This document analyzes the potential synergies and trade-offs between agricultural productivity, climate mitigation, adaptation, water quality, and biodiversity under different policy instruments using theoretical and empirical models. It applies these models to data from Finland to analyze the impact of various policies, finding that: decoupled payments negatively impact productivity but not others; crop insurance subsidies have little impact; a nitrogen tax improves productivity, mitigation, and biodiversity but hurts adaptation and water quality; payments for set-asides and a soil carbon tax improve mitigation, adaptation, and biodiversity but reduce productivity; and investment subsidies improve adaptation but not productivity.

1. SYNERGIES AND TRADE-OFFS BETWEEN
PRODUCTIVITY, CLIMATE MITIGATION
AND ADAPTATION, WATER QUALITY AND
BIODIVERSITY
Jussi Lankoski
OECD Workshop on Biodiversity, Climate Change and Agriculture
October 25, 2017

2. Background and key policy questions
• Governments recognize the need to address enhanced
productivity and sustainability objectives but potential
synergies and trade-offs are not necessarily identified
• Previous literature has focused on separate aspects of the
problem
• Coherence between the productivity and multiple
sustainability objectives is relatively unstudied issue
• Main policy question:
– Do the current agricultural, environmental and
agri-environmental policies send signals that foster
all the policy objectives or are signals contradicting?
OECD Trade and Agriculture Directorate 2

3. Theoretical and empirical models
Key features of the theoretical and empirical models:
– Heterogeneous production units (field parcel level modelling)
– Farmers are risk-neutral or risk-averse
– Productive input (fertilizer, irrigation water, pesticide) is risk-increasing or
risk-decreasing
– Investment in productivity enhancement is input-increasing or input-saving
– Heterogeneity: land productivity, environmental site-productivity, risk
aversion
– Three margins: intensive, extensive, and entry-exit
– Dynamics: investment in capital is main driver of productivity, adaptation
and sustainability performance
– Non-linear utility function with production function (Mitscherlich or
Quadratic) is given different parameterisations depending on the application
(risk aversion, crops, crop rotations, tillage methods, soil types, productivity
etc.)
OECD Trade and Agriculture Directorate 3

4. Making policy objectives operative
• Productivity: total factor productivity (TFP) as a divisia index,
in which the outputs are divided by inputs to produce relative
productivity levels
• Climate change mitigation: net GHG emissions from crop
production;
• Adaptation to climate change: an adaptation index
combining investment in capital, crop yields and net-revenue
• Water quality: nitrogen and phosphorus runoff (represented
by N-equivalent runoff)
• Biodiversity: habitat quality index based on observed species
number of butterflies in different farmland and semi-natural
habitats
• All indicators are reported in relation to the market solution
without policy intervention
OECD Trade and Agriculture Directorate 4

5. Application on the basis of data from
Finland
• 18 differential regional production units (soil type, land
productivity, tillage methods)
• Analysed policy instruments:
1. Income support and risk management
– decoupled crop area payment (€190/ha)
– crop yield insurance subsidy (€59/ha)
2. GHG emissions, water quality and biodiversity
– subsidy for green set-aside (€120/ha)
– nitrogen fertilizer tax (11% to reflect CO2-eq damage from nitrogen)
– tax on net soil GHG emissions (€32/ton of CO2-eq)
3. Productivity and adaptation
– investment subsidy for adaptive capital (40% cost-share subsidy for
improved subsurface drainage)
OECD Trade and Agriculture Directorate 5

6. Results
Policy instrument
Productivity,
index value
Net GHG
emissions,
t/ha
Adaptation,
index value
N-eq.
runoff,
kg/ha
Biodiversity,
index value
Market solution 1.004 6.4 1.000 15.9 12.1
Decoupled crop
area payment
0.891 7.3 1.033 17.8 11.7
Crop insurance
subsidy
0.998 6.4 1.048 16.0 12.1
Nitrogen fertilizer
tax
1.035 5.7 0.923 13.5 12.5
Payment for green
set-aside
1.131 5.8 0.988 12.6 17.2
Carbon tax for soil
emissions
1.127 3.1 0.819 11.6 13.5
Investment subsidy
for adaptive capital 0.975 6.4 1.221 16.6 12.2
OECD Trade and Agriculture Directorate 6

7. Summary
Policy instrument Productivity Mitigation Adaptation Water quality Biodiversity
Decoupled crop
area payment
- - + - -
Crop insurance
subsidy
- 0 + - 0
Nitrogen fertilizer
tax
+ + - + +
Payment for green
set-aside
+ + - + +
Carbon tax for soil
emissions
+ + - + +
Investment subsidy
for adaptive capital - 0 + - +
OECD Trade and Agriculture Directorate 7