Agricultural landscapes (summary)

Table of Contents

1.1 Issue definition
1.2 Working group objective
1.3 Working group methodology
1.4 Research summary
1.4.1 Environmental farm plans (EFP)
1.4.2 Municipal property tax credit (MPTC) for on-farm conservation areas
1.4.3 Conservation cover program (CCP)
Table 1 - Estimates of external benefits of a conservation cover program in the Upper Assiniboine River Basin in eastern Saskatchewan and western Manitoba
1.4.4 Challenges and opportunities-The way forward

1.1 Issue definition

Within agricultural landscapes, EFR might be applied to provide better incentives for ecologically sound land management and pollution control. The desired long-term outcome is to enhance the ecological integrity of agricultural landscapes-where healthy water, healthy soil, and biodiversity are maintained. This outcome requires the cooperation of private landowners.

Incentives may be required, since private owners cannot be expected to pay the full cost of creating and maintaining social goods such as ecological services. However, farming practices must also be carried out in a sustainable fashion, requiring private investments and changes in operating procedures that are worked into the costs of production. Designing the right package of incentives is the challenge. Actual experience is quite varied, as demonstrated by cases in the United States, Europe, New Zealand, and in various farming regions of Canada. And the realities are complex. Political and administrative philosophies can dictate choices of instruments. There are many types of agricultural landscapes, many different aspirations on the part of farmers, and a wide variety of ecological needs. And, importantly, many options are available.

1.2 Working group objective

The objective of the Agricultural Landscapes Working Group's activities was to:

Determine the feasibility of redirecting governmental (federal, provincial, and municipal) taxation and expenditure programs affecting farmers across Canada to meet conservation needs and pollution reduction from farmlands.

1.3 Working group methodology

The case study followed three lines of inquiry:

• examination of existing efforts within North America, Europe, and other areas such as New Zealand, with some points summarized in the present report;
• identification of analytical needs, including economic analysis and modelling reviews and other studies required to make the case for EFR in terms that are relevant to decision makers at the federal and other levels of government; and
• examination of three approaches in detail, drawing on Canadian initiatives and data. These three cases are summarized here, with the full studies available as annexes.

These three approaches for applying elements of EFR for conservation within agricultural regions show that a suite of instruments will most likely be drawn upon to achieve the desired outcomes. The first two examples, development of environmental farm plans (EFP) and municipal property tax credits (MPTC) for conservation lands, draw upon existing initiatives that were started recently as regional pilot programs but have potential for national application. The third is an economic analysis that could be used for the design of a variety of conservation cover programs (CCP). This example, for the first time in Canada, rigorously investigates the net social benefits of expanding the extent of conservation cover based on watershed-level information.

The EFP case is an example of an expenditure program designed for awareness raising and education at the level of individual farmers and groups of producers. It aims for behavioural change with respect to ecological health and protection at the farm level. The MPTC example is a tax credit for on-farm conservation activities. The CCP example could serve as the analytical basis for designing support/subsidies for conservation and environmental inputs and conservation cover programs. Conservation cover programs can include protection of riparian areas, wetland protection/restoration, and the transfer of cultivated lands with high ecological value to vegetative cover that is not used for agriculture (also called "set-asides"), as well as more generic initiatives for reducing annual cropping.

1.4 Research summary

1.4.1 Environmental farm plans (EFP)

Starting in the early 1990s, farm organizations and governments began devising new methods of helping farmers become more aware of their impact on the environment. The most comprehensively developed EFP programs are in Ontario and Quebec. Each model is quite distinctive, revolving around environmental farm plan workbooks and peer review processes in Ontario, and agri-environmental advisory clubs in Quebec. Currently, there are seven versions of EFPs in Canada, along with several new ones in the making. EFPs build on voluntary action and link education and action of value to health, safety, and environmental concerns both on and off the farm. Environmental farm planning helps identify the environmental risks, liabilities, strengths, and assets affecting a farmer's operations, as well as on- and off-farm environmental conditions. From this analysis, farmers can flag areas of concern and identify opportunities for improvement. Environmental farm planning also makes farmers more aware about regulations that may apply to their farm.

The Quebec and Ontario programs use incentives quite differently. The private benefits of program content of both are delivered through participation, and a cash transfer or fee. In Ontario, there is a cash transfer of $1,500 to participants. The transfer is paid out to farmers, after initiation of their farm plans, to help cover costs of implementation. Quebec's farm "clubs" charge members a $500 annual fee in exchange for information and individual assistance (25 hours) that has a market value far in excess of $500. The difference in cash incentives (a $1,500 payment versus a $500 fee) may reflect the difference in the valuation of the private benefits provided by the program. Ontario producers face no regulatory requirement to produce an EFP or comply with specific environmental management requirements. As a result, the private benefits of the program accrue from the value of the information provided in reducing costs of production and in community relations.

In Quebec, as noted, farmers receive technical assistance. This may be of particular benefit to cattle growers, who face regulations for manure management.

A number of factors influence program uptake. The most important include:

• that it is a producer-driven, voluntary initiative;
• confidentiality to ensure farmers feel that they will not be put at a competitive disadvantage with other farmers or exposed to government fines or other regulatory action;
• incentives sufficient to secure farmer interest;
• recognition of due diligence that might aid in future loan acquisitions;
• recognition that profitability may be enhanced through actual on-farm environmental improvements;
• recognition of potential for improved market access/branding through adoption of environmentally safe practices; and
• educational benefits through access to information regarding new and innovative farm technologies and practices.

An EFP is a way to address environmental awareness raising and capacity building within the farm community. But it has potential to go beyond these important needs. Unfortunately, a key gap in these programs is the lack of systematic monitoring of environmental impacts. For example, is water quality actually improved? A University of Guelph farmer survey found risks to the health of the farm family, risks to soil health, and risks to water health as the main environmental issues addressed by farmers (in that order). The $1,500 incentive produced a very substantial private investment.

Environmental farm plans can be unique to each type of farm operation and the distinct geography of farms across Canada. There is considerable latitude in design. They can be tied to other incentive approaches such as awards and peer interaction. And they may backstop other incentive-based or regulatory programs. Support seems to be strongest for voluntary programs that are driven by farmer organizations and provincial considerations. While the greatest interest has been in central and eastern Canada, there is potential for a national program that takes into account these points. In June 2001, Canada's agriculture ministers agreed to work toward a comprehensive plan for accelerated environmental action, fully covering all Canadian farms. This decision provides a significant opportunity for EFPs nationally.

1.4.2 Municipal property tax credit (MPTC) for on-farm conservation areas

A municipal property tax credit can encourage various conservation land uses. A variety of examples exist, especially in the U.S. For this case study, a pilot project in Manitoba was examined. The incentive effects of property taxes depend on whether mill rates vary by land use characteristics, on whether property owners know how the rates vary, and on any other specific features of the property tax system. If the assessed value assumes the land is being used for production and the tax rate is uniform across all types of land use, there is a clear incentive to use the land for agricultural products (i.e., crops and livestock production). Any unused land-that set aside for conservation assuming a strict conservation interpretation of no agricultural use-will generate no revenue for the farmer but will incur the property tax. A profit-maximizing/cost-minimizing farmer will then set aside land for conservation only if development for agriculture generates net private losses.

If a rural municipality (RM) offers a tax credit, resulting in a reduction in property taxes for each acre/hectare of land set aside for conservation, the incentive is now much stronger to set aside land of low market value. The tax credit is a negative tax and as such provides a reward to the landowner for conservation. The incentive will be strongest for lands that have the lowest opportunity cost-those with the lowest value in production.

A three-year pilot study covering two rural municipalities in Manitoba provided a $1 per acre municipal tax credit for landowners who adopt specified environmentally sustainable land use practices. Funding for the project comes from Ducks Unlimited Canada, the Prairie Farm Rehabilitation Administration, and the Northwest Soil Management Association. The two municipalities provide support in-kind. Participation is voluntary. Land is eligible for the tax credit if it is used for conservation initiatives that include tame forage, native grassland, wetlands, riparian buffer zones (trees or grass within 100 metres of a waterway), and annual cropland with a minimum of 40% straw cover.

The size of the tax credit was based on two factors: $1 per acre represented the average property tax paid in Manitoba for wetlands and bush, and it was felt that any smaller amount would not provide a strong enough incentive for farmers to sign up for the program. The tax credit is clearly not sufficient to compensate owners for the total ecological services provided by their land, but it provides a small amount of compensation for allowing society to benefit from conservation. The sponsors of the program also emphasize its educational value-illustrating to farmers the need for conservation practices on their lands and that society does value them.

Landowners must apply for the tax credit each spring, specifying the lands that they consider eligible. RM staff help landowners prepare their applications. Satellite imaging confirms land uses in the appropriate conservation category for each applicant. Ground inspection for a small percentage of each RM's area helps to ensure compliance. Tax credits to those in compliance are paid at the time taxes come due in the fall. In 2000, the program protected some 31% of the land base, including 6,538 acres of wetlands, 15,116 acres of land under conservation tillage, and 39,334 acres of tame forage, native prairie, and riparian zones. The average tax credit payout was $261, with individual farmers receiving between $1 and $1,628. An evaluation of the program via mail survey indicated that 86% of participants felt the program was worthwhile and 88% agreed that the property tax system was effective compensation. The total cost of the program in 1999 was $75,787, of which approximately $61,000 represented the tax credits. The balance was for administrative costs, including satellite analysis, advertising and communications, labour, travel, processing, and program evaluation.

To assess the "value" of the program, the focus should be on the present value of the social benefits and costs-that is, those incurred by society as a result of the program. The social benefits of using an MPTC are believed to include improvements in environmental quality such as:

• preservation of soil quality/reduction in erosion;
• improvements in water quality for drinking and for recreation;
• reduced flooding;
• increase in and maintenance of wetlands;
• protection of air quality (carbon sequestration);
• preservation of riparian ecosystems, with associated benefits;
• biodiversity conservation;
• wildlife habitat enhancement for aquatic and terrestrial species; and
• energy conservation.

Social benefits also include reduced public expenditures on environmental infrastructure such as:

• less silt removal needed from waterways;
• lower water treatment costs;
• reduced flood control expenditures;
• lower erosion, culvert, and crossing repairs; and
• less drain clogging.

These benefits have not been quantified, but it is not unrealistic to assume that the savings in public expenditures could amount to at least $1 per acre. The program, therefore, pays for itself in cost savings to municipalities. Over time, improvements in environmental quality may also lead to higher land productivity due to less soil erosion, for example. This could raise land values, and, in turn, generate more property tax revenue, which could be allocated for public goods and services. The MPTC could even lead to a more diversified local economy through more recreational opportunities on conserved lands, more tourism, different crop mixes, and so on. The well-being of residents may rise.

Social costs (to the municipalities) could include:

• forgone revenues;
• incremental administrative costs (above those for normal property tax collection); and
• costs of assessing the program's effectiveness in meeting environmental targets.

Another issue is the jurisdictional level at which the social benefits and costs of the program are measured-municipal, provincial, or national? Normally, one would focus on the jurisdiction doing the decision making, in this case, the municipality. But this is problematic for the MPTC, because the environmental benefits may extend far beyond municipal boundaries. Thus, some costs of the program may logically be borne by governments at the two higher jurisdictional levels.

Lessons from the Manitoba initiative show that a variety of factors contribute to a program's success. For example, a program benefits from:

• support from a broad spectrum of affected parties, including local government;
• being voluntary;
• tax credits that can reduce a landowner's property taxes to less than zero;
• annual review, permitting reversible land use and return of cash to the farmer in each year of participation;
• a relatively small minimum acreage required for participation;
• administrative simplicity, including fewer and less complex eligibility requirements;
• public awareness and a favourable political climate, with no sense that the program is an unwarranted subsidy, but simply a payment that recognizes the social benefits from conservation occurring on private lands;
• a design that is not likely to initiate any international trade actions;
• a structure adapted to local conditions and more flexible than a "one size fits all" program; and
• being a stand-alone program that does not require landowners to participate in other programs, but can be readily integrated with other conservation initiatives.

Based on a review of several MPTCs in North America, the challenges include:

• sustainable program funding, since the tax credit affects municipal revenues;
• low participation rates/lack of awareness of the program, arising from factors such as size of acreage covered, insufficient advertising/communication, eligibility requirements that are too costly and complex for the landowner to comply with, and program design not well targeted at clear environmental objectives;
• difficulty in measuring the environmental benefits;
• determining whether the tax credit is even necessary (i.e., whether landowners would have taken action without the incentive);
• setting the tax credit at an appropriate rate-too low and it will fail to get participation, too high and the landowner gets unnecessary rents; and
• integration with other programs to avoid double dipping.

On this last point, if more than one program operates in a region simultaneously, the challenge is to ensure that the landowner is not collecting two payments for the same activities, unless this is the goal (perhaps resulting from different funding sources).

In summary, the MPTC is an incentive-based policy that merits continuation-and extension beyond the pilot programs-as one of a potential suite of EFRs designed to improve environmental quality. A MPTC creates a market-like value for conservation activities valued by society but not traded in traditional markets. The landowner looks at the "price" (tax credit) per unit of land if specified conservation activities are undertaken and compares this price with the land's marginal returns in any other use. While typically a modest incentive, it conveys the idea to landowners of valuing non-market environmental benefits. Programs with clear eligibility requirements, low compliance costs, and flexibility in land allocated (through small minimum acreage levels) are more likely to draw participants and deliver environmental benefits. Key challenges are funding the tax credit and measuring net benefits of the programs to ensure that they are successful in improving environmental quality.

1.4.3 Conservation cover program (CCP)

In the past year, Ducks Unlimited Canada has proposed a national conservation cover program. Targeted lands would have a number of conservation values, such as those exhibited in riparian zones or wetland areas. A CCP provides for the removal of these lands from agricultural use either permanently or for a period of years. Economic incentives to encourage this land conversion provide a policy instrument that facilitates a public investment into private land use decisions, ensuring that the agricultural landscape provides a range of goods and services valued by society.

These external environmental benefits may involve a number of factors associated with improved water quality, including

• decreased treatment costs;
• lower dredging costs to remove sediment from water conveyance and storage infrastructure; and
• increased recreational opportunities (including fishing and swimming).

Other external benefits may include:

• greater wildlife use;
• biodiversity;
• stewardship for species at risk;
• aesthetic values;
• increased carbon sequestration and decreased net greenhouse gas emissions; and
• mitigation of flooding.

External costs of the conservation cover program may include the extra costs associated with delivering land conversion incentives and compensation required for incremental crop depredation by wildlife.

It is assumed that if the landowner decides to convert a parcel of land to conservation cover, the private benefits (including the economic incentive provided by the institution responsible for delivering the program) are greater than the private costs associated with the conversion. Therefore, quantifying only the external benefits and costs associated with the land conversion will facilitate calculation of the net external benefits (or costs) of the program. The three river basins/watersheds selected for the study are the Upper Assiniboine River Basin of Saskatchewan and Manitoba; the Grand River Watershed located near Guelph, Ontario; and the Mill River Watershed in western P.E.I. These units were selected because they represent agricultural landscapes within different regions, and because reasonable data exist for each one.

While some data problems remain, there is a consistent pattern demonstrating a substantial net external benefit from a conservation cover program. In the case of the Grand River, the best estimate was net external benefits of $195/ha/year (with a range of $79 to $342). The Upper Assiniboine River demonstrated net external benefits in the range of $29 to $106, with a best estimate of $65/ha/year. Information on the Mill River falls in between the other two (range $69 to $236, with a best estimate of $142/ha/year). In the case of the Upper Assiniboine River, it has been possible to determine optimal program impacts using a supply response based on known lease rates. Table 1 shows both the calculated values for the external benefits and the calculated optimal program impacts. Information on the other two watersheds is provided in the main report.

The external benefits in this and the Grand River case show a similar pattern. The largest external benefits arise from a combination of carbon sequestration and greenhouse gas emissions reduction. But the next largest benefit is saved government payments, because land is taken out of agricultural production. In the Grand River case, the figure is even higher ($46.00 compared with $12.00). Also in the Grand River, there are additional benefits such as phosphorus reduction ($23.50), recreational fishing ($26.00) and high non-consumptive wildlife use value. These factors all contribute to the higher net external benefit for a CCP in this river, which flows through areas of relatively high human population density.

The major contribution of this study is the substantial level and quality of information compiled. An economic analysis like this has not been done before. Moreover, the analysis is not based on "back of the envelope" guesses. The figures are rigorously developed from the best available economic and ecological information. They make a compelling case that a conservation cover program would provide a very good return to society in a variety of watershed settings representing different environmental and regional conditions across Canada. The figures compiled for each case represent an "average" watershed situation-a baseline condition. With more fine-tuning, it would be possible to examine the benefits of particular kinds of conservation cover programs, for example, for riparian zones. This fine-tuning would require more information on the specific impacts of various types of riverside and watershed cover on factors such as sediment trapping by riparian vegetation, nutrient removal, and enhanced fish production. In each instance, such information would have to be translated into economic impacts.

The three watersheds were chosen to represent different agricultural regions and, thus, different climates, farming operations, and farming practices. The information could be refined over time, and the analysis to date has revealed a variety of data gaps. In its own right, this "shortcoming" can add value, because it highlights research needs. There would be high returns to our knowledge by compiling additional and better information around these three rivers, rather than repeating the exercise at a superficial level in other basins.

1.4.4 Challenges and opportunities-The way forward

There is little doubt that EFR initiatives can be successfully implemented and help society to safeguard and provide ecological services in agricultural landscapes. Success will come by engaging a substantial portion of the farmers within a region. To do this, it will be necessary to adjust incentives, consider the impact of issues such as cross-compliance, and build a level of understanding about what exactly is to be achieved. The compelling strengths of the examples studied are that they are voluntary and have the potential to save society and governments money. They demonstrate that each level of government can play a role in EFR for agricultural landscapes, yet not every level of government needs to be involved in each case.

The range of instruments available provides many options and opportunities to assemble suites of instruments that are mutually supportive, expand the opportunity for voluntary stewardship action, and lend substance to the notion of the eventual "green branding" of Canadian agriculture. There must be a progression from building awareness and knowledge, to implementation, to adequate assessment of outcomes (especially improved environmental conditions in agricultural watersheds and landscapes).

Environmental farm plans can act as a precursor for action-providing the baseline knowledge and "kick-start" for small initiatives at the individual farm level. The municipal property tax credit shows that even a modest incentive can help encourage and reinforce conservation behaviour. The EFP and MPTC are complementary, since the former would help landowners identify which land is best to set aside, and municipalities might wish to extend a MPTC to those with an EFP. Economic analysis of net external benefits can be used not only for CCP design, but also for a range of other purposes, including the monitoring of which lands are most valuable for conservation easements or for determining the most appropriate lands to qualify for incentives such as the MPTC.

The study identified key factors influencing program uptake. One very important matter is to remember that one size will not fit all. Provincial inputs and philosophies, flexibility of designs based on inputs of specific agricultural sectors and regional groups, simplicity in operation and administrative rules (even if this means less capacity for targeting at the initial stage), and modest administrative costs are all hallmarks of a successful program. There is a need to examine how best to tailor EFR to specific regions, especially when several initiatives are layered on current (command and control) regulatory approaches such as zoning. A "one window" approach may be helpful for farm producers faced with a variety of programs and regulatory concerns. It is not clear what level of uptake constitutes success. The notion of continuous improvement will be helped as the participant base expands.

Strategic investment in science and program assessment is required to support the various EFR initiatives. It is difficult to sort out the value of individual programs when several are contributing to changes, so science must be linked in many instances to economic analysis. This is most clearly demonstrated in the watershed net external benefit analysis. There are years of work ahead, especially for targeted activities such as riparian zone conservation initiatives. But this should not prevent the development and implementation of incentive programs, if, from the outset, a commitment is made to evaluate them through rigorous scientific monitoring. It will be an inexpensive way for society to obtain information about the environmental conditions and ecological dynamics of agricultural landscapes.

The goals of EFR in agricultural landscapes need to be focused on the positive net benefits/externalities for society in terms of enhancing and maintaining ecological integrity. Private benefits may also accrue, but it is not necessary for society to pay for them. In the design of programs, revenue-neutrality may be a goal, keeping in mind that programs may be effectively revenue-neutral if the conservation activities result in lower costs to government for mitigation of environmental degradation. The important point is to be able to demonstrate as clearly as possible that the results truly reflect a cost-effective, positive level of social benefit. The expression of benefits must be easily understood by a range of people and organizations, including producers, stakeholders and decision makers. Failure to communicate benefits effectively will threaten otherwise well-planned initiatives. Often this will mean partnerships that can generate and use knowledge in an adaptive fashion-learning by doing, as outlined above.

EFR for agricultural landscapes will be implemented only to the extent that demand exists to drive programs forward, sometimes in the face of barriers that favour the status quo. At least some of the demand will be generated through global accords such as climate change, where there is interest in carbon sequestration, and through voluntary initiatives such as greener production certification at national or international levels. Unless net societal benefits are clearly articulated and can be verified by monitoring of outcomes, the full value of EFR approaches (which provide farmers with flexible options) is not likely to be achieved.

The following recommendations are proposed for follow-up action to this report:

• The NRTEE should continue to explore EFR, focusing on increasing understanding of the potential applications to the agricultural sector, and providing specific recommendations to federal and provincial governments that would assist in the design and implementation of such initiatives.
• Federal departments, led by Agriculture and Agri-Food Canada, should develop a plan for "green branding" of Canadian agriculture nationally and internationally that fully incorporates EFR, including voluntary initiatives that can be implemented through farmer stewardship.
• The June 2001 ministerial commitment to accelerate the pace of improving environmental practices on-farm should be met by expanding programs based on, among other things, the three EFR examples provided here.
• High-priority conservation cover and environmental initiatives should be developed, based on the watershed ecological-economic analysis presented here, for example, by designing a program for improving water quality associated with farm runoff.
• There should be an increased federal and provincial commitment to the gathering and sharing of information on the effectiveness of EFR initiatives and indicators of success, and to the development of mechanisms for using this information in the design of complementary EFR initiatives employing suites of instruments.
• Farmer organizations should become more involved in the design, promotion, and implementation of EFR initiatives, with a view to becoming active partners in the development of regionally and sectorally focused approaches.