Agricultural Policy Monitoring & Evaluation 2022: Reforming Agricultural Policies for Climate Change

agriculture policy brief

Agricultural Policy Monitoring and Evaluation 2022: Reforming Agricultural Policies for Climate Change Mitigation

Government policies generate substantial transfers to the agricultural sector across OECD countries and major emerging economies – amounting to USD 817 billion per year in 2019-21. USD 500 billion per year comes in the form of budgetary support paid by taxpayers, with the remaining USD 317 billion per year being transferred by consumers through higher prices.

Almost half of support to the sector - USD 319 billion per year - is market distorting and potentially harmful to long-term efforts to ensure food security and combat climate change. Investments in general services, notably innovation, biosecurity and infrastructure, which are key for sustainable productivity growth, account for only 13% of total transfers to the sector, compared to 16% two decades earlier.

While investing in adaptation, agriculture must also reduce its contribution to climate change. A policy agenda to achieve both food systems and climate objectives should focus on reforming current agricultural support policies, providing direct incentives for adaptation and mitigation, and ensuring appropriate social safety net policies to facilitate an inclusive transition.

What’s the issue?

Total support to the agricultural sector reached a record USD 817 billion per year in 2019-21 for the 54 countries* covered in the OECD Agricultural Policy Monitoring and Evaluation 2022 report. Only a small share of this support was directed at longer-term efforts to combat climate

change and other food systems challenges. The 13% increase in support over the USD 720 billion reported for 2018-20 largely reflects temporary support to both consumers and producers in the context of the COVID-19 pandemic, and increased market price support related

Figure 1. Breakdown of agricultural support, total of 54 countries, 2019-21

to feed shortages linked to rebuilding livestock herds following African Swine Fever.

Of the total support, USD 500 billion per year was paid by taxpayers from public budgets, with the remaining USD 317 billion per year being transferred by consumers through higher prices (market price support). In a small number of countries, policies also suppress prices for some or all commodities, generating a transfer of USD 117 billion away from agricultural producers. In total, USD 391 billion per year was transferred to producers in the potentially most distorting forms of support (market price support and payments based on output or the unconstrained use of variable inputs).

Agricultural policy reforms in OECD countries have stalled over the past decade, and in some cases, have even been rolled back. Support in OECD countries averaged USD 346 billion per year over 2019-21, with the European Union and the United States, both large agricultural producers, jointly accounting for two thirds of this total. At the same time, support in eleven major emerging economies has increased significantly, reaching USD 464 billion per year in 2019-21, with China alone accounting for about 60% of this total.

The COVID-19 pandemic led to a significant increase in expenditures for the sector to provide additional food aid to low-income consumers, keep food supply chains

functioning, and help producers cope with disruptions. In 2020 and 2021, this additional support amounted to USD 55 billion and USD 70 billion, respectively, representing 10% and 13% of all budgetary support in these years. This estimate is likely a lower bound of actual additional expenditures, as it only includes support for which the link to the pandemic could be clearly identified.

At the same time, agriculture is contributing substantially to climate change globally. Along with forestry and other land use, it represents around 22% of anthropogenic greenhouse gas (GHG) emissions. These emissions consist of methane and nitrous oxide directly generated by agricultural activities – livestock, rice cultivation and fertiliser use – and indirect carbon dioxide emissions through land use change, such as deforestation and carbon losses in agricultural soils.

Agricultural GHG emissions across the 54 countries covered in the report amount to 4.1 Gt CO2eq per year, or 68% of direct agricultural GHG emissions globally. Of these emissions, about 70% are related to livestock. Only 16 of the 54 countries have set some form of mitigation target specific to their agricultural sector, which can help to focus efforts and measure progress. There is significant scope to intensify and accelerate emissions reductions in the sector.

Figure 2. Breakdown of transfers to specific commodities, 2019-21 (Share of gross farm receipts)

Note: EU data refer to EU28 for 2019, EU27 and the United Kingdom for 2020 and EU27 for 2021.

Agriculture can also play a key role in reducing global emissions. On the supply side, countries can increase productivity and efficiency in input use; adopt production techniques that reduce emissions; increase soil carbon sequestration, afforestation and restoration of degraded lands; and reduce food losses in the field and on the farm. On the demand side, countries can provide information and incentives to consumers to shift the emissions intensity of their food choices, and to reduce household food waste.

Yet many existing support policies for agriculture contribute to increasing emissions. Direct support for the production of specific agricultural products accounted for half of the support provided directly to producers, or USD 247 billion per year in 2019-21 (USD 362 billion in positive transfers and USD 115 billion in implicit taxation). Support for livestock products in particular, which tend to have high GHG emissions intensities, amounted to USD 111 billion per year. Rice, a significant source of methane emissions and the most emission-intensive staple crop, received USD 44 billion per year in support. Most support to producers also takes the form of measures that have the greatest potential to harm the environment and encourage the unsustainable use of natural resources. Payments for variable inputs (without constraints on their usage) represented USD 60 billion per year in 20192021. Environmentally harmful inputs such as synthetic fertilisers, feed and fuel should be taxed rather than subsidised, to account for their negative environmental

externalities.

In contrast, general services for agriculture, such as innovation, biosecurity and infrastructure, only represent a small share of support. Despite their importance for achieving food security, climate change and other food systems goals, investments in these areas have been falling relative to the size of the sector for most of the past two decades. Overall, support to general services accounted for 13% of total support for the sector in 2019-21, down from 16% in 2000-02.

What should policy makers do?

There is considerable scope for reforms that tackle the triple challenge facing food systems of ensuring food security, providing livelihoods and enhancing the sustainability of the sector, and that ensure that agriculture contributes to ambitious emission reduction targets in line with the Paris goal to limit the increase in global temperatures to less than 2°C, and preferably no more than 1.5°C, above pre-industrial levels. Policy reforms should include six complementary actions:

1. Phase out market price support and payments with strong potential to harm the environment and to distort markets and trade. Payments based on output and on the unconstrained use of variable inputs, together with market price support, have the

Figure 3. Public investments in general services , 2019-21 (Percentage of total support to agriculture)

Note: “Other” includes the marketing and promotion, cost of public stockholding, and miscellaneous categories of the General Services Support Estimate (GSSE).

Agricultural Policy Monitoring and Evaluation

potential to increase pressures on natural resources and to raise national GHG emissions. While the global effect of removing market price support is uncertain, these measures can contribute to higher national GHG emissions. These types of support are also potentially most production- and trade-distorting, are inefficient tools for transferring income to farmers, and tend to be inequitable, as they are not targeted to producers with low incomes.

2. Re-orient budgetary support to the provision of public goods and key general services to improve the performance of the agricultural sector, or increase it where current budgetary support is low. Most current payments neither incentivise nor facilitate more sustainable agricultural production and reduced GHG emissions, although environmental compliance requirements may partly address this gap. Directly paying farmers to supply public goods, such as ecosystem services or carbon sequestration in agricultural soils, and to adopt resource-saving production practices, both helps reduce emissions and provides farmers with new sources of income. Re-orienting expenditures to innovation, particularly R&D on emission-reducing technologies and production methods, should support mitigation and foster sustainable productivity growth, thereby also contributing to food security and reducing income pressures from stricter environmental and emission standards.

3. Target income support to those households most in need. Transitional assistance and extended social safety nets may be required for poorer farm and other households to offset income losses from the removal of positive price support, or the higher food costs associated with the removal of negative price support. This will require better information on the incomes and assets of farm households. Savings from reform of poorly targeted budgetary support could also generate significant additional funds for public goods and social safety nets.

4. Enhance the resilience toolkit for a world of diverse risks and increasing extreme weather events and natural disasters. Investments in relevant data, tools and skills enable small- and medium-scale risks to be better covered by farmers themselves or insured through market instruments. Large-scale risks will still need to be covered by governments, through welldefined policies that avoid crowding out private risk management.

5. Implement an effective pricing system for agricultural GHG emissions to incentivise the transition to lowemission agriculture. Abatement subsidies may offer

an alternative but may be challenging to maintain with rising mitigation needs over time.

6. Where agriculture is not included in broad carbon pricing or equivalent schemes, or complementing those, develop a package of approaches to ensure significant emissions reductions in agriculture. Governments can act across supply and demand sides to reduce emissions in agriculture. This includes supply side efforts to increase productivity and efficiency in input use; adopting production techniques to reduce emissions; increasing soil carbon sequestration, afforestation and restoring degraded lands; and reducing food losses in the field and on the farm. On the demand side, they can focus on providing information and incentives to consumers to shift the emissions intensity of their food choices, and to reduce household food waste. Co-ordinated action and international co-operation would increase the efficiency of measures.

* The 54 countries include the 38 OECD member countries, five non-OECD EU-Member States, and 11 emerging and developing economies: Argentina, Brazil, People’s Republic of China, India, Indonesia, Kazakhstan, the Phillipines, the Russian Federation, South Africa, Ukraine and Viet-Nam.

• OECD (2022), Agricultural Policy Monitoring and Evaluation 2022: Reforming Agricultural Policies for Climate Change Mitigation, OECD Publishing, Paris, https://doi.org/10.1787/7f4542bf-en

• Compare Your Country https://www. compareyourcountry.org/support-for-agriculture

www.oecd.org/agriculture tad.contact@oecd.org @OECDagriculture