Realigning Agricultural Support to Promote Climate-Smart Agriculture KEY MESSAGES: • From 2015 to 2017, the group of 51 countries analyzed provided approximately $570 billion annually in public sup- port for agricultural producers, according to the Organisation for Economic Co-operation and Development (OECD). • Distortionary agricultural subsidies often result in large negative impacts, worsening rather than improving climate outcomes. • Significant opportunities exist to realign public support to deliver public-good outcomes and, in particular, promote climate-smart agriculture (CSA). The special report, Global Warming of 1.50C, presented at the Public support for agriculture in most countries around the 48th session of the Intergovernmental Panel on Climate Change world has historically been focused on improving food security (IPCC), delivered sobering news. Climate impacts are occurring and making progress on other socio-economic indicators but at a faster pace than previously anticipated. Based on the current has not sufficiently focused on improving climate outcomes. Gov- rate of change, actions pledged for the Paris Agreement will not be ernment policies have achieved or made substantial progress toward sufficient even to prevent a disastrous 2⁰C increase in average global their explicit short-term goal of food security. However, a perceived temperature. The implications are especially dire for the world’s poor tradeoff exists today between food security and climate outcomes, and undernourished, as the impacts of warming are likely to be felt with traditional crop and animal husbandry ironically putting at risk the most prominently through agricultural and food security challenges. sustainability of the outcomes that these policies strive to achieve. A major Food and Agriculture Organization (FAO) report concurrently argues that these impacts are likely already being felt.1 The FAO report Agriculture is a direct victim of climate impacts but is also culpa- shows an alarming reversal in the global trend in terms of the number ble for climate change outcomes. Agriculture accounts for almost of undernourished people—rising for the third year in a row since 25 percent of global greenhouse gas (GHG) emissions. A little more 2014, reversing the steady decline seen since the early 2000s (Figure 1). than half of these emissions are caused by current crop and livestock husbandry practices. The remainder are the result of converting native forests and other natural landscapes to agricultural land. A business-as- FIGURE 1: GLOBAL POPULATION OF UNDERNOURISHED usual approach to agriculture will not meet the challenge facing the PEOPLE, 2005–17 global food system, namely to increase food production by another 15 1000 50 percent by 2050 (compared to 2010) to feed an expected popula- 950 tion of almost 10 billion people (up from the current 7 billion) on an 14 increasingly stressed and limited natural resource base, while adapting 900 to inevitable climate change and without adding to GHG emissions. 13 850 While total public support for agriculture provided by the coun- 12 800 tries included in OECD’s annual agriculture policy monitoring 750 and evaluation analysis is large, there is limited support for cli- 11 Numb r (Millions) 700 mate finance. From 2015 to 2017, as a group the 51 countries analyzed 10 Pr v l nc (%) provided an annual average of approximately $570 billion in public 650 support for agricultural producers, according to the OECD.2 These coun- 9 600 tries supply two-thirds of global agricultural output, with public support 7 05 06 07 08 09 10 11 12 13 14 15 *2 6 accounting for 28 percent of the value of agricultural production. In 01 1 20 20 20 20 20 20 20 20 20 20 20 20 comparison, of the $391 billion of global climate finance invested in Source: FAO, The State of Food Security and Nutrition in the World (Rome: FAO, 2018). Note: * = projected values 2014, only $6 billion to 8 billion was allocated for agriculture, forestry, and land use.3 AGRICULTURE GLOBAL PRACTICE NOTE — NOVEMBER 2018 How can public support help agriculture become more are the least distortionary and have less impact on farm prices and climate-smart? A number of CSA technologies are readily available, associated production decisions. These payments are typically based and much more needs to be done to develop and improve CSA. If on current or past land area under crop cultivation, extended and adopted by farmers, CSA technologies would make or number of livestock owned. a significant difference in terms of “triple-win” outcomes—higher productivity, lower levels of agriculture-sourced GHG emissions, and Approximately 51 percent of agricultural support is in the form greater resiliency. In this context, a relevant question is whether public of market price support, about 34 percent are direct payments policies, and in particular public spending, are aligned to achieve these to producers and input subsidies, and about 15 percent is outcomes. budgetary spending on public goods (Figure 2). Of the $570 billion in total support for agricultural producers (annual average Public spending can yield high returns in agriculture, a sector 2015–17), $484 billion were in the form of producer subsidies ($294 that needs urgent transformation to produce better livelihoods billion through market price supports, $126 billion as direct payments and better environmental and health outcomes. Due to limited to producers, $59 billion in input subsidies, and about $6 billion for budgets and political economy considerations, however, countries conservation measures). Only $86 billion were for public-good type often favor subsidies over investment in public goods, such as investments such as agricultural research and extension, infrastructure, investment in agricultural research and development. Yet agricultural skills development, and food safety.4 subsidies have typically yielded much lower economic returns. And, the most distortionary subsidies often result in large nega- FIGURE 2: ANNUAL AVERAGE FORMS OF PUBLIC tive consequences such as promoting excessive use of fertilizers, AGRICULTURAL SUPPORT IN 51 COUNTRIES, 2015–17 (%) over-pumping groundwater with cheap or free electricity, inefficient use of underpriced water, or monocultural production systems of targeted outputs. Production P m nts, 22.1% Current farm support takes multiple forms which may require Input Subsidi s, 10.3% public budget outlays. Farm support includes investment in much- Cons rv tion, Production needed public goods (such as research and advisory services, public R tir m nt nd so on, 1.1% infrastructure, and food safety and standards) and subsidies Public Goods, 15.2% to agricultural producers. Subsidies take different forms, as follows: • Price supports to keep domestic prices for specific outputs higher M rk t Pric Support, 51.4% than equivalent world market prices. These supports are given either directly through public spending for the public procure- Source: OECD, Agricultural Policy Monitoring and Evaluation 2018 ment of farm outputs or indirectly through import restrictions (Paris: OECD Publishing, 2018). and other market barriers that help push producer prices higher. In the case of market barriers, domestic producers receive implicit Producer subsidies increased rapidly over the past 15 years, from transfers from consumers through higher prices for agricultural $255 billion in 2000–02 to $484 billion in 2015–17 in the 10 non- outputs, with no public expenditures. OECD (a mix of developing and emerging) economies, and was driven • Transfers to producers linked to the type of inputs used or agricul- by a 16-fold increase in producer support in China. The remaining nine non-OECD countries included in the analysis also increased their sup- tural outputs produced. These subsidies include lowered interest port, from $11 billion to $24 billion. Producer subsidies often worsen rates on agricultural credit or lowered prices of specific inputs rather than improve climate outcomes, leading to overuse of fertilizers, (either variable or fixed capital) such as fertilizers, pesticides, seeds, higher GHG emissions, and water pollution. In addition, subsidies are water, and electricity. Producers can also receive direct payments often captured by wealthier farmers. tied to the production of specific outputs. • Payments to farmers not tied to the outputs produced or inputs CSA requires more support for sustainable intensification. CSA involves adopting agricultural practices that can meet rising used—often referred to as decoupled payments. global food demand, mitigate agriculture’s GHG emissions, and adapt Several governments, such as the European Union member to inevitable climate change. The key to making agriculture cli- States, are shifting agricultural policy from market price supports mate-smart is increasing land-use efficiency through higher produc- toward less distorting direct payments to farmers. Market price tivity, which reduces the need for clearing more land for agricultural supports are the easiest to implement and have the lowest public production.5 These productivity gains must also be rooted in using budget outlay. However, these supports are highly distortionary as inputs such as water and chemicals more efficiently to reduce any they restrict imports (to raise domestic prices) or exports (to reduce negative environmental impacts. Actions and activities to pursue this domestic prices). In the latter case, these supports impose a tax or neg- sustainable intensification offer the greatest synergy between mitiga- ative subsidy on farmers. Direct payments linked to the inputs used or tion, production, and adaptation. Critical to achieving these outcomes types of products produced are less distorting than market price sup- is an enabling environment that provides efficiency-enhancing public port, but nevertheless encourage excess production of the targeted goods while reforming policies that distort market prices and associ- output, or excessive use of the targeted input. Decoupled payments ated input use and production decisions. 2 | AGRICULTURE GLOBAL PRACTICE NOTE — NOVEMBER 2018 In some countries, reforms to producer subsidy programs are • Prior to the 1992 CAP reforms, price supports had kept starting to take shape but much remains to be done. While spend- farm prices in the EU above world prices, encouraging ing that directly targets environmental outcomes such as conservation excess fertilizer use. Price guarantees backed by import tariffs, or restoration remains limited (currently at about 1 percent of the total large government purchases, and export subsidies to help dispose support to agriculture), an increasingly significant share of agricultural of resulting surpluses kept farm prices above international levels. subsidies is being delivered in the form of less distortionary decoupled For example, the 1987–89 EU intervention price for wheat was payments in the 28 European Union (EU) countries, and to a lesser more than 60 percent higher than the average farm price for extent in the United States (Figure 3). It is important to note that this wheat in the United States.6 As a result, the fertilizer-to-grain change in how support is delivered has not meant a decline in the price ratio was significantly lower in the EU, resulting in EU level of support, which has remained more or less the same in the past fertilizer application rates over twice the level of the United States. 15 years. In China and in the aggregate of all the remaining 21 coun- tries in the analysis, market price supports and other forms of direct • In 1992, EU reforms shifted from market price support to subsidies continue to be the dominant form of public support. direct producer payments, decoupled from crop choice and input use. Price guarantees were scaled down for crops How can agricultural subsidies be realigned to better deliver (but remain to date for some beef and veal products), and CSA outcomes? The EU’s Common Agriculture Policy (CAP) provides replaced with direct payments to farmers. For example, by the an illustrative example of an approach that leads to improved envi- late 1990s, the intervention price for wheat had been reduced ronmental outcomes. The composition of subsidies (the split between by about one-third, increasing the ratio of fertilizer-to-grain prices market price supports and direct budgetary payments) in many coun- by about 60 percent. This change increased the incentives to use tries today is similar to the composition of support that the EU had in fertilizer more efficiently and economically.7 place at the start of its reform process in the early 1990s (Figure 3), providing a baseline for comparison: FIGURE 3: AGRICULTURAL PRODUCER SUPPORT TRENDS IN 51 COUNTRIES, 1995–2017 3 : Produc r Support Tr nds in th Unit d St t s 3b: Produc r Support Tr nds in th EU-28 60 US$ Billions 140 50 120 40 100 30 80 60 20 40 10 20 0 0 19 5 19 6 19 7 98 20 9 20 0 20 1 20 2 20 3 04 20 5 20 6 20 7 20 8 20 9 20 0 11 20 2 20 3 20 4 20 5 20 6 19 5 19 6 19 7 19 8 20 9 00 20 1 20 2 20 3 20 4 20 5 20 6 07 20 8 20 9 20 0 20 1 20 2 13 20 4 20 5 20 6 17 17 9 9 9 9 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 1 19 19 20 20 19 20 20 20 3c: Produc r Support Tr nds in Chin 3d: Produc r Support Tr nds in th R m inin 200 21 Countri s 250 200 150 150 100 100 50 50 00 0 19 5 19 6 19 7 19 8 20 9 00 20 1 20 2 20 3 20 4 20 5 20 6 07 20 8 20 9 20 0 20 1 20 2 13 20 4 20 5 20 6 17 19 5 19 6 19 7 98 20 9 20 0 20 1 20 2 20 3 04 20 5 20 6 20 7 20 8 20 9 20 0 11 20 2 20 3 20 4 20 5 20 6 17 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 1 9 9 9 9 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 19 20 20 20 19 19 20 20 Source: OECD, Agricultural Policy Monitoring and Evaluation 2018 CO PI PC PHNR PHR PM PN (Paris: OECD Publishing, 2018). Note on figure 3: CO = support based on commodity outputs, predominantly market price support; EU-28 = EU’s 28 member states; PC = direct payments based on current area/animals, production required; PHNR = direct payments with no production required; PHR = direct payments based on non-current area/animals, production required; PI = payments based on input use; PM = miscellaneous payments; PN = payments based on non-com- modity criteria and include payments for conservation, land retirement, and so on. AGRICULTURE GLOBAL PRACTICE NOTE — NOVEMBER 2018 | 3 • These reforms were accelerated in 2003 with more decou- Other countries are adopting innovations with potentially pling and direct farm payments.8 An OECD evaluation con- significant CSA outcomes. As in the EU and United States, Brazilian cluded that the share of potentially market-distorting support policy has sought to link subsidized farm credit to forest protection (as a share of producer support) decreased from 92 percent (to avoid deforestation), while increasing the efficient use of land for in 1986–88 to 27 percent in 2015–17.9 The shift toward direct cattle grazing. In prior years, China’s subsidies have contributed to the payments decoupled from production has increased rapidly overuse of both nitrogen fertilizer and groundwater, high levels of since 2004 and now accounts for nearly half of total agricultural GHG emissions, and other environmental problems. Recently, China subsidies, as shown in Figure 3. Support was also provided for has phased out fertilizer subsidies and is now piloting a program to agricultural research to help develop improved crop varieties. shift to organic fertilizers. It has also scaled up programs to improve water-use efficiency and soil quality, and has a large conservation • In addition, two other important regulations were adopted program for converting steep-sloped and degraded land back to its that helped to reduce the negative impacts associated with natural ecosystem. Recognizing the damage done by imbalanced and agricultural input use. The 1991 Nitrates Directive was intro- overuse of nitrogen fertilizers, recently India promoted coating urea duced to reduce nitrate pollution of ground and surface water. fertilizers with neem oil to slow the release of nitrogen. This process The 2006 Groundwater Directive also set limits on nitrate concen- increases fertilizer efficiency by making nitrogen available to the crop trations in groundwater. when needed. Lastly, specific efforts in Kenya have sought to increase • Reforms led to improved environmental outcomes while dairy efficiency by improving forage quality. crop yields increased. During the period of these policy reforms An important emerging lesson is that the political economy plays a (1990–2015), nitrogen fertilizer use in the EU-28 countries declined role in determining the pace and extent of the subsidy-reform process. by 20 percent, leading to a 17 percent decline in nitrous oxide For those who may lose due to the removal of subsidies, bargained emissions from agricultural soil.10 There were also significant compromise and compensation are often required for reforms to declines in the use of phosphate and potash fertilizers. In the move ahead. Maintaining the overall level of public support for agri- same period, cereal yields in the EU-28 countries increased. culture is both politically and socio-economically important. But signif- • CAP reforms have also been inclusive. A recent World Bank icant opportunity exists to realign this support for better public-good outcomes and in particular, more CSA.  study showed that CAP reaches the poorer regions in EU member states and is associated with poverty reduction and decreasing inequality at a subnational level.11 The transition toward decou- pled direct payments and rural development support has enabled Footnotes: 1  FAO (Food and Agriculture Organization of the U.N.), The State of Food Security and this favorable trend. While starting at lower levels, incomes are Nutrition in the World (Rome: FAO, 2018). growing faster in the new member states. The CAP is supporting 2 OECD (Organisation for Economic Co-operation and Development), Agricultural Pol-  convergence in agricultural performance across member states. icy Monitoring and Evaluation 2018 (Paris: OECD Publishing, 2018). The data cover all OECD members, plus 10 of the largest agricultural producers among the remaining • Even more can be done to improve CSA outcomes. For exam- 3 countries, with the notable exception of India and Indonesia.  World Bank, 2016, “Making Climate Finance Work in Agriculture,” Discussion Paper, ple, about 10 percent of direct payments to EU farmers are still http://documents.worldbank.org/curated/en/986961467721999165/pdf/ACS19080- coupled to production. Approximately 70 percent of this amount REVISED-OUO-9-Making-Climate-Finance-Work-in-Agriculture-Final-Version.pdf. is used to support livestock and livestock products (mainly beef 4 OECD, Agricultural Policy Monitoring and Evaluation 2018 (Paris: OECD Publishing,  2018). and veal).12 Redirecting these funds to decoupled payments or 5  WRI (World Resources Institute), 2013, World Resources Report: Creating a narrowing the eligible crops (excluding livestock) could further Sustainable Food Future: Interim Findings, https://www.wri.org/publication/ improve environmental outcomes. In addition, strengthening creating-sustainable-food-future-interim-findings. the greening requirements for producer budgetary payments 6  S. Leetmaa, C. Arnade, and D. Kelch, 2004. “A Comparison of US and EU Agricul- tural Productivity with Implications for the EU Enlargement,” WRS-04-04, Economic and their implementation could help improve environmental Research Service, United States Department of Agriculture, Washington, DC. impacts.13 7 Leetmaa et al. 2004. 8  European Commission, 2013, “Overview of CAP Reform 2014–2020,” Agricultural The United States and EU have moved to impose environmental Policy Perspectives Brief No. 5, conditions on the receipt of farm payments. The last round of Euro- https://ec.europa.eu/agriculture/sites/agriculture/files/policy-perspectives/ policy-briefs/05_en.pdf. pean agricultural reforms made 30 percent of payments to farmers 9 OECD, Evaluation of Agricultural Policy Reforms in the European Union: The Common  conditional upon additional conservation measures. The criteria for Agricultural Policy 2014–2020 (Paris: OECD Publishing, 2017). meeting these measures are low, thus it is likely they have only had 10 Eurostat data. 11  World Bank, Thinking CAP: Supporting Agricultural Jobs and Incomes in the EU small effects beyond existing environmental cross-compliance mea- (Washington, DC: World Bank, 2017). sures.14 However, environmental conditions do hold some promise. 12 OECD 2017. Although enforcement appears to be limited in the United States, 13  European Commission, 2017, “Evaluation of the CAP Greening Measures”. European conditional payments have likely helped protect some wetlands and Commission. 14 OECD 2017. modestly reduced soil erosion. Conditional payments in the EU have 15  R. Jongeneel, K. Hart, M.-J. Zondag, and M. Bocci, 2016, “Mapping and Analysis of the helped to protect the most valuable grasslands.15 Implementation of the CAP,” EUR 2016.1365 EN, European Commission. 15  Neem oil is extracted from the fruit and seed of neem (Azadirachta indica), an evergreen tree endemic to the Indian sub-continent. INTERNET: WWW.WORLDBANK.ORG/AGRICULTURE  TWITTER: HTTP://TWITTER.COM/WBG_AGRICULTURE