How cost-effective are direct payments to organic farms for achieving environmental policy targets?

Summary

Since 1993, the Swiss federal agricultural policy has been providing financial support for organic farming via area payments. Like other voluntary agri-environmental measures (AEM), these payments are intended as incentives for farmers to comply with defined production standards. Such payments lead to better environmental performance, as compliance with organic production standards averts negative and provides positive external effects compared to conventional or integrated farming (CRER, 2002). For instance, organic farming is largely not dependent on external inputs. This minimises the resource use of the farming system and limits the nutrient loads in the system, which in turn leads to less overfertilisation and reduced eutrophication risks involving nitrogen and phosphorus (Haas et al., 2001). Besides effectiveness, against the background of limited public budgets, efficiency in delivering environmental impacts plays a fundamental role in the further development of direct payment schemes (Swiss Federal Council, 2009). The targeting and tailoring of policies to achieve maximum effectiveness with a given budget is essential (OECD, 2007). It is therefore necessary to compare both environmental effects and the societal costs of AEM with each other in order to provide a basis for economically sound policy design (Pearce, 2005).
Agricultural economists hold differing views on the cost-effectiveness of organic farming support payments. Von Alvensleben (1998) argues that the organic farming area support payments are not economically sound, as the policy goals could be achieved more efficiently using more flexible and targeted combinations of various AEM. The economic rationale behind this argument was introduced by Tinbergen (1956), who theorised that an efficient policy requires at least as many specific instruments as there are specific goals. However, the Tinbergen Rule may not apply fully in this case due to interactions between policies, conflicting goals and the limited determinability of different aspects of environmental performance. Furthermore, the multi-purpose character of organic agriculture could increase its cost-effectiveness due to its potentially lower transaction costs compared to targeted AEM (Dabbert et al., 2004).
Empirical papers on this question lack. Thus, this paper aims to compare the cost-effectiveness of a) direct payments to organic farms and b) AEM, in providing environmental services. This is done, using the current Swiss agricultural policy scheme as a case study.