Is the promotion of organic farming the most cost efficient way of achieving environmental goals? A Danish Case story

Summary

This paper explores the development of an agricultural specific input-output table that explicitly includes organic farming. The table is used in an Applied General Equilibrium (AGE) model of the Danish economy to analyse four different scenarios for the development of organic agriculture and their effects on selected environmental indicators. One advantage of AGE models is that they explicitly allow for substitution between inputs in production. Introducing a tax on environmentally harmful inputs, for example, will initially increase the cost of production, although the producers to a certain extent can limit the burden of such taxes by substituting away from the taxed inputs into other inputs. The extent of substitution is determined by the exogenously given elasticity of substitution.
The objective of this paper is to analyse the cost efficient ways of achieving given environmental goals and these instruments interaction with the possible role of organic farming in such environmental strategies. The first scenario explores the impacts of a consumer demand induced increase in organic farming (a market driven scenario) followed by three different policy scenarios in absence of this assumed consumer preference change.
In the first two of the policy scenarios a subsidy to agricultural land in the organic sectors is introduced to promote a movement of land into organic production with a positive environmental effect being achieved. The first of these two subsidy experiments is designed to achieve the same hectares of land being employed by organic producers as achieved in the consumer preference scenario. This does not, however, lead to the same reduction in the use of environmental harmful inputs. Therefore, in the second of these two subsidy experiments, the subsidy to organic land is determined so as to achieve the same effects on the environmental indicators. Finally, the last policy experiment introduces environmental taxes on fertilizers and pesticides generally to achieve the same effects on the environmental indicators as in the consumer preference scenario.
It is concluded that the most cost efficient way of achieving environmental protection is through polices that specifically target the “problem”, i.e. policies targeted at reducing the use of environmental harmful inputs. Policies that aim at increasing the share of organic farmland may increase the size of the organic sector and thereby reduce the overall use of environmental harmful input but does so at cost that is up to seven times higher measured by real GDP.