modeling the efficiency of the agri-environmental payments to czech agriculture in a cge framework...

Modeling the efficiency of the agri-environmental payments to Czech agriculture in a CGE framework

incorporating public goods approach

Zuzana Křístková - Czech University of Life Sciences, Department of Economics

Tomáš Ratinger - Institute of Agricultural Economics and Information (UZEI)

Evidence-Based Agricultural and Rural Policy Making: Methodological and Empirical Challenges of Policy Evaluation122nd EAAE Seminar, February 17 – 18, 2011

Presentation Outline

Introduction and the objective of the paper Description of the methodological approach Model application and results Conclusion


Introduction

The effects of the agrarian policy simulations cannot be captured fully without incorporation of multifunctional aspects of agriculture such as the landscape provision.

In the context of the Czech agriculture, the landscape function is mainly supported by agri-environmental payments directed to permanent grasslands with the extensive livestock production.

The objective of the paper is to incorporate the landscape provision into the CGE model and to assess the efficiency of the agri-environmental payments.


Methodological approaches in modelling multifunctionality

EU-based research focused on the integration of bio-physical, land use and economic models:– Uthes, Ittersum and Sieber (2010), Renting, Rossing and

Ittersum (2009), Rossing, Zander and Josiem (2009), Parra-Lopez, Groot, Torres et al. (2009)

Incorporation of demand side of multifunctionality in the CGE framework:– Cretegny (2002) - Switzerland, and Rødseth (2008) –

Norway.


Applied methodology The CGE model is built for the economy of the Czech

Republic (base year 2006) and provides simulations till 2020.

SAM for the CGE model constructed with the use of the National Accounts, Statistics of Household Accounts and agricultural surveys provided by UZEI.

Public goods in form of landscape provision stemming from extensive beef production on permanent grasslands is incorporated into the CGE model.

Main features of the CGE model Recursively dynamic CGE model following standard IFPRI

structure. Supply of labour and land fixed; capital stock grows at the

rate of net investments (following Tobin q investment function).

Two types of households – farmer and other households maximizing utility modelled by the LES function.

Standard macroeconomic balance of savings and investment. Government closure determined by a fixed share of

governmental budget to GDP. Both foreign sector closures (for the EU and the RoW) assume

fixed foreign savings and endogenously adjusting exchange rates.

Direct payments modelled partially as land subsidies, partially as production subsidies.


Incorporation of landscape into the CGE model

Sector of extensive livestock farming is explicitly included in the SAM.

Following Cretegny, supply of landscape (public commodity) is modelled in a joint production function with beef meat (market commodity)

The demand for landscape corresponds to the households´ WTP and is incorporated into the LES (instead of originally intended use of the contingent valuation for CR, parameters for LES determined by certain assumptions)


Production sectors included in the CGE model

Sector Land employment Descriptionsec1

Secland

cerealssec2 fruits and vegetablessec3 oilseedssec4 sugar beetsec5 intensive livestocksec6 pigs and poultrysec7 milksec8 other agriculture

sec14 extensive livestocksec9

Secnland

forestry and fishingsec10 food industrysec11 other industrysec12 R&Dsec13 other services

Nested production structure in the CGE

model

Linear function of capital

Value added i Intermediate Consumption i

Leontief

Gross production i

Depretiation i

Value added of secnland i

CES I

Capital Labour

Value added of secland i

CES II

Capital$secland

Land

Intensive farming(Sec 1-8)

CES I

Capital$secland

Capital-Land

Extensive farming (Sec 14)

Leontief

Capital$secland

Capital-Land

Leontief

Capital$secland

Land


Optimal grassland area with internalized demand for landscape

"Market" for PG

0

1000

2000

3000

4000

5000

6000

7000

8000

0 0.2 0.4 0.6 0.8 1 1.2 1.4

Grassland Area (milion ha)

Pri

ce p

er h

ecta

re

Supply PG mWTP, Y Demand for Beef mWTP+DemBeef

L

S

Lm

mWTP

mWTP+BeefDem

Grassl./beef Supply

Beef/GrassDem

"Market" for PG

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0 0.2 0.4 0.6 0.8 1 1.2 1.4

Grassland Area (million ha)P

rice

per

hec

tare

Supply PG Supply PG_addAEP

mWTP+DemBeef mWTP, Y_+10% + BeefDem

L L* L**

Income growth

addit. support

a) b)

Source: own illustration following Rødseth (2008)


Scenario Description

Scenario Purpose Performed simulation

Scenario 1Determine optimal landscape provision based on households´ WTP, no additional agri-envi payments to the extensive livestock sector

Additional agri-envi support removed from 2007 on, subsidies redistributed to hous

Scenario 2Determine optimal landscape provision under parallel existence of landscape market and additional agri-environmental support

Subsidy rates according to baseline

Scenario 3 Illustrate changes of landscape provision if additional agri-envi subsidies are removed in 2014

Additional agri-envi support removed from 2014 on, subsidies redistributed to hous


Results

The impact of the considered scenarios is evaluated with respect to:– Evolution of grassland size– Demand for landscape– Production of extensive and intensive livestock

sector– Total gross agricultural production and GDP

Impact on the size of grasslands

725781 816

878924

964 992 1023 1034 1040 1067 1077 1099 1108

1407

17491673

1737 17241662

1699 16781632 1649

1407

17491673

913953 987 1018

1071 1093

1299

17191529

1484

1752

400

600

800

1000

1200

1400

1600

1800

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Scenario 1 Scenario 2 Scenario 3

Figure 1. Land employed in the extensive farming sector (‘000 ha)

Note: If the provision of landscape is determined purely by the households´ WTP, the optimal landscape size converges to 1,100 mil. ha, which is about 30% less than if the extensive livestock sector is also supported by additional agri-environmental payments

Impact on the demand for landscape

1.19 1.16 1.14 1.13 1.18 1.21 1.26 1.29 1.30 1.31 1.34 1.36 1.39 1.40

2.051.92

2.14 2.18 2.16 2.112.20 2.17

2.09 2.15 2.12 2.06 2.09

1.74

2.51

2.83 2.83 2.83 2.83 2.83 2.83 2.83 2.83 2.83 2.83 2.83

1.74 1.441.431.411.391.371.351.32

2.22

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Scenario 1 Scenario 2 Scenario 3 Subsidy rates

Figure 2. Demand for landscape by households (bln. CZK)

Note: In the absence of additional agri-envi support, demand for landscape referring to optimal subsidy rate would converge to 1.4 bln CZK, which is 50% lower compared to actual subsidy rates. This is mainly attributed to growth of landscape prices.

Impact on the livestock production intensity

5.2

5.86.2 6.1 6.2

6.46.7

7.07.3

7.67.9

8.28.5

8.99.3

5.2 5.15.4 5.4 5.3

5.55.9

6.2 6.46.8

7.27.4

7.88.3

8.7

1.30.9 0.9 0.8 0.8 0.9 0.9 0.9 1.0 1.0 1.0 1.0 1.0 1.0 1.0

1.31.5 1.5 1.4 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.5 1.6

0

1

2

3

4

5

6

7

8

9

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Scenario 1 intensive Scenario 2 intensive Scenario 3 intensive

Scenario 1 extensive Scenario 2 extensive Scenario 3 Extensive

Figure 3. Gross production of beef in extensive and intensive livestock farming (bln. CZK, constant prices of 2006)

Note: The longer term size of the extensive livestock sector would stabilize around 1 bln. CZK, which is 22% less than the initial period. With additional governmental support, the size of extensive livestock would reach 1.6 bln CZK.


Impact on gross agricultural production

Figure 4: Gross value added in agriculture (CZK bln., constant prices 2006)

54.657.1 56.3

58.1 59.361.3

63.565.6

67.969.9

72.074.3

76.779.2

54.656.2

57.7 59.060.9

63.165.1

67.369.4

71.473.6

76.078.5

51.4

30

40

50

60

70

80

90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Scenario 1

Scenario 2

Scenario 3


Impact on GDP

4.5% 4.5%

5.2%

7.0%

4.5% 4.5%

3.0%

5.1%

7.1%

3.0%

4.5% 4.5%

3.0%

5.1%

7.1%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

GDP Consumption Government Investment Net Exports

Scenario 1

Scenario 2

Scenario 3

Figure 5: GDP components (average % growth between 2006-2020)


Conclusions Incorporating public goods in the CGE model has

important capacity to improve insight in the analysis of agri-environmental policy.

The results confirm the theoretical assumptions:– landscape demand increases with growing households´

income– Additional subsidy payments allow households to consume

more landscape It is hard to conclude which subsidy rate is the

socially optimal taking into account that under additional governmental subsidies, the households are willing to consume more landscape.


Further research considerations

It is necessary to obtain correct WTP estimates that will significantly improve the valuation of the non-commodity production of agriculture.

The research can be further extended with the incorporation of other sectors with multifunctional activities and the special attributes of the bio-beef meet.


Thank you for your attention.

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