They’re the basis of much present and planned Canadian agricultural policy, but “externalities” are still a poorly understood and quantified element of farming.
“Addressing externalities is perhaps the most important rationale in the design of agri-environment policies in Canada,” says a new report by the Canadian Agri-food Policy Institute, written by Margaret Zafiriou.
That’s because externalities, the term for costs and benefits that are not recognized in the market values of an activity, are uniquely challenging for farms and agricultural operations. It is simpler to quantify those costs and benefits in more uniform industries, but farms range wildly in size and style, geography, climate and commodity mix.
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“Because of these nuances, policy development in this sphere is more challenging than in many other areas.”
Externalities are a fundamental concept in economics. In free market systems, prices are supposed to reveal the supply and demand and, over time, the cost of production and relative risk of a product or activity. If important costs or benefits are left out of the factors that go into the market price, then some people are gaining or losing without their gains or losses being recognized.
In other words, somebody could be making money from something while dumping the costs on somebody else who has no way of being compensated, or somebody could be gaining from something without the producer getting anything in return.
Benefits are not rewarded and costs are not penalized, skewing production and consumption. It’s a form of market failure.
This becomes a crucial issue in agriculture because so many things people attack farmers for and so many things for which farmers want to be recognized end up becoming externalities.
In climate change, for example, farmers are accused of emitting greenhouse gases through cow burps or fertilizer leakage, while farmers are annoyed that their carbon mitigation activities like minimum-till farming, 4R fertilizer management and grassland preservation aren’t widely recognized.
Farmers are also affected by wildlife conservation, environmental protection and other issues that often ignore the benefits and costs that farmers’ actions have.
Industry, federal and provincial programs have attempted to correct the externalities problem in a multitude of ways, with programs that reward farmers for doing good things, such as environmental goods and services, that discourage negative activities, such as regulatory restrictions on unlicensed drainage, and which try to strike a balance, such as the taxes and refunds of the federal carbon tax.
Some governments and private groups have attempted to create market-based solutions for externalities, such as carbon credit markets.
Finding ways to recognize “beneficial management practices” and reward them has been a focus of many programs but getting the devil out of the details has always been a challenge.
With “cross-compliance,” which means requiring certain standards to qualify, coming into play for various programs, assessing the true worth and impact of farming practices is vital, the CAPI paper says.
Europe and the U.S. have years of experience in implementing cross compliance, so they have been able to work out some of the wrinkles.
“However, in Canada there is still significant work to be done to ensure that these programs are designed in such as way they are effective, efficient, well-targeted and accommodate regional differences such as soil types, crop types, climate and farm structure, which all vary across the provinces,” concludes the report.
“And when it comes time to evaluate whether they provide value for money, it will be important to have the proper data, metrics, monitoring and evaluation tools for measuring the environmental outcomes they produce. It will also be important to be able to value the externalities that they have addressed. Further research in this area is therefore important.”
