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AoA Issues Series: Green Box Policies and the Environment

Utpal Vasavada, Steven Warmerdam, and Wesley Nimon
USDA, Economic Research Service and University of California, Berkeley


Policies aimed at reducing environmental degradation and conserving natural resources can also, in some instances, alter production and price levels, thereby distorting trade patterns. A sound evaluation of the tradeoffs is needed to determine eligibility criteria for inclusion in the World Trade Organization's (WTO's) green box, a category of domestic support policies, such as environmental and research programs, that are exempt from reduction commitments. National governments can use the green box exemption to further protectionist goals or to influence the terms of trade.

Background

A free market framework may not always be effective for achieving environmental protection and natural resource conservation. For instance, when the private benefits of conservation are small, farmers and ranchers may not protect natural resources at socially desirable levels, which can contribute to environmental degradation and unsustainable natural resource use patterns. Market failures such as this are unlikely to be self-correcting in a private enterprise, free market economy. For this reason, the responsibility to protect the environment and to conserve natural resources falls within the domain of public intervention.

Natural resource conservation policies are those that preserve natural assets such as timber and fish for future use by preventing their overexploitation. Environmental policies, however, are typically directed at curbing polluting activities. In practice, however, the distinction is often blurred and a policy may have elements of both. For example, the conservation reserve program (CRP) both preserves productive farmland for future use and limits polluting agricultural runoff into surface waters by taking environmentally sensitive land out of production.

In the agricultural sector, environmental and natural resource policies are directed at problems such as:

  • Runoff of agricultural chemicals and of manure from livestock facilities, which can pollute surface water;
  • A loss of wetlands, which means a loss of the benefits they provide: improving water quality, reducing soil erosion, conserving surface water, improving subsurface moisture, contributing to flood control, enhancing an area's natural beauty, and providing habitat for migratory waterfowl and other wildlife;
  • Soil erosion, which diminishes recreation activities, increases water treatment costs and dredging of navigation channels, silts up drainage and irrigation channels, and causes the sedimentation of reservoirs;
  • Improper management of land, which ultimately harms the environment through sedimentation, pollution of surface waters, and loss of highly productive and unique soil.

Selected Green Box Programs Affecting Agriculture

USDA-Administered Programs

  • Environmental Quality Incentives ProgramThrough use of technical assistance, education, cost-sharing, and incentive payments, EQIP assists farmers and ranchers in adopting management techniques that reduce nonpoint-source surface and groundwater pollution. Fiscal 2000 appropriated funding: US$174 million. 
  • Conservation Reserve ProgramCRP provides rental payments to agricultural producers who retire environmentally sensitive cropland. Since 1987, annual erosion has been reduced by one-fifth. Fiscal 2000 expenditures: US$1.6 billion. 
  • Conservation Technical AssistanceCTA provides technical assistance to farmers and ranchers who implement soil and water conservation and water quality improvement. Fiscal 2000 appropriated funding: US$568 million. 
  • Farmland Protection ProgramFPP allocates funds for purchase of conservation easements and other types of interest in land with prime, unique, or other highly productive soils. Fiscal 2000 expenditures were zero, but the 2001 budget requested US$65 million.
  • Wetland Reserve ProgramWRP assists landowners in returning farmed wetlands to their original condition through easement payments and restoration cost sharing. Fiscal 2000 appropriated funding: US$157 million. 
  • Emergency Conservation ProgramECP provides financial assistance to farmers who conserve water while recovering from natural disasters such as severe drought. Fiscal 2000 appropriated funding: US$60 million. 

EPA-Administered Programs

  • Nonpoint Source ProgramEstablished by Section 319 of the Clean Water Act, NSP provides States with program guidance, technical support, and limited funding to establish nonpoint-source pollution management plans. Fiscal 2000 operating plan budget: US$200 million 
  • Coastal Zone Management Act Reauthorization AmendmentsUnder CZMARA, states must submit to EPA a coastal zone management plan that implements management measures for nonpoint-source pollution to restore and protect coastal waters. 
  • Wellhead Protection ProgramAuthorized by the Safe Drinking Water Act, WPP protects ground water supplies used as public drinking water from contamination by agricultural chemicals, including pesticides and nutrients (e.g., nitrogen). Fiscal 2000 operating plan budget: US$1.2 million. 

State-Administered Programs

  • Water Quality Improvement ProgramsSome 44 States have passed laws or instituted programs to protect water quality. States use a variety of approaches to address water quality problems, including controls on inputs and practices, controls on land use, economic incentives, and education programs. 

The WTO recognizes the need for countries to protect their environment and to conserve natural resources. Under the WTO regulations set forth in the Agreement on Agriculture, member nations are required to reduce domestic support levels. When trade and trade-related aspects of domestic policy are determined to be small, the WTO allows environmental and natural resource policies to be placed under the green box exemption. The WTO stipulates the following conditions for a policy to qualify for the green box exemption:

  • must affect trade and production only minimally,
  • must not support prices or increase consumer costs, and
  • must be financed by the government

Green box environmental programs must limit subsidies to the extra cost of complying, while green box resource retirement programs must retire land for a minimum of 3 years and must not link payments to prices or production that apply to land not retired. U.S. environmental and natural resource programs are frequently implemented through a Federal-State partnership.

Environmental and natural resource green box policies rely on a mix of instruments such as cost sharing, technical assistance, rental and easement payments, income safety nets, and conservation research and development. In the United States, green box expenditures on rental and easement payments have increased in relative importance, while expenditures of cost sharing programs have declined. Most rental payments are administered through the Conservation Reserve Program (CRP) and are for land taken from production and turned into protective cover. Through the EQIP, producers implementing structural practices (e.g., animal waste management facilities, terraces, and filterstrips) receive up to 75 percent of the projected cost through cost sharing agreements with the Government or receive incentive payments for adopting management practices for conservation purposes.

From 1987 to 2000, U.S. expenditures on rental and easement payments have been the largest category and have been growing the fastest.   Expenditures on technical assistance have remained fairly stable over the period, while expenditures on cost-sharing and practice installation programs have declined.

Environmental and natural resource conservation policies can affect production levels, prices, and patterns of trade. If large enough, land retirement programs can drastically reduce production for specific commodities. Excluding land not planted for other reasons, 8.8 percent of cropland in the United States was idled under the CRP in 2000. Although the CRP's specific aim is to retire environmentally marginal cropland, it may generate output effects. USDA's Economic Research Service has shown that environmentally sensitive land might not be economically marginal in terms of production potential. Green box programs such as the EQIP can also affect costs through the introduction of more environmentally benign technologies that might not have been adopted in the absence of government cost-sharing programs. If new technologies are adopted on a large scale, they can potentially affect production, prices, and trade. Programs such as the CRP and EQIP are deemed to be nondistorting in terms of their effects on trade, prices, and production, thereby fulfilling the criteria for placement in the green box.

Area planted to major crops is the largest category of land use from 1975 to 2007 (projected), ranging from about 240 to 280 million acres, followed by area planted to other crops (79=84 million acres).  Area idled under annual programs ranged from 1 to 60 million acres over the period 1975-1995, while CRP area ranged from 2 million acres in 1986 and is projected to peak at about 36 million acres in 2001-2007.

Unresolved Issues

How will the tradeoffs between environmental protection and trade distortion be assessed? Decisions must be guided by the economic costs and benefits of environmental and natural resource policies. In practice, however, well-developed markets may not exist for attributes of environmental quality, making it difficult to assign monetary values to environmental quality changes within a country. Also, environmental quality improvements and natural resource conservation in one country may be valued by consumers in other countries, further complicating the assignment of monetary values.

How will the increasing demand for environmental services and protection be addressed? In the United States, public opinion surveys over the past 25 years confirm that the public supports increases in funding for environmental protection and natural resource conservation. To meet these growing demands, emphasis on environmental and natural resource policies is expected to increase. The transition has already begunfrom 1996 to 2000, U.S. funding committed to resource conservation programs increased by US$51 million under the six USDA-administered programs, and the 2001 budget calls for an additional US$503 million for these programs. It is unclear whether future U.S. policies chosen to reduce environmental degradation and to conserve natural resources will be considered green box by the WTO.

Should developing countries be treated in the same way as developed countries? Developed countries typically spend proportionally more funds on environmental and natural resource policies than their less developed counterparts, reflecting both funding opportunities and attitudes. Many of the environmental and resource problems faced by developing countries are more severe. Still at issue is whether less developed countries should be allowed greater flexibility in domestic expenditures on environmental and resource policy.

Once countries submit domestic policies supposedly falling into the green box, how will the WTO decide which policies are legitimate? Because certain environmental and natural resource conservation green box policies allow for small changes in production, a country may have an incentive to use these policies to increase its competitiveness on the world market. Failure to adhere to most requirements of the green box is fairly easy to detect, but the criteria that a policy have only "minimal trade-distorting effects" is open to interpretation. In some cases environmental and natural resource policies are used to correct for pre-existing market failures (e.g., idling highly erodible land that would otherwise be used for production) and their success requires substantially altering production patterns. Typically, environmental and natural resource policies will affect prices, production, and trade. An open question is whether placement of such policies in the green box will be permitted.

Future discussion of the green box must tackle some of these issues. Otherwise, some countries could use the green box exemption to further a protectionist trade agenda or to manipulate the terms of trade.

For Additional Information, See:

Agriculture, Trade, and the Environment: What are the Concerns? (Agricultural Outlook, December 1996), 88KB

Other Papers in This AoA Issues Series:

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Updated date: January 3, 2001