CAP Subsidies Harm the Environment

Patrick Hall // 10 December 2018

Environmental degradation is a regular by-product of agricultural practices. Greenhouse gases, mass irrigation, water quality issues, and disrupted ecosystems are all examples of side effects that agriculture has on the environment. As such, policy makers in the agricultural sector should, within reason, seek to create policies which reduce this damage as much as possible.

The subsidies associated with the EU’s Common Agricultural Policy (CAP) contribute to increased environmental degradation. Subsidies encourage wasteful management of energy, materials, and natural resources. The EU subsidised farmers €41,74 billion this year in income support payments as part of the CAP.

Untargeted subsidies do little to protect the environment, and more to damage it. Brunner and Huyton found that subsidies associated with the CAP led to increased water usage, particularly since subsidies do not encourage efficient management of resources. The side-effects of intense water usage include degraded water quality and pollution from runoff. CAP subsidies were also seen to encourage over-intensification of agriculture in order to fulfil an artificial demand created by subsidies. Increasing the intensity of crops and livestock has led to deforestation and further degradation of the land as well.

Subsidies have also contributed to an increase in the use of chemicals and pesticides in agricultural practices. A publication by the IEA on innovation and agriculture noted that “subsidies . . . enabled the overuse of chemicals at the expense of adoption of more refined, targeted treatments”. Subsidies remove the driver for farmers to seek more efficient and innovative solutions for production by encouraging maintaining the status-quo.

Of course agricultural practices are always going to have some form of environmental side effect, but the CAP goes further than this by exacerbating these side effects through unnecessary subsidies. As seen below in the example of New Zealand – a virtually zero subsidy agricultural market – a free market approach to agriculture has led to greater environmental management, productivity, efficiency, and innovation.

Comparatively, the EU has far higher levels of agricultural subsidies than New Zealand. OECD data indicates that the EU subsidises agricultural producers at 20.99% (measured as a percentage of gross farm receipts), whilst New Zealand is as low as 0.86%. New Zealand slashed its agricultural subsidies as part of liberal economic reforms in the 1980s.

After the removal of farmer subsidies, agricultural productivity grew three times as much as the rest of the New Zealand economy as a whole. Inappropriate land usage sharply fell as subsidies no longer fuelled production of agricultural products that were ill-suited to certain types of land. For example, the number of sheep flocks decreased, resulting in a reduction in hilly terrain erosion. Instead, land such as this was used for forestry as it was better suited. The end result being less erosion, afforestation, and more efficient output due to appropriate land use. Income support payments are correlated with increased fertilizer and pesticide use. Therefore, it is unsurprising that following the removal of agricultural subsidies, there was a reduction in fertilizer and pesticide use in New Zealand. Removal of government intervention in agriculture has resulted in industry-led – not government-led – initiatives to combat future challenges, such as increased emissions from dairy farming.

An example of this kind of innovation can be witnessed in the development of methane recovery plants for dairy farms, created by the New Zealand agricultural company Fortuna Group. The technology works by capturing methane in a covered pond, sucking the methane from the pond to a biogas generator, which in turn creates electricity to power the dairy farm. The entire system will pay for itself over a five-year period. The Fortuna Group is an excellent example of a company making profit in a free market by solving wide-spread challenges using innovation.

Subsidies associated with the CAP contribute to environmental degradation through inefficient management of resources and inappropriate land management. New Zealand’s removal of agricultural subsidies and the subsequent improvement in land management and environmental conditions that followed should serve as an exemplar for CAP reform. Innovation is not fostered by subsidies, but flourishes in a free market – as has been demonstrated with the aforementioned example of the Fortuna Group. EU policy makers should consider removing the income support component of the CAP in the interests better environmental management, and greater innovation. The removal of subsidies is not a ‘fix-all’ remedy to environmental woes, but it is certainly a step in the right direction.

The opinions in this article belong to to author only and are not necessarily representative of EPICENTER or its member think tanks. 

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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