This report provides a discussion of how well the Conservation Security Program (CSP) and the Conservation Reserve Program (CRP) comply with WTO Green Box rules. Specifically, some market watchers have questioned whether the current USDA implementation rules for CSP are consistent with paragraph 12 of Annex II of the Agriculture Agreement (AA). Also, questions have been raised about whether the allowance of harvesting hay and grazing on CRP land, as well as the proposed use of CRP land for biomass production, would be consistent with a reading of paragraph 10 of Annex II of the AA. Both CSP and the CRP are likely to remain important policy tools in the next farm bill. Yet certain aspects of both programs potentially are ambiguous or fall into "gray" zones concerning their compliance with WTO rules. This report is not a legal opinion, but describes both the CSP and CRP programs, the WTO Annex II (so-called Green Box) provisions that govern compliance, and the potential issues involved in evaluating the compliance status of the two programs. The Conservation Security Program, authorized in the 2002 farm bill ( P.L. 107-171 ), is a voluntary program that provides financial and technical assistance to promote conservation and improvement of natural resources on tribal and private working lands within selected watersheds. CSP is administered by USDA's Natural Resources Conservation Service (NRCS). Unlike the Conservation Reserve Program and some other NRCS programs, CSP provides payments for conservation on land that remains in production. NRCS implements CSP on a watershed basis in order to focus funding on high-priority areas that offer the greatest environmental impact per dollar spent. In FY2006, USDA spent $259 million supporting 19,375 new and existing CSP contracts (4,400 new CSP contracts were added in FY2006) covering 15.8 million acres (an average outlay of about $16.40 per acre). Based on a review (done with technical support from NRCS) of a producer's environmental resources and current conservation practices, each participating producer prepares a CSP contract including a stewardship plan that details the conservation activities that exist and/or are to be implemented. Contracts extend from 5 to 10 years. By statute (Section 2001 of the 2002 farm bill, P.L. 107-171 ), CSP participants qualify for one of three levels (or tiers) of participation, with each successive tier obligating the producer to meet a higher degree of resource management standards. Depending on the stewardship plan described in a CSP contract, participating producers may be eligible for four types of payments—stewardship or base payments; cost-share payments on existing practices; one-time new practice cost-share payments; and enhanced payments. These are defined as follows. This is a payment tied to the number of acres enrolled in CSP. It is calculated separately for each land use by multiplying (1) the stewardship payment rate established for the watershed (based on 2001 national rental rates by land use category), times (2) the number of acres, times (3) the tier factor, times (4) the tier reduction factor (see Table 1 ). The reduction factor was not part of the authorizing legislation, but was implemented by USDA to provide a broader distribution of limited funding toward targeted activities and conservation benefits. In addition to the reduction factor, the stewardship payment is subject to an annual cap by tier. USDA and the participating producer each share a portion of the specific costs incurred or income forgone in meeting a particular tier's contract obligations. The farm bill restricts payments for new and existing practices to not more than 75% of the practice cost (this rises to 90% for beginning farmers and ranchers). However, in practice, USDA has restricted payments to a substantially smaller share of implementation costs in an attempt to facilitate their calculation and minimize producer paperwork. For example, under FY2006 contracts, existing practice payments were calculated at a flat rate of 25% of the stewardship payment, and new practice payments were made at not more than 50% of the cost-share rate. Supplemental payments, called enhancement payments, are available for exceptional conservation effort and additional conservation practices or activities that provide increased resource benefits beyond those prescribed in the CSP contract. NRCS has stated that it seeks to base its enhancement payments on an objective measure of either adoption cost or environmental benefit; however, NRCS recognizes that it is not always possible to quantify and monetize the benefits generated by environmental activities. For FY2006, the enhancement payment was calculated with a variable payment rate for activities that were part of the benchmark inventory. The total of the stewardship, existing/new cost-share, and enhancement payments cannot exceed the following percentages of the unadjusted stewardship payment (which is based on average land rental rates): 15% for Tier I; 25% for Tier II; and 40% for Tier III. In addition to the percentage restriction, the total combined payment for a participant is subject to an annual dollar limit by tier. Since its authorization in the 2002 farm bill, $505.4 million of funding has been provided for CSP during the FY2003-FY2006 period. USDA has announced that it has no funding for new contracts in FY2007. As a result, CSP outlays in FY2007 will be limited to support for existing contracts and will likely be about the same as in FY2006. Most CSP spending is for cost-share payments. In FY2006, of the $259 million in outlays, $7.1 million was for stewardship payments and $2.6 million was for enhancement payments, with the remainder for cost-share payments. The relevant language for notifying CSP payments as an environmental program in the WTO's AA, Annex II is paragraph 12. To the extent that CSP payments are in the form of reimbursement for a cost incurred or income forgone as described in paragraph 12(b) above, they clearly comply with WTO Green Box criteria. If, however, CSP payments are made in the form of bonus or incentive payments that exceed the costs incurred or income forgone of implementing a particular conservation activity, then the "Green Box" compliance status of such payments could be called into question. Based on the way CSP payments are made, it appears that: cost-share payments fit "cleanly" into the paragraph 12(b) criteria of reimbursing for the extra costs or loss of income involved in complying with the CSP program; stewardship payments appear (at first glance) to have a "bonus or incentive" aspect in that they are simply based on participation (i.e., the number of acres enrolled and the level of participation by tier), thus making them questionable for the Green Box as environmental cost-share payments; and enhancement payments also fall into more of a gray zone in that they are described as sort of a "bonus" for exceeding contract practices, while it is unclear if they are limited in value to the often-difficult-to-measure added cost of implementing a higher level of environmental practice than otherwise called for in the contract. However, two considerations are noteworthy. First, the combined effect of the both the tier and reduction factors as applied to the stewardship payments is to reduce them to a minor share of the 2001 average rental rate used—1.25% for Tier I; 5% for Tier II; and 11.25% for Tier III. Since cost-share payments are limited to 75% of the practice cost (in actuality a much lower share is applied, as mentioned earlier), it appears unlikely that the combined value of the payments exceeds 100% of the WTO permissible cost-share value. Second, even the "bonus-like" nature of stewardship and enhancement payments could still be classified as Green Box eligible direct payments (rather than environmental payments) under the terms of paragraph 5 of Annex II, which allows for existing or new types of direct payments to be Green Box-eligible (i.e., to be exempt from amber box limits), provided they conform to criteria (b) through (e) in paragraph 6 in addition to the general criteria set out in paragraph 1, all of which are reprinted below. Since stewardship payments are linked to the number of acres enrolled in the CSP, they would appear, at first glance, to violate paragraph 6(d)—which states that payments may not be based on or related to a factor of production, such as land, currently in use. However, stewardship payments are essentially fixed at sign-up since both enrolled area and payment rate do not vary during the life of the contract—enrollment in a CSP contract is derived from production activities on previously farmed acres, and thus a base for participation is established (and fixed) at sign-up, while the payment rate is based on average 2001 land rental rates. As a result, stewardship payments could arguably be described as direct payments that fit paragraph 6(b)-(e). Various policy analysts from both the European Union and United States have argued the merits of bonus-type conservation payments, suggesting that some incentive payment should be made WTO-legal since conservation activities have bona fide public good aspects and only minimally (if at all) distort trade, and without such bonus payments participation in conservation activities may be low. The WTO's Framework Agreement of August 2004 called for Doha Round negotiations to "review and clarify" the existing Green Box criteria. However, little discussion of Green Box criteria has taken place during the current Doha Round of WTO trade negotiations, and none of the Doha Round proposals includes any such provision to permit conservation bonus-type payments. It is unlikely that the Green Box will play a major part in a final Doha Round agreement should ongoing negotiations reach a successful conclusion. The vulnerability to WTO challenge of such ambiguous bonus-type payments is probably highly correlated with the value of subsidy outlays. USDA programs in general tend to attract more attention and are subject to more international scrutiny when subsidy payments are large and arguably market-distorting.