Table of Contents

• INTRODUCTION
• CONCLUSIONS DRAWN FROM THE ULLENSVANG PAPER ON ENVIRONMENTAL NON-TRADE CONCERNS NTCs
• POLICY INSTRUMENTS USED TO MEET ENVIRONMENTAL NTCs
• ENVIRONMENTAL POLICIES IN THE CONTEXT OF THE PRESENT WTO AGREEMENT ON AGRICULTURE
• HOW SHOULD ENVIRONMENTAL POLICIES BE REFLECTED IN A FUTURE WTO AGREEMENT ON AGRICULTURE?

Annexes

1. A Resume of the EC’s Ullensvang Paper on the Environment
2. Policy Instruments Used by Some Countries to Meet Environmental NTCs

INTRODUCTION

In its paper entitled "Agriculture's contribution to environmentally and culturally related non-trade concerns", submitted to the Ullensvang conference on non-trade concerns on 2-4 July 2000, the European Commission analysed the link between farming and conservation of the environment, and advanced the need for specific targeted policies in this respect. After a resumé of the conclusions drawn from the Ullensvang paper, the present note looks at the policy instruments which are presently used in this area in a number of countries, and the relevant provisions in the Agreement on Agriculture covering environmental measures. It then raises the question of how environmental issues should be reflected in a future agreement on agriculture.

CONCLUSIONS DRAWN FROM THE ULLENSVANG PAPER ON ENVIRONMENTAL NTCs

1. The paper identified 3 issues as environmental non-trade concerns:

• Conservation of biological diversity, meaning the numbers of species and individuals of flora and fauna;
• Maintenance of farmed landscapes, including cultivated and semi-natural habitats and landscape features, such as terracing;
• Protection against disasters, whether natural or induced (or exacerbated) by human intervention, such as flooding, fire, avalanche, and severe erosion caused by wind or water

2. The paper stressed that the significance of these non-trade concerns will depend on the values placed on them by society. Whether the farming sector in a given country or region fully satisfies these concerns will depend on a number of variables (technological development, farm structures, availability of capital, land and labour, market signals, competitive environment) as well as on the messages resulting from governmental policy. Nevertheless, for all non-trade concerns, care is needed to identify legitimate objectives which may be pursued and avoid abuse of the concept. In the case of public goods, such as environmental benefits, technology and market messages are unlikely to provide the necessary targeted support to deliver the desired outcome. Consequently, there can be a need for targeted policy measures.
3. The paper concluded that in order to meet society's environmental and cultural non-trade concerns, a range of policy instruments are necessary, including the following:

• Encouragement actions, such as the provision of extension services, publicity and public campaigns (which can be led by non-governmental organisations);
• Compulsory regulation, where appropriate, for example to cover farm-related activities which should be prohibited. Regulation may be an appropriate option in order to prevent pollution with compliance costs being normally shifted to farmers;
• Voluntary programmes designed to persuade farmers to deliver public goods, such as environmental services. Farmers are normally ready to provide environmental services beyond the reference level of "good farming practices", if such services are appropriately remunerated. By creating a market in provision of public goods, farmers can bring environmental factors into their economic decisions in the same way as commercial pressures presented by the marketplace for their crops and livestock products.

4. The paper underlined that in devising policy responses to secure the provision of non-trade concerns, governments have to ensure that the clear objective of the policy is to secure the public good. This requires that policies are targeted, have clear objectives, are administered in a transparent manner, and are implemented in no more than minimally trade-distorting ways.
5. In addition, it was stressed that many environmental non-trade concerns can only be met through farming activities. Consequently, wherever society, in pursuit of legitimate environmental objectives, demands that farmers undertake efforts to deliver public goods beyond "good farming practice", farmers would respond positively, but only to the extent that their additional costs and income foregone are covered.
6. Finally, the reform process under the auspices of WTO rules should allow governments to implement present and future policies which meet legitimate environmental non-trade concerns.
7. A resume of the Ullensvang paper is included as annexed 1.

POLICY INSTRUMENTS USED TO MEET ENVIRONMENTAL NTCs

8. The importance attached to environmental policies by governments will depend to a great extent on the value placed on them by society. Such values reflect generally accepted thresholds, although history and culture can also influence them. Priorities will therefore tend to vary, and evolve from one country to another.
9. The maintenance of appreciated environmental features can also be a factor in rural development, to the extent that it can be a factor in the development of tourism, which provides an increasingly important source of revenue in rural areas in both developed and developing countries
10. Examples of such policies in a number of countries are described in annex 2.

ENVIRONMENTAL POLICIES IN THE CONTEXT OF THE PRESENT WTO AGREEMENT ON AGRICULTURE

11. The UR Agreement on Agriculture contains a definition of payments under environmental programs that are not subject to reduction commitments ("green box"). This reads as follows (Annex 2 paragraph 12):

Payments under environmental programmes

(a) Eligibility for such payments shall be determined as part of a clearly-defined government environmental or conservation programme and be dependent on the fulfilment of specific conditions under the government programme, including conditions related to production methods or inputs.

(b) The amount of payment shall be limited to the extra costs or loss of income involved in complying with the government programme.

12. However, payments covered by other provisions are not addressed. As an example, direct payments which are subject to the EC cross compliance scheme described in annex 2, which links the payment of EC direct aids under the so-called "blue box" to enforcing "good agricultural practice", are not taken up .

HOW SHOULD ENVIRONMENTAL POLICIES BE REFLECTED IN A FUTURE WTO AGREEMENT ON AGRICULTURE?

13. Society at large is increasingly aware of the need to tackle environmental problems, both at the local as well as at the global level. In order to meet these genuine non-trade concerns, countries around the world are adopting a range of policy instruments including measures affecting the agricultural sector. It is suggested therefore that environmental issues should be examined in the context of the agricultural negotiations, and in particular under discussion of non-trade concerns, with a view to reviewing the relevant existing provisions and examining what new provisions may be necessary.
14. However, in devising policy responses to secure the provision of non-trade concerns, governments have to ensure that the clear objective of the policy is to secure the public good. Consequently, the review in the context of the agricultural negotiations, should bear in mind the need to ensure that policies are targeted, have clear objectives, are administered in a transparent manner, and are implemented in no more than minimally trade-distorting ways. Such an approach would enable governments to implement policies, which meet legitimate environmental non-trade concerns.
15. It is suggested that the NTC conference in Mauritius should address these issues in some detail, identifying environmental policy measures and their place in a future agricultural agreement on agriculture.
16. The following are some suggested questions for debate:

• What is the relationship between the environment and a more liberalised trading system?
• Are the criteria for inclusion of measures in the current "green box" sufficiently broad in order to respond to society's concerns on the environment?
• What measures other than those included in the green box could be useful to address environmental concerns?
• Given the different attitudes which society around the world places on environmental concerns, what is the most appropriate approach to ensure an adequate response, acceptable to all?

Annex 1

A RESUME OF THE EC’s ULLENSVANG PAPER ON THE ENVIRONMENT

1. The paper identified the following 3 issues as environmental non-trade concerns (cultural outputs of farming, which were addressed in the paper, are not taken up in the present paper):

• Conservation of biological diversity, meaning the numbers of species and individuals of flora and fauna;
• Maintenance of farmed landscapes, including cultivated and semi-natural habitats and landscape features, such as terracing;
• Protection against disasters, whether natural or induced (or exacerbated) by human intervention, such as flooding, fire, avalanche, and severe erosion caused by wind or water

2. The significance of these non-trade concerns will depend on the values placed on them by society. Whether the farming sector in a given country or region fully satisfies these concerns will depend on a number of variables (technological development, farm structures, availability of capital, land and labour, market signals, competitive environment) as well as on the messages resulting from governmental policy. Nevertheless, for all non-trade concerns, care is needed to identify legitimate objectives which may be pursued and avoid abuse of the concept. In the case of public goods, such as environmental benefits, technology and market messages are unlikely to provide the necessary targeted support to deliver the desired outcome. Consequently, there can be a need for targeted policy measures.

THE LEGACY OF FARMING

3. Only a minority of rural landscapes in the world are not the result of agricultural activities. This is reflected in the pattern and size of fields, extent and type of grasslands, existence of landscape features, use of terracing, cropping rotations, and settlement patterns. The ecological stability of rural areas is also shaped by the farming past, which has influenced the evolution of diverse species of wild flora and fauna. This relationship between the rural environment and farming systems is common to rural areas throughout the world.
4. However, the impact on the environment of agriculture has been the largely unintended consequence of efforts by farmers to overcome challenges limiting their productive capacity. The need to control the supply of water has been pivotal in the development of agriculture. In the highlands of Asia, extensive terracing systems were developed in mountainous regions to collect and control water supply and prevent soil erosion from heavy rains. A subsidiary effect was to protect lands further downstream from flooding. In low-lying areas throughout the world, flood plains used and maintained by farmers help to deal with, and profit from, periodic flooding.
5. The need to increase nutrient input, which has more recently led to problems of pollution of water resources, was another challenge faced by farmers. Their efforts to improve soil fertility have had lasting impacts on the landscape and biological diversity. Sophisticated means of obtaining additional nutrients and energy were developed locally through pasturing systems on heaths and in woodlands, alternating the use of fields, meadows and fallow, giving rise to characteristic landscapes. In addition, farmers adopted techniques to address diverse challenges, including to reduce the risk of disease outbreak, to guard against fire, drought, wind erosion and other natural disasters, and to exploit difficult terrain. These processes have led to an increase in biological diversity of both domestic and wild species, the creation of semi-natural habitats, and today’s farmed landscapes.
6. On the down side, while technological efforts initially gave rise to the landscape so valued by society, more recent advances in technology have led to deleterious impacts. In extreme cases, soil itself has been lost to wind/water erosion due to inappropriate farming methods. Improvements in technology, availability of capital and a competitive marketplace have led to monoculture-based systems replacing mixed farms—together with the landscapes, flora and fauna, which they sustain. A particularly acute problem has been the marginalisation of certain farming systems caused by increasing efficiencies of production elsewhere. Thus production of grains or livestock products in (economically) developing countries may be less efficient than equivalent production in developed countries, despite substantial competitive advantages and proximity to local markets. Even within the economically developed countries, the continuation of farming systems in marginal areas, such as mountain or arid regions, which are integral to the conservation of the landscape and its biological diversity, may be under threat for similar reasons.

THE ENVIRONMENTAL OUTPUTS OF FARMING

7. Farming systems today continue to influence the development of the rural environment. Agriculture has both positive impacts, leading to the maintenance or enhancement of non-trade concerns, or negative effects, such as the pollution of water resources or destruction of landscape features. The main areas of interest are biological diversity, the farmed landscape and natural disasters.
8. Biological diversity: Research in northern Europe has shown that the great majority of vascular plant species occurring naturally are dependent on open farmed landscapes. If farming were to cease, scrub would quickly encroach, leading to afforestation and a loss of diversity. However, the farming systems on which plant diversity depends are typified by low-input, low-output management of livestock. Clearly, a high-input, high-output intensive system of production, which requires high levels of nutrient input use, would not conserve the biological diversity of the grazed lands. It should be noted that in terms of economic efficiency, a low-input, low-output system is not intrinsically less efficient than an intensive system, as efficiency depends on cost and profit variables, especially the levels of debt and capitalisation of the farm.
9. Management of farming systems dedicated to the conservation of biological diversity may require the farmers to undertake costly activities or forego profitable operations. In many cases, this will result in reduced production as the intensity of use of inputs, and hence the level of food and fibre outputs, is diminished. Thus, although the conservation activity is linked to production, output is at a lower level than under the farming system which would otherwise take place.
10. Farmed landscape: For a substantial part of its growth cycle, rice needs to be cultivated in slow-moving water, necessitating flat fields. In hill and mountainous regions this has inevitably led to the creation of terraced landscapes, for example in Japan. While rice can be cultivated at a lower cost elsewhere in the world, cessation of production on terraces would most likely lead to their disrepair and eventual destruction. This would impoverish the landscape as well as increase the risk of flooding to communities downstream of the terraces.
11. Mixed farm landscapes, created in order to utilise benefits to fertility of rotation and diversity of crops and livestock, are a feature of rural areas throughout the world. However, advances in technology have enabled farmers to specialise while increasing productivity—but at the expense of the landscape. In some countries, the cessation of the use of mixed farming patterns has led to impoverishment of the soil and erosion as the soil structure breaks down. In certain arid zones, farming bears a particular role to preserve the farmed landscape and prevent its loss to desert. This imposes on farmers the duty to follow specific management techniques to maintain soil in an agricultural condition and avoid soil erosion. The conservation of farmed landscapes may impose costs related to maintenance activities, or through uneconomic farming practices in places liable to abandonment.
12. Natural disasters: In a semi-natural landscape, the impact of natural disasters is likely to be greatly influenced by farming activities. The cases of rice terraces preventing floods in lower-lying regions, or farmers avoiding desertification of their land, are illustrative. Abandonment of farmed terracing for crop production has been shown to cause the loss of entire hillsides in Europe. Prevention of many other types of natural disaster is also dependent on farming methods. In dry regions the build up of scrub, can result in a substantial risk of fire. Where appropriate farming is practised, the scrub is grazed out, thus helping to avoid such a risk. Grazing can also reduce the risk of avalanche in mountainous regions, which is minimised on grazed or cut mountain pastures.
13. However, farming can be responsible for provoking natural disasters; for example inappropriate ploughing and land use can lead to loss of soil on a disastrous scale through erosion. In these cases, society may expect that farmers adopt certain farming techniques. However, if society demands that farmers undertake specific additional efforts in order to secure the public good of minimising risk of disaster there may be additional costs to farmers not recompensed by the market.

PRESSURES ON FARMING PUTTING AT RISK NON-TRADE CONCERNS

14. The application of new technologies (inputs, machinery, seed varieties, bloodlines), as well as improved efficiencies, give farmers the tools to increase production and reduce costs. In the absence of policy instruments to mitigate the message from the market, farmers are forced to focus on narrow economic concerns with the provision of public goods hardly entering the equation. If this process is unchecked by public policy, it may lead farmers to destroy landscape features, notwithstanding the negative impact on nutrient-adverse wild plants and the risk of pollution. This has led to four clearly identified trends in agriculture:

• Concentration, where farmers producing the same product congregate in certain zones and so increase economies of scale, for example by lowering supply costs;
• Specialisation, leading to the decline of the mixed farm and rise of specialist or monoculture farms;
• Intensification, resulting in increased use of inputs, higher operating costs and higher yields needed to cover the increased costs;
• Marginalisation, resulting in the underuse and in some places abandonment, of farmland handicapped by structural disadvantage.

15. All of these trends militate against the continued provision of adequate responses to non-trade concerns: high-value landscapes are lost; biological diversity suffers; pollution of water resources increases; and production methods become divorced from public expectations.

CONCLUSIONS DRAWN FROM THE ULLENSVANG PAPER

16. In order to meet society's environmental and cultural non-trade concerns, a range of policy instruments should be considered, including the following:

• Encouragement actions, such as the provision of extension services, publicity and public campaigns (which can be led by non-governmental organisations);
• Compulsory regulation, where appropriate, for example to cover farm-related activities which should be prohibited. Regulation may be an appropriate option in order to prevent pollution with compliance costs being normally shifted to farmers;
• Voluntary programmes designed to persuade farmers to deliver public goods, such as environmental services. Farmers are normally ready to provide environmental services beyond the reference level of "good farming practices", if such services are appropriately remunerated. By creating a market in provision of public goods, farmers can bring environmental and cultural factors into their economic decisions on an equal footing with the commercial pressures presented by the marketplace for their crops and livestock products.

17. In devising policy responses to secure the provision of non-trade concerns, governments have to ensure that the clear objective of the policy is to secure the public good. This requires that policies are targeted, have clear objectives, are administered in a transparent manner, and are implemented in no more than minimally trade-distorting ways.
18. Many environmental non-trade concerns can only be met through farming activities. Consequently, wherever society, in pursuit of legitimate environmental objectives, demands that farmers undertake efforts to deliver public goods beyond "good farming practice", farmers would respond positively, but only to the extent that their additional costs and income foregone are covered.
19. The reform process under the auspices of WTO rules should allow governments to implement policies which meet legitimate environmental non-trade concerns.

Annex 2

POLICY INSTRUMENTS USED BY SOME COUNTRIES TO MEET ENVIRONMENTAL NTCs

EUROPEAN UNION

For the EU, entry into force of the Amsterdam Treaty reinforced sustainable development as an objective to be pursued, while retaining existing Treaty bases for environmental and agricultural policy. In particular, the need to integrate environmental protection requirements into the definition and implementation of all Community policies was highlighted. As agriculture remains a Community policy where the instruments of the CAP are decided by the Council of Ministers, environmental considerations can be developed, enacted and applied throughout the EU.

The CAP reforms undertaken as part of Agenda 2000 provide a powerful impetus for the integration of environmental concerns into agricultural policy. The Commission, Member States, local authorities and agricultural and rural communities now have a considerable range of instruments at their disposal to achieve sustainable agriculture. In addition to continued market reform, Agenda 2000 embodies the development of a second pillar to the CAP covering structural, agri-environmental and rural policy.

A provision on "cross-compliance", aimed at implementing environmental requirements has been introduced. This measure authorises Member States to cut direct payments to farmers (e.g. in the livestock, arable and olive sectors), as a penalty for not complying with environmental legislation or specific environmental requirements.

JAPAN

Due to its geographical conditions: 72% of its land area reaching at least 100 meters above sea level, with severe irregularities of altitude, heavy rainfall due to being situated in the Asian monsoon region, rice farming in Japan has long played an important role other than producing rice. It prevents flooding, prevents soil erosion and landslides, as well as fostering water resources. However, with the increase in food imports, that has made Japan the biggest net food importer in the world, as well as low productivity, less-favoured living conditions in rural areas, ageing of farmers and lack of successors, total paddy field area has been on the decline. It has dropped from 3.4 million ha in 1970 to 2.7 million ha in 1999, and this has raised a great concern on environmental issues in agricultural policy discussion. A considerable area of agricultural lands, primarily in marginal regions, has been abandoned every year and fears that the positive externalities of agriculture would deteriorate further have been realised in some rural areas.

In general, agricultural policy has both positive and negative effects on the environment, and the negative effects are highlighted when the policy measures encourage excessive use of inputs or cause serious burden on the environment. However, policy intervention is indispensable, if a certain level of domestic production, necessary to ensure environmental benefits, cannot be sustained without such a support. Indeed, with the situation described above, in an opinion poll conducted in July 2000, around 65% of Japanese people surveyed recognised that agriculture contributes to the preservation of the environment: and more than 90% surveyed responded affirmatively to the need to maintain domestic agriculture with its multifunctional roles. With this background, Japanese agricultural policy debate focuses on how to ensure sustainability of agriculture, which encompasses a number of policy measures including amber domestic support and import tariff, as well as green box measures.

KOREA

Geographically, Korea is characterised by a large number of steep hills and mountains. Rainfall in June to August ranges between 600 and 800 mm per year, accounting for 60 percent of the average annual precipitation. Due to the seasonal pattern of precipitation, rice paddy farming has predominated over upland farming in agricultural production in the country. Dating back over thousands of years, rice paddy farming in Korea not only provides a staple food but also generates a number of positive externalities throughout the production process. These encompass environmental conservation such as flood prevention, mitigation of soil erosion, purification of air and water resources, conservation of bio-diversity, various social and cultural benefits such as economic viability of rural communities and preservation of traditional culture, and food security.

However, the excessive use of agricultural chemicals including fertilisers and pesticides to increase the productivity of farming can adversely affect the environment. As per capita income increased and living standards improved as a result of economic development in Korea, social demands to curtail environmental pollution caused by agriculture have increased. At the same time, there is growing recognition that positive environmental functions of farming should be preserved and promoted. A certain level of domestic production is indispensable to ensure the positive environmental functions of agriculture. As a country still in the developing process without enough financial resources and administrative capability, Korea has not yet developed sufficient policy measures that are targeted and specific, but still depend much on import tariffs and price support to guarantee a certain level of domestic production.

In 1997, the Korean government established a "Sustainable Agriculture Promotion Act" to respond to growing social demands in a more specific and targeted manner, and recently new programs including direct payments for environment-friendly agriculture are being introduced under the law.

NORWAY

Norway’s approach to environmental non-trade concerns consists of two main elements. First, as environmental benefits can only be provided through farming activities, there is a fundamental need to ensure that farming is sustainable and profitable at the farm level. In low-potential high-cost areas such as Norway, this would require substantial government intervention in terms of a policy measure combination that includes, to a large extent, the use of production-related policy measures. In Norway, production-related measures consist of Blue box measures and AMS, including market price support provided through tariff protection.

Second, specific measures, including specifically tailored and targeted green box support, environmental taxes and regulations, and cross-compliance requirements according to a set of environmental criteria, are frequently used in order to ensure that certain farming practices are encouraged and others avoided, thereby ensuring the quality of the environmental goods that are provided by agriculture. For instance, in Norway, Blue Box support is subject to such cross-compliance, since landscape support through the Acreage and Cultural Landscape Scheme is only provided if the farmer meets a set of environmental criteria.

SWITZERLAND

Swiss agricultural reforms since 1992 largely incorporate environmental concerns into agricultural policy.

Most budgetary payments are subject to (environmental) cross-compliance provisions: They are only granted if farmers comply with a set of strict environmental standards and farm-management practice requirements (good agricultural practices, in Switzerland called "production intégrée/prestations écologiques requises"). Additional payments granted to organic farming are conditional on even higher environmental standards. Generally, cross-compliance payments were introduced to minimise negative and increase positive externalities from agricultural production.

Additionally, reforms since 1992 introduced specific agri-environmental payments with restrictions on farming practices ("ecological payments"). They were introduced to meet public demand for biodiversity and other environmental goods. The latter payments, highly decoupled from the production of food and fibre, increased particularly strongly in recent years. They include, among others: Extensive meadows, hedges, litter areas, floral fallow land, rotational set-aside, low-intensity meadows, extensive area strips, and high stem fruit trees.

The gradual shift from market price support to agri-environmental and other payments is leading on the one hand to a higher production of public goods demanded by society at large and, on the other, to more market-oriented agricultural production able to face increasing competition from abroad as well as for some products on world markets.