Design issues for agri-environmental payment programmes

A majority of OECD countries offer monetary payments to farmers to encourage them, on a voluntary basis, to implement more environmentally friendly farming practices going beyond those required by regulations, or defined as good farming practices. Most of these agri-environmental programmes offer a single, fixed payment for compliance with a predetermined set of environmental requirements, such as reduced tillage or limits on the intensity and timing of fertiliser, manure and pesticide applications. The obvious problem with this type of fixed-rate payment approach is that heterogeneity in either farmers’ compliance costs or siteproductivity of environmental goods supplied are not taken into account in policy design and implementation. Thus, offering a fixed-rate payment under heterogeneous conditions could reduce the cost-effectiveness of agrienvironmental payment programme.