Externalities in agriculture: How to include their monetary value in decision-making?

Abstract

Soil protection and sustainable agriculture have become a key issue in Common Agricultural Policy. Emphasis is being placed on climate-smart agriculture, nature-friendly agricultural technologies and implementation of a range of nature-based measures to protect soil, retain water in landscape, etc. Recent agricultural policy is mostly based on qualitative assessment of the current state and impacts of technologies. Economic assessment is still missing, although subsidies and other forms of financial support are provided from both national and European Union funds. Externalities in agriculture not only generate social costs and profits for the current generation but also strongly affect future well-being. The objective of this paper is to present a newly developed approach that enables monetary assessment of externalities in agriculture. The process of monetary assessment means inclusion and calculation of all costs and benefits, including positive and negative externalities going beyond financial revenue. The methodology is based on modified cost-benefit analysis using the concept of ecosystem services. The proposed method is demonstrated on a case study in the South Moravian Region of the Czech Republic. This region has been struggling with drought in the last few years, but its agricultural technologies are not adapted and appropriate nature-based solutions are not implemented. Economic analysis focuses on assessment of externalities and possible measures. It covers operating and investment costs; the loss of profits due to decreasing production; and benefits consisting mainly of prevented loss of regulating services. The results show that implementation of measures is always preferable regardless of climate change and avoids society loss.

Discounting and life cycle assessment: a distorting measure in assessments, a reasonable instrument for decisions

“…In comparison to a non-discounted impact in example 1, a decision maker would attach greater value to low fuel consumption than to the recyclability of the car, which would make sense in the ecologic as well as economic perspective. The example of Macháč et al (2021) shows the same idea from another perspective. Here, not the costs but rather the revenues play the most important role.…”

“…Further, assuming the absence of opportunity costs, the second variable in discounting, would mean to assume a limitless availability of goods or the complete fulfilment of human needs. The farmer of Macháč et al (2021) could potentially invest in better machinery instead of fertilizers to improve his yield, but maybe he also wants to buy a new car (which is more or less recyclable). In a world of finite resources, every decision means to miss many opportunities, be it other environmental beneficial measures or benefits in other fields of interest for humans.…”

“…Some environmental impacts are easier to monetize than others. For example, Macháč et al (2021) monetized soil degradation by accounting the reduction of agricultural yield. They showed that a higher discount rate would result in less fertilization today because of the reduced utility of future yield.…”

Multi-level Governance, Climate Change Adaptation and Agrienvironmental Stewardship in Small States : Micro-level Behaviour of Actors and Macro-level Policy Results

“…These impacts in many cases are both negative and positive non-market externalities (Sandhu et al, 2019). Some positive environmental externalities include biodiversity support, capturing of greenhouse gases and pollutants in the air, water quality control, soil erosion prevention and carbon sequestration (Macháč et al, 2020). In the absence of the internalization of these positive externalities, an under provision of these public goods will occur.…”

“…AES also aim to improve climate resilience of the agricultural sector, contributing to climate change adaptation and mitigation (Keenleyside et al, 2011;Macháč et al, 2020). Olsen (2007) made strong arguments for why policies to support adaptation and mitigation should be closely linked to the development of AES.…”