Welfare Impacts of Agri-Environmental Policies in an Open Economy: A Numerical General Equilibrium Framework

This paper uses a numerical general equilibrium model to evaluate the welfare impacts of alternative agri-environmental policies in an open economy while recognizing the presence of distortionary agricultural support subsidies and factor income taxes. In this context, the paper indicates that a revenue-neutral budget reform, which cuts all distortionary agricultural support subsidies and pays released funds as a lump-sum transfer payment to the land owner, increases welfare and reduces nitrogen run-off. It also shows that, at low levels of nitrogen reduction targets (less than 40 percent reduction in applied nitrogen), a tax on crop production is the most efficient policy while, at higher levels, a tax on applied nitrogen is more efficient. From the numerical results, the paper concludes that a reduction in nitrogen run-off can generate a double dividend (an economic gain over and above the environmental gains) at low levels of nitrogen reduction targets because they reduce the provision of distortionary agricultural support subsidies and because a part of the burden of these policies can be passed on to foreign consumers of agricultural products through the world market. This paper supports revenue-neutral budget reforms that reduce distortionary domestic agricultural support subsidies, release more funds for decoupled payments, and subsidize nitrogen reduction activities.