Do support payments for organic farming achieve environmental goals efficiently?

Abstract

Concerns about the impact of modern agriculture on the environment have in the past few decades resulted in strict legislation concerning the leaching of nitrogen from Danish farms and their use of pesticides. An often-heard argument in recent years is that conversion to organic farming is a solution to many environmental problems. Hence, in the late 1990s several initiatives to support the development of organic farming have been taken, including permanent direct support for producing organically. This was made possible by the 1992 reform of the Common Agricultural Policy (CAP) that allowed for specific subsidies for environmentally friendly production. This paper discusses the cost efficiency of two alternative policy measures for obtaining an overall reduction in the use of nitrogen and pesticides in Danish agriculture. The first policy measure is a subsidy for producers who produce organically and thus reduces the use of nitrogen and abandons the use of pesticides. The other policy measure is the use of taxes levied on fertilizers and pesticides. Using an applied general equilibrium model, the two policy measures are compared. The paper concludes that an overall reduction in the use of pesticides and fertilizers is most efficiently obtained by taxing those agents using these inputs. The size of the organic sectors should be determined by consumers' willingness to pay for organic products.