Policy Instruments for Protecting Environmental Quality

Environmental quality is a public good. We benefit from having good environmental quality (i.e., clean air to breathe and clean water to drink), but the environmental quality available to us is dependent on decisions made by myriad institutions and individuals. There are no property rights assigned to many of the resources that are impacted by those decisions. The result is often what economists call negative externalities, which occur when Individuals who make decisions that impact resources do not incur the full costs of their actions and therefore may not take those "external costs" into account in management decisions. In anticipation of a bumper crop, for example, farmers may use more fertilizer than is actually needed in more average years, resulting in nutrient run-off that adversely affects nearby waterways. In deciding how much fertilizer to apply, the farmer may consider the price of the fertilizer, but not factor in the costs associated with the additional water degradation. 

There are a variety of ways to address these negative externalities through policy instruments, ranging from fully voluntary to regulatory.

Economic Policy Instruments

Education includes a broad category of instruments aimed at providing information to farmers and ranchers on ways they can engage in activities that improve environmental quality. These instruments involve extension services and technical assistance through education materials, demonstration projects, and face-to-face meetings. In USDA, these activities are undertaken by the Agricultural Research Service, the National Institute of Food and Agriculture, the Economic Research Service, the Farm Service Agency, the Agricultural Marketing Service, the Forest Service, and the Natural Resources Conservation Service.

Government labeling standards are a way to identify products that are produced using certain standards that may be of value to consumers, such as those produced with specific environmental practices. National certification standards ensure consumers have accurate, consistent information regarding the products with specific labels (e.g., labels for organic produce or other "eco-labels"). Participation is voluntary, but producers must meet minimum standards to use specific labels. For instance, USDA sets uniform national standards defining the term "organic" for both bulk and processed products through the National Organic Program.

Financial incentive policies provide payments to farmers and ranchers to encourage environmentally beneficial activities or tax farmers to discourage harmful activities. Ideally, these incentives would be scaled based on achievement of environmental outcomes. However, because of difficulties in measuring environmental outcomes from conservation and production practices, incentives are almost always based on application of specific practices that are projected to have positive outcomes, rather than on measurement of actual outcomes. Both positive incentives (e.g., payments to farmers) and negative incentives (e.g., fines or taxes) create an opportunity cost of engaging in environmentally harmful activities. In practice, only positive incentives have been used by USDA to induce the voluntary adoption of conservation practices. See the Conservation Programs topic for more information.

Environmental credit trading is an approach for reducing pollutant discharges that uses market forces to allocate pollution control costs among different pollution sources. Agriculture is generally believed to be able to reduce pollution at a lower cost than most sources typically regulated by U.S. pollution control laws (factories and municipal water treatment plants, or point sources), for those pollutants common to both, such as nutrients. Farmers might be allowed to participate in a trading program in order to provide a source of "cheap" credits that point sources can purchase to meet their discharge requirements. For example, farmers might produce nitrogen credits by reducing nitrogen runoff using a comprehensive nutrient management plan. If point sources are willing to pay more for emissions credits than it costs farmers to produce them (by cutting nutrient loss in this case), then a trade can be made that allows farmers to benefit financially. Point sources also benefit because they pay less for pollution control than if they had to do it themselves. Farmers would continue receiving these payments for as long as they maintained the practices. A major challenge for agriculture participating in trading programs is the accurate measurement of pollution abatement (needed to assign credits) associated with implementing conservation practices. For a more detailed discussion of trading, see EPA’s Water Quality Trading Assessment Handbook.

Mitigation banking is a market mechanism similar to emissions trading. When a regulation restricts the conversion of sensitive wildlife habitat to other uses, development may be allowed if the developer offsets the lost ecosystem services by restoring habitat elsewhere. The demand for restoration creates an economic incentive for landowners to restore habitat and sell mitigation "credits" to developers. The number of credits produced is determined by a designated review board. Credit prices are determined by negotiation between buyer and seller. Wetland mitigation banking, administered by USDA’s Natural Resources Conservation Service, in response to Section 404 of the Clean Water Act, and conservation banking, administered by the U.S. Fish and Wildlife Service in response to the Endangered Species Act, are the two primary examples of this approach. Agriculture is in a position to provide restored habitat under either policy.

Compliance mechanisms require a basic level of environmental compliance as a condition of eligibility for other agriculture programs. This tool shares characteristics with both Government standards for private goods/actions and economic incentives. It is similar to Government standards in that the Government establishes a set of approved practices, except that here compliance is linked to a direct economic payment, such as subsidies for federal crop insurance. Because existing programs are used for leverage, compliance mechanisms require no new budget outlay for producer payments, although considerable technical assistance is needed to develop conservation compliance plans. See the Conservation Programs topic for more information.

Regulatory requirements lie at the other end of the policy spectrum from voluntary participation. Rather than attempting to facilitate or encourage improved environmental performance, policymakers can simply require it. Regulations can ban the use of a particular input or practice deemed a significant threat to public safety or the environment, or can require the use of a beneficial practice. The ban on the production and application of the chemical DDT (through the Federal Insecticide, Fungicide, and Rodenticide Act) is an example of the former. The Clean Water Act regulations requiring the implementation of a Comprehensive Nutrient Management Plan by concentrated animal feeding operations (CAFOs) is an example of the latter. Regulatory policies that can affect agriculture include the Coastal Zone Management Act Reauthorization Amendments (for polluted runoff), the Clean Water Act (for polluted runoff), the Federal Insecticide, Fungicide, and Rodenticide Act (for pesticide use), the Clean Air Act (for airborne particulates), and the Endangered Species Act (for wildlife habitat). 

Application of Policy Instruments to U.S Conservation Problems

Conservation programs are designed to address a broad suite of environmental and resource concerns, such as soil erosion, nutrient runoff and water pollution, and habitat loss, among others. The rows of the matrix below illustrate a subset of environmental concerns associated with agriculture; longstanding concerns about soil productivity losses from erosion, which date back to the 1930s Dust Bowl, are reflected in the top rows, and relatively more recent concerns (such as wetlands loss, nitrogen leaching, and manure management) appear in the bottom rows.

The policy instruments introduced above can be organized according to three broad groupings: involuntary measures that are, to varying degrees, coercive; voluntary measures providing varying amounts of financial incentive; and facilitative measures that rely primarily on information. In the chart below, these policy instruments are arrayed from left to right in order of increasing level of direct control the instrument has on producer decisions. In other words, the more closely prescribed the producer actions, the farther right a particular instrument falls on the continuum.

Three broad groupings organize the instruments: involuntary measures that are, to varying degrees, coercive; voluntary measures providing varying amounts of financial incentive; and facilitative measures that rely primarily on information. Instruments are arrayed from left to right in the chart in order of decreasing level of direct control the instrument has on producer decisions. In other words, the more closely prescribed the producer actions, the farther left a particular instrument falls on the continuum.

The approximate dates that specific policies were first applied to an environmental concern are indicated in the body of the matrix. Some of the programs listed have been phased out or combined with other programs. For example, the functions of the Wildlife Habitat Incentive Program were taken over by EQIP in 2014. More details on the matrix can be found in The Use of Markets To Increase Private Investment in Environmental Stewardship, ERR-64, September 2008.