAP

Environmental objectives initially were omitted from the CAP, which was conceivedprimarily as a policy to support the operation of agricultural commodity markets for the benefit offarmers and consumers. However, the CAP did include an objective with respect to "structural"aspects of agriculture (e.g., farm size, farm population characteristics, farm organizations, investmentin production or marketing facilities, or regional disparities), which served subsequently as a legal(and financial) framework for agri-environmental measures.

Until 1992 (see below), agri-environmental measures were financed from a separatestructural fund, the Guidance Section of the European Agricultural Guarantee and Guidance Fund(EAGGF), while commodity support was financed from the Guarantee Section. Guidance fundsaveraged about 10% of the total funding of the CAP (around EUR 4 billion); agri-environmentalprograms were only a small portion of total Guidance spending. As structural measures, pre-1992agri-environmental programs that meet the general definition of green payments used in this memowere co-financed on a 50-50 basis by the EU and member states, although the percentage of EUfinancing could be larger for projects in poorer regions. These programs, which are nowincorporated into the EU's rural development policy, provide compensation to farmers forundertaking specific agri-environmental measures. Among the programs are the following.

The Less Favored Area Program (LFA). (24) The LFA targets farmersin mountainous areas, areas threatened with abandonment, and other areas where agriculture isdeemed necessary for the conservation or improvement of the environment, management oflandscape, promotion of tourism, or protection of coastlines. Farmers in these areas can receivepayments aimed at compensating the costs and income losses resulting from implementation ofenvironmental or conservation measures. Member states identify the zones and implement theprograms in their national territories. LFA payments were fixed at EUR 200 per hectare.

The "Efficiency" Regulations. (25) As indicated by theirdesignation, these regulations were aimed at improving the efficient development of the agriculturalsector. The regulations encouraged, for example, the creation of agricultural associations and theformation of groups of farmers to promote common use of equipment in farming operations. It alsointroduced the possibility for member states to make payments to farmers for environmentallyfriendly farming practices. Such payments were subject to rules intended to prevent them frombecoming national subsidies of a competition-distorting nature. However, financing was by memberstates only. Without EU funds, the regulations were not attractive to many member states. As aresult, only four countries (Denmark, Germany, the Netherlands, and the United Kingdom)implemented agri-environmental programs under the efficiency regulations.

Organic Farming. (26) These regulationsencourage farmers to engage in this type of production, which is deemed beneficial andenvironmentally friendly because of its emphasis on less intensive land use, exclusion of chemicalinputs, and use of conserving practices. The EU legislation establishes principles and rules to befollowed on production, processing, labeling, and imports of organically produced products. Theyprovide for inspection and control of the process at all stages in order to verify that organic methodshave been used. Incentive payments are available to farmers who participate voluntarily in organicfarming, and participants may receive annual payments for up to five years and up to a maximumof EUR 3,000 per holding per year.

Agri-Environmental Measures in the 1992 CAP Reform

The EU undertook a major reform of the CAP in 1992. The major aims of the reform wereto reduce market surpluses, make agricultural products more competitive in world markets, securefarmers' incomes, and conform the CAP to anticipated WTO rules and disciplines with respect todomestic support. The essential element of the reform was to reduce price supports to farmers, whilemaking direct payments to farmers to compensate them for loss of income due to price reductions.At the same time, the reform gave additional emphasis to agri-environmental measures.

Agri-environmental measures were dealt with in two ways in the 1992 CAP reform. First,some agri-environmental measures were included in commodity support programs; second, specificagri-environmental measures were introduced as measures "accompanying" the market reforms. Examples of the former include compulsory set-asides for large farmers, primarily to managesupplies but also to foster the rotational release and recovery of arable land; limits on stockingdensity (per holding or per hectare) in order to qualify for payments; extensification premiums forfurther reducing stocking density per hectare; and payments to fruit and vegetable producers madecontingent on the adoption of environmentally sound production practices.

The three accompanying measures in the 1992 CAP reform were:

agricultural production methods compatible with the requirements of theprotection of the environment and the maintenance of the countryside; (27)

early retirement from farming; (28) and

afforestation of agricultural land. (29)

For the agri-environmental accompanying measures, assistance, in the form of payments,would be made to farmers or herders who voluntarily participated in measures to:

reduce the use of fertilizers and chemical inputs;

introduce or continue with organic farming methods

change production methods toward or maintain extensification ofproduction;

reduce the number of animals per forage unit;

maintain the countryside and landscape and generally promotebio-diversity;

ensure the upkeep of abandoned farmland or woodlands;

set aside farmland for at least 20 years for nature reserves or parks or to protecthydrological systems; and

manage land for leisure activities and public access.

Payments were made to farmers to cover the costs and/or loss of income from adopting theagri-environmental measures. In addition, assistance included measures to improve the training of farmers with regard to farming or forestry practices compatible with environmental protection.

The two other accompanying measures, though not principally agri-environmental, also hadenvironmental aspects. The principal aim of the early retirement scheme was to encouragereplacement of elderly farmers by younger ones or to reallocate the land to non-agricultural uses. In both cases, member states were to operate the programs "in harmony with the requirements ofenvironmental protection or assure that the land is used in a manner compatible with protection orimprovement of the quality of the environment and of the countryside" (Reg. EEC 2079/92). Similarly, the EU afforestation program aimed to encourage farmers to withdraw their land fromcrop or livestock production for up to 20 years (a permanent set-aside) and dedicate it toafforestation. Implementation of the program was supposed to contribute to forms of countrysidemanagement more compatible with environmental balance and to combat the effects of greenhousegasses by absorbing carbon dioxide through an eventual improvement in forest resources (EEC2080/92).

Each member state could decide on its participation in the accompanying environmentalmeasures. Programs were funded from the Guarantee Section of the EAGGF, not the GuidanceSection, on a matching basis -- 50% of the costs of the programs were funded by the EU, 50% bymember states. (EU co-financing for such projects in poorer regions was 75%.) Farmers whovoluntarily agreed to implement agri-environmental measures for a minimum period of five yearsreceived annual payments calculated on the basis of additional costs and income forgone and thefinancial incentive needed to spur adoption. Payments were limited to EUR 450-900 perhectare. (30) Paymentswere also made to livestock producers on a per animal unit basis (EUR 210 for each sheep or cattleunit by which a herd is reduced; EUR 100 for each livestock unit of an endangered breed reared).

That these agri-environmental programs were funded from the Guarantee Section of theEAGGF rather than the Guidance Section was an important change. This is the first time thatGuarantee funds were allocated to anything other than commodity support. But whereas commoditysupport was totally financed by the Guarantee Section, the Guidance Section approach ofco-financing structural programs on a matching basis was used to allocate the Guarantee funds tothe agri-environmental (and other rural development) programs.

Agri-Environmental Programs in Agenda 2000(31)

The process of agricultural policy reform and of integrating agri-environmental measures intoagricultural policy was continued with the Agenda 2000 reforms. The primary rationale for furtherreforming the CAP was to adapt it to the enlargement of the EU by another 10 member states withinexisting budgetary and other limits. A second rationale was to prepare the EU for new WTOagricultural trade negotiations that were to have been launched in Seattle in 1999, but were launchedsubsequently at Doha, Qatar, in 2001.

Agenda 2000 established adoption of agri-environmental measures as the only compulsoryelement of EU rural development policy. Member states have to include agri-environmentalmeasures (such as those identified in the 1992 regulations) in their rural development programs totap funding available from the Guarantee Section of the EAGGF.

Agenda 2000 also established rural development (including the agri-environmentalaccompanying measures and the other environmental programs) as the second pillar of the CAP, thefirst pillar being the commodity support programs and direct income support payments to farmers. All of the rural development measures are co-financed by the EAGGF Guarantee Section in allmember states. This fund has an annual average ceiling of EUR 4.3 billion for rural development(which includes agri-environmental measures) for the budget period 2000 to 2006, about 10% ofannual Guarantee funds under Agenda 2000. The EAGGF Guarantee Section, as a rule, co-finances50% of the cost of the rural development/agri-environmental measures undertaken by member states. Poorer regions could qualify for a higher percentage of EU co-financing.

2003 CAP Reforms and Agri-Environmental Programs(32)

A midterm review of Agenda 2000 undertaken by the EU resulted in further significantreforms of the CAP in 2003. The major reform was the establishment of a single farm paymentdecoupled from production (with some exceptions for certain crops) to replace the myriadcommodity payments made to EU farmers. Receiving the single payment is contingent on farmers'compliance with environmental and other requirements (food safety, occupational safety, animalwelfare) set at the EU and national levels (cross-compliance). Cross-compliance is now compulsoryand all farmers receiving direct payments will be subject to it. Farmers will be sanctioned fornon-observance of these standards through cuts in direct payments. These policy changes took effecton January 1, 2005. Member states still benefit from co-financing of agri-environmental and otherrural development measurers out of Guarantee funds. The 2003 reform makes additional fundsavailable for rural development by reducing the Guarantee funds available for commodity price andincome support and transferring them to rural development, a process referred to as modulation.

Cross-Compliance with Agri-EnvironmentalMeasures. In order to qualify for the single farm payment, EU farmers must observe"statutory mandatory requirements" related to the environment as well as "good agricultural andenvironmental farming practices." (Cross-compliance also entails meeting standards for food safetyand animal welfare). No additional compensation is available to farmers for meeting these minimumstandards. The statutory mandatory requirements include the regulation established in the waterprotection, nitrate, pesticide, and habitats and wild birds directives discussed above. Good farmingpractices are spelled out in the regulation implementing the 2003 reforms (see Table 2 ).

Table 2. Good Agricultural and EnvironmentalPractices

Source: Annex IV of Council Directive (EC) No 1782/2003.

Farmers who do not comply with the statutory management requirements or good agriculturaland environmental practices "as a result of action or omission directly attributable to the individualfarmer" will be subject to reduction or cancellation of their single farm payment. If non-complianceresults from negligence, the farmer's payment is reduced by a minimum of 5% or, in the case ofrepeated non-compliance, 15%. If non-compliance is intentional, the percentage reduction will benot less than 20% and may go as high as the total payment for one or more calendar years. Memberstates get to keep 25% of any amounts derived from non-compliance.

Member states are responsible for carrying out spot checks to verify that farmers arecomplying with the requirements. The European Commission is responsible for ensuring that themember states are enforcing cross-compliance and providing them with technical assistance ifneeded.

Assistance to Farmers in Meeting Standards. The2003 reforms added two measures that assist farmers in meeting the new, more demanding standards.Temporary and degressive support will be payable to farmers to help them adapt to the introductionof the new standards. Assistance will be on a flat-rate basis and degressive for a maximum periodof five years and subject to a ceiling of EUR 10,000 per holding in any year. Support will also beavailable to help farmers with the costs of using farm advisory services to assess the performanceof their farm business against the new cross-compliance standards being introduced. Farmers mayreceive up to a maximum of 80% of the cost of such services, subject to a ceiling of EUR 1,500 perservice.

Support for Implementing Natura (2000). The2003 CAP reforms also made some changes in the Natura 2000 program (see page 7). Per hectarefunding for areas covered by the habitats and wild birds directives will be increased. Assistance canstart at EUR 500 per hectare, declining to EUR 200 per hectare over five years. Higher paymentsinitially are intended to reflect higher initial costs associated with adjustment of farming practiceswhen land is designated under the Natura 2000 program. The total area eligible for Natura 2000funding is no longer restricted to a maximum of 10% of the area of a member state.

Increased EU Co-Financing for Agri-Environment (and AnimalWelfare). EU co-financing for these measures increases to a maximum of 85% inpoorer regions and 60% in other areas. (Previous co-financing of rural development measures was75% for poorer regions and 50% for all others.)

Increased Support for LFAs. Compensatoryallowances for LFAs are increased to a maximum of EUR 250/hectare (on average at member statelevels). Previously, per hectare payments in LFAs were set at EUR 200.

Additional Financing for Rural Development Policy (Modulation)

The 2003 CAP reforms also introduced a new system for financing rural development(including agri-environmental) policy called compulsory modulation. Under compulsory modulationfunds from commodity support will be transferred to rural development support. Member states maythen use the additional funds to finance new rural development measures or to increase financing ofexisting measures. Under the system, farms receiving over EUR 5000 a year in direct payments willhave those payments reduced (i.e., modulated) by 3% in 2005, 4% in 2006, and 5% from 2007onward. The additional funds become available in 2006. When the modulation rate reaches 5%,estimates are that it will result in additional EU rural development funds (inflation-adjusted) of EUR1.2 billion per year (over the 4.3 billion previously allocated).

Currently EU agri-environmental programs account for 52% of rural development spending(from both EU and member states' financing). Within the rural development spending category,agri-environmental programs compete with rural restructuring (e.g., investment aids) and non-farmrural economy programs (e.g., agri-tourism or village renewal). Despite these competing programswithin the rural development program, spending on agri-environmental measures appears likely tocontinue as a substantial component of total rural development spending over the 2007-2013 EUbudget period ( Table 3 ). (33)

Table 3. Proposed Budget Commitments for the CAP, RuralDevelopment, and Total EU Spending

(EUR million -- 2004 prices)

Note: Rural development, which includes spending on agri-environmental measures, is a componentof total CAP spending.

Funds generated by modulation will be distributed among all member states for use in theirrural development programs financed by the EAGGF Guarantee Section. As of 2007, 20% of themodulation money generated in a member state will be allocated to that member state. Theremaining amounts will be redistributed among member states, according to their

agricultural area;

agricultural employment;

GDP per capita purchasing power.

Every member state, however, will get back at least 80% of the modulation funds generated fromits farmers.

In September 2005, the EU's Council of Ministers adopted a new Rural DevelopmentRegulation (2007/2003). Under this new legislation, rural development funding (includingagri-environmental funding) will be centralized in one single fund: The European Agriculture Fundfor Rural Development (EAFRD). The regulation establishes that a minimum of 25% of ruraldevelopment spending will focus on environmental stewardship in land management. (34)

EU Spending on Agri-Environmental Measures

It is difficult to get an estimate of EU and member states' total spending onagri-environmental programs, particularly since funding of such activities is a shared responsibilitybetween the EU and the member states. Nevertheless, an idea of how much is spent on this categoryof programs is included in the EU's notification to the WTO of domestic support for agriculture in2000-2001 (marketing year), the most recent year available. (35) The EU reports spendingby the EU and its member states of EUR 5.7 billion for "protection of the environment andpreservation of the countryside, control of soil erosion, extensification, aid for environmentallysensitive areas; support and protection of organic production by creating conditions for faircompetition; aid for forestry measures in agriculture; (and) conservation of genetic resources inagriculture." In contrast, the United States, in its WTO notification, reports spending of $2.7 billionfor various environmental programs in its 2000-2001 notification. (36)

Some Concluding Observations

This review of U.S. and EU current agri-environmental policies reveals both similarities anddifferences (see Table 4 following this section). Many of the major environmental topics dealt withby U.S. and EU policy and programs are much the same -- soil and water quality, wildlife habitat,farmland preservation and protection, and wetlands protection and restoration, but how they areaddressed is different in many significant ways. One major difference is the extent to whichcross-compliance measures are used in relation to receipt of commodity support payments. AlthoughU.S. agri-environmental policy has emphasized voluntary participation, farmers or ranchers witherodible lands or wetlands must comply with cross-compliance measures as a condition for receivingcommodity payments. In the EU, on the other hand, all farms (as of January 1, 2005) are requiredto meet certain statutory environmental management requirements and observe "good agriculturaland environmental practices" in order to receive support payments (provided as a single farmpayment). (37)

In the United States, the federal government is primarily responsible for programadministration and funding. It provides technical assistance and financial or cost-sharing assistancedeveloping and implementing conservation plans. In contrast, EU member states are primarilyresponsible for administering agri-environmental programs which are co-financed generously by theEuropean Commission. Farmers receive technical assistance to enable them to meet the compulsoryagri-environmental standards and financial aid as they implement activities to meet the standards.

In the United States, integrating agri-environmental programs with rural development policyand shifting funds from commodity to agri-environmental efforts are at issue. To date, United Statespolicy makers have not chosen to make this linkage or to transfer funds. EU policymakers seem tohave made a decision to integrate agri-environmental programs into a broad rural developmentpolicy. The EU, as part of its most recent reform of the CAP, has also made a policy decision to shiftincreasing amounts of funds from commodity to agri-environmental support. Part of the differencebetween the United States and the EU with respect to funding derives from different approaches tobudgeting for agricultural programs in the EU and the United States. While the EU operates on aseven-year fixed budget for agriculture (with inflation factors built in), the United States operateswith budgets decided in annual appropriations legislation, although programs are authorized formulti-year periods.

Further developments in agri-environmental policy in both the United States and the EU willlikely depend at least in part on outcomes from ongoing multilateral agricultural trade negotiations. If these negotiations result in further restrictions on trade-distorting domestic commodity support,farmers, ranchers, and policymakers may view increased funding for green payments as an attractivealternative for providing support to agriculture. If further restrictions are required, it seems morelikely that the United States and the EU will look at the other's policies and experiences moreclosely. If such an examination demonstrates that historic and current differences are extensive anddifficult to overcome, it may be that a broad and imprecise definition of green payments will servethe interests of diverse parties who participate in farm policy debates.

For U.S. policy, the status of these negotiations in early 2007, when crafting the next farmbill is likely to start in earnest, will be particularly important because designers of this legislation andinterest groups will likely give the status and direction of these negotiations strong consideration asthey contemplate farm bill options. If the outcome of the negotiations is uncertain while the farmbill is being debated, this uncertainty will compound the intensity of the debate, and possibly resultin the inclusion of language in legislation giving the Department greater flexibility inimplementation.

Congressional discussion of green payments may become contentious for other reasons aswell. One source of that contention may be the translation of the concept into policies and programs. Most interests involved in farm policy who have expressed an opinion support the general conceptof green payments. But as the discussions become more specific, participants may find that theyhave different views about program design, funding allocations, administrative responsibilities andsimilar questions, making it difficult to hold together coalitions of supporters. Among the mostdifficult of these questions may be deciding whether such a program should include a significantincome support component and contribute to the "bottom line" of each participant, or should it belimited to covering costs to install and maintain conservation practices. A related question may bedeciding what is to be accomplished through a green payment approach. Some may view it asmeeting international obligations, and seek a minimal program with limited impact to currentdomestic efforts, while others may view it is a major new and positive direction in farm policy, andseek to make it large and far-reaching. One aspect of discussing these options may be over whetherpayments should be based on cost-sharing for individual practices, which has a long history inagri-environmental policies, or on the level of improved environmental performance that results frominstalling practices.

Consideration of green payments may also include a debate over questions of scale. To thispoint, all conservation programs are implemented at the scale of an individual farm. Green paymentscould include additional incentives for coordinated and collective action that have much largercumulative benefits than actions on individual farms are likely to result in. Such programs could bedesigned around the magnitude of the benefits that the group provides, and grow or shrink for allmembers of the group as the participation, and therefore the benefits, change.

Differences between the United States and the EU in how green payments have been definedand translated into policy and programs may make consideration of EU agri-environmental policyas a model or source of ideas problematic. Some aspects of EU policy, e.g., compulsorycross-compliance with agri-environmental measures as a condition for receiving price and incomesupport, differ substantially from historical U.S. practice, in which cross-compliance has been farmore sparingly applied. Spending on agri-environmental programs in the United States has beenrelatively less than in the EU, both as a portion of total federal spending for agriculture and as anamount spent. Identifying sources of increased funding for agri-environmental programs, even inthe context of possible new WTO restrictions on other forms of farm support, might still be difficultgiven projected budget deficits. Even with new multilateral restrictions on farm subsidies,agri-environmental programs might compete unfavorably with the more conventional forms of farmsupport or with other WTO-compatible programs. Apart from funding considerations, a consensusfor linking agri-environment and rural development with more traditional farm program measureshas not emerged in the United States as it apparently has in the EU. So the extent to which EUagri-environmental policy could serve as a model or source of ideas for U.S. agri-environmentalpolicy remains to be seen.

Table 4. Comparison of Current U.S. and EUAgri-Environmental Policies

Source: Congressional Research Service, based on literature review including U.S. and EUpublications.