domestic support measures in the context of adaptation and ... · domestic support measures in the...
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Domestic support measures in the context of adaptation and mitigation
to climate change
Background paper for The State of Agricultural Commodity
Markets (SOCO) 2018
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Domesticsupportmeasuresinthecontextofadaptationandmitigation
toclimatechange
Backgroundpaperfor
TheStateofAgriculturalCommodity
Markets(SOCO)2018
JosephW.Glauber
SeniorResearchFellowInternationalFoodPolicyResearchInstitute
FormerChiefEconomistUSDepartmentofAgriculture
FoodandAgricultureOrganizationoftheUnitedNationsRome,2018
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Required citation: Glauber, J. W. 2018. Domestic Support Measures in the Context of Adaptation / Mitigation to Climate Change. The State of Agricultural Commodity Markets (SOCO) 2018: Background Paper. Rome, FAO. 2018. 40 pp.Licence: CC BY-NC-SA 3.0 IGO. The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views or policies of FAO. © FAO, 2018
Some rights reserved. This work is made available under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO; https://creativecommons.org/licenses/by-nc-sa/3.0/igo). Under the terms of this licence, this work may be copied, redistributed and adapted for non-commercial purposes, provided that the work is appropriately cited. In any use of this work, there should be no suggestion that FAO endorses any specific organization, products or services. The use of the FAO logo is not permitted. If the work is adapted, then it must be licensed under the same or equivalent Creative Commons license. If a translation of this work is created, it must include the following disclaimer along with the required citation: “This translation was not created by the Food and Agriculture Organization of the United Nations (FAO). FAO is not responsible for the content or accuracy of this translation. The original English edition shall be the authoritative edition. Any mediation relating to disputes arising under the licence shall be conducted in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) as at present in force. Third-party materials. Users wishing to reuse material from this work that is attributed to a third party, such as tables, figures or images, are responsible for determining whether permission is needed for that reuse and for obtaining permission from the copyright holder. The risk of claims resulting from infringement of any third-party-owned component in the work rests solely with the user. Sales, rights and licensing. FAO information products are available on the FAO website (www.fao.org/publications) and can be purchased through [email protected]. Requests for commercial use should be submitted via: www.fao.org/contact-us/licence-request. Queries regarding rights and licensing should be submitted to: [email protected]. Cover photograph: ©FAO/Soliman Ahmed
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Contents Acronyms........................................................................................................................................................................ivAbstract.............................................................................................................................................................................v1.Introduction................................................................................................................................................................12.Agriculture’scontributiontoglobalGHGemissions.............................................................................23.Theeffectsofclimatechangeonglobaltrade...........................................................................................34.WTOdisciplinesaffectingdomesticsupportpolicies...........................................................................74.1SupportmeasuresandtheAgreementonAgriculture.......................................................................74.2DefiningGreenBoxsubsidies..........................................................................................................................95.Thepotentialimpactofinternationaltradingrulesonclimatepolicies.......................................95.1TaxingGHGemissions.....................................................................................................................................105.2ProvidingsubsidiestoincreaseGHGefficiencyinproduction....................................................115.3ProvidingsubsidiestoreduceGHGemissionsorsequestercarbon.........................................135.4Measurestoincreaseresiliencetoproducerstotheeffectsofclimatechange...................145.4.1Agriculturalinsuranceanddisasterassistance...............................................................................155.4.2Publicstockholdingprograms.................................................................................................................185.4.3Structuraladjustmentpayments............................................................................................................195.5Regulatorypoliciestoaddressclimatechange....................................................................................206.DesigningWTO-compatibleCSApolicies..................................................................................................217.Conclusions..............................................................................................................................................................23
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Acronyms CSA ClimateSmartAgricultureWTO WorldTradeOrganizationCO2 CarbonDioxideAMS AggregateMeasurementofSupportAFOLU Agriculture,ForestryandOtherLandUseAoA AgreementonAgricultureGHG GreenhouseGasR&D Research&DevelopmentIBLI Index–BasedLivestockInsuranceUNCTAD UnitedNationsConferenceonTrade&SupportCRP ConservationReserveProgramACEP AgriculturalConservationEasementProgram
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AbstractClimateSmartAgriculture(CSA)hasbeenpromotedasakeyapproachinaddressingtheeffectsofclimatechange.Firstlaunchedin2009,CSAreferstoagriculturaltechnologiesthatarewellsuitedtoincreasefarmerlivelihoodsinthefaceofachangingclimateby1)raisingagriculturalproductivity;2)buildingresilienceoflivelihoodsandfarmingsystems;and3)reducingcarbonemissions.Whilegovernmentimplementationofmitigationandadaptationpoliciesmaybeaneffectivemeanstohelpaddressclimatechange,concernsarise,ifCSApoliciesruncountertointernationaltradedisciplines.Inparticular,CSApoliciescouldcomeintodirectconflictwithWTOtraderules,ifthesepoliciesservetoinsulatedomesticproducersfromcompetition.Thus,theycouldpotentiallydistortproductionandtrade.ThispaperexaminesCSApoliciesinthecontextoftheWTOagreements,includingdomesticsupportdisciplinesundertheWTOAgreementonAgriculture.
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1.IntroductionClimatechangewilllikelyhavesignificantimpactsonagriculturalproduction,particularlyindevelopingcountrieshighlydependentonrainfed-agriculture(McCarthy,LipperandZilberman,2018).FindingsofthefifthassessmentreportoftheIntergovernmentalPanelonClimateChangeconcludethat“allaspectsoffoodsecurityarepotentiallyaffectedbyclimatechangeincludingfoodaccess,utilization,andpricestability”(Porteretal.,2014,p.488).Thus,thepotentialimpactsofclimatechangewillfurthercomplicatethegoalofmeetingfoodandnutritiondemandsforagrowingglobalpopulationandgrowingconsumerincomes,aslaidoutintheUnitedNationsSustainableDevelopmentGoals(UN,2015).ClimateSmartAgriculture(CSA)isanapproachdevelopedbytheFoodandAgricultureOrganizationoftheUnitedNations(FAO)todevelopthetechnical,policyandinvestmentconditionstoachievesustainableagriculturaldevelopmentforfoodsecurityunderclimatechange(FAO,2013).TheCSAapproachhasthreemainpillars:1)sustainablyincreasingagriculturalproductivityandincomes;2)adaptingandbuildingresiliencetoclimatechange;and3)reducingand/orremovinggreenhousegasemissions,wherepossible.CSAaimstoimprovefoodsecurity,helpcommunitiesadapttoclimatechangeandcontributetoclimatechangemitigationbyadoptingappropriatepractices,developingenablingpoliciesandinstitutionsandmobilizingneededfinances(FAO,2013).Tradecanhelpmitigatetheeffectsofclimatechangeonfoodsecuritybyprovidingabufferagainstshorttermdisruptionsinsupplies,causedbydroughts,floodsorotherextremeweatherevents,eventswhichareprojectedtobemorelikelyasglobaltemperaturesrise(Lantz,BaldosandHertel,2015).Theimportanceoftradehasincreasedinrecentyears,aslargersharesofglobalconsumptionaresuppliedbyimports.Thesetrendsareprojectedtocontinueoverthenexttenyears(OECD-FAO,2017;O’DonoghueandHansen,2017).Overthelongerterm,tradewillbecomeevenmorecritical,aschangingclimatescausefoodproductiontoshiftgeographicallyandmorehighlyvariableweatherincreasespricevolatility.Whilegovernmentimplementationofmitigationandadaptationpoliciesmaybeaneffectivemeanstohelpaddressclimatechange,concernsariseifCSApoliciesruncountertointernationaltradedisciplines.Inparticular,CSApoliciescouldcomeintodirectconflictwithWTOtraderules,ifthosepoliciesdistortproductionandtrade.ThispaperconsidershowCSApoliciesmayaffectproductionandtrade;andassuch,comportwithexistingWTOrules.Section2discussesagriculture’scontributiontoglobalgreenhousegas(GHG)emissions.InSection3,recenttrendsininternationaltradearereviewedandtheimpactsofGHGemissionsoninternationaltradearediscussed,includinghowtradecanpotentiallyhelpachievesustainableagriculturaldevelopmentforfoodsecurityunderclimatechange.WTOdisciplinesaffectingdomesticsupportpoliciesareanalyzedinmoredetailinSection4.Section5focusesonhowCSApoliciesmaypotentially
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conflictwithWTOtraderules,includingtheAgreementonAgriculture,andtheAgreementonSubsidiesandCountervailingMeasures.Section6offersrecommendationsonhowCSApoliciescanbebestdesignedtoensurecompatibilitywithWTOrulesorhowWTOrulescouldbemodifiedtoaccommodateCSApolicies,withoutcreatinglargetradedistortions.ConcludingcommentsareofferedinSection7.
2.Agriculture’scontributiontoglobalGHGemissionsAgricultureisamajorcontributortoglobalgreenhousegasesthroughcropandlivestockproduction,aswellasthroughlandconversion.Agriculturecontributestoclimatechangedirectlybyemittingmethane(CH4)andnitrousoxide(N2O)incropandlivestockproduction,andindirectlybyaffectingnetCO2emissionsthroughitsimpactonsoil,forestsandotherlanduses.Agriculturecanalsoservetosequesteratmosphericcarbon,throughsoilmanagementpracticesandplantingofperennialcropsandtrees.Agricultureisanemissions-intensivesector,whichtypicallyemitsafargreatershareofGHGgasesthanitproducesineconomicactivity.TheWorldBank(2017)estimates,thatagricultureaccountsforabout3.8percentoftotalGDPin2015,comparedto24percentofglobalGHGemissions.IntheUnitedStates,agricultureaccountsforabout10percentoftotalGHGemissionswhiletheagriculturalsectoraccountsforonly1percentofGDP(USDAandERS,2017).EstimationbySmithetal.(2014)showed,thattotaldirectandindirectGHGcontributionsfromagriculture,forestryandotherlanduses(AFOLU)in2010,wasthesecondlargestsourceofGHGemissions(afterfossilfueluse),accountingfor24percentoftotalglobalanthropogenicemissions.BasedonFAOSTATdata,BlandfordandHassapoyannes(2017)estimated,thatdirectemissionsfromagricultureaccountforabout10–12percentofglobalGHGemissionsin2012–2014.Agricultureisthelargestcontributortonon-CO2GHGemissions,accountingfor56percentofemissions.Livestockareestimatedtoaccountfor80percentofthedirectemissions,largelyintheformofCH4.Ruminantsaccountformorethan80percentoftotallivestock-relatedGHGemissions(Havliketal.,2014).LandusegeneratesCO2emissionsbychangingthecarbonstockinforestland(soilandbiomass),andinthesoilofcropland,grassland,andwetlands(peatlandsandfloodedland).Gibbsetal.(2010)estimate,thatbetween1980and2000,83percentofagriculturallandexpansioninthetropicsoccurred,becauseofdeforestation,muchofwhichwasdonetoincreaselivestockproduction.BlandfordandHassapoyannes(2017)estimated,thatdeforestationaccountedfor59percentofgloballanduseemissionsin2012–2014.Agricultureisalsoanenergyintensivesector,usingfossilfuelsforanumberofproductionactivities,includingfuelfortrucksandmachinery,naturalgasandelectricitytopowerpumps,andprovideheatingandcoolingforlivestockoperations.Agricultureutilizesfertilizersandpesticidesthatareproducedinanenergy-intensivemanner.
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WhileemissionsfromenergyusearenotaccountedforundertheAFOLUsector,theyaccountforalmostonepercentofglobalGHGemissions(BlandfordandHassapoyannes,2017).Alsoomittedinthosecalculationsareemissionsfromfurtherdownstreamprocessing,forexamplefoodproductionanddistribution. Blancoetal.(2014)estimated,thatbetween1970and2010,GHGemissionsfromAFOLUincreasedby20percent,althoughthenetchangesince1990hasbeenminimal,dueinparttodecreaseinlanduseemissions.BlandfordandHassapoyannes(2017)estimated,thatduringtheperiod1990-2014emissionsfromdeforestationandotherlandusesdroppedbynearly25percent.Yet,whilelanduseemissionshavetrendeddownward,theirdeclinehasbeenoffsetbyincreasesinagriculturalemissions.Overtheperiod1990to2010,agriculture’sdirectemissionsincreasedby15percent,duetoanincreaseintheuseofsyntheticfertilizersandincreasedlivestocknumbers(BlandfordandHassapoyannes,2017).Withfooddemandprojectedtoincreasebyasmuchas60percentbetween2010and2050(FAO,2017),agriculturalGHGemissionsarelikelytoincreaseproportionately,unlesstherearesignificantoffsetseitherthroughdecreasedlanduseemissionsorincreasedemissionefficienciesinagriculturalproduction.
3.TheeffectsofclimatechangeonglobaltradeClimatechangewillpotentiallyhavesignificanteffectsoninternationaltradeinagriculturalproducts,astherelativecomparativeadvantageofcountrieschangeswithshiftsinproduction.Tradecanhelpmitigatetheimpactsofclimatechangebyhelpingtobalanceshiftsinsupplyanddemand.Butaswehaveseeninthepast,marketdistortionscausedbygovernmentpolicies,caninterferewithtradeandexacerbatepricevolatility.Figure1:Growthinworldagriculturalexports2000–2015
Source:WTOStatisticsDatabase2017
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Agriculturaltradehasincreasedmorethan200percentsince2000(Figure1).Higherincomegrowth,increasedpopulationandmoreopenmarketsbroughtoninpartbycompletionoftheUruguayRound,whichbroughtagricultureundermultilateraltraderulesanddisciplinesthathaveallcontributedtoitsgrowthinbothvolumeandvalue.Since2000,importsaccountforalargershareoftotalconsumptionformanycommodities.Forexample,soybeansimportsnowaccountforalmost43percentoftotalglobalconsumptioncomparedtoonly31percentin2000(Figure2a).Wheatimports–asashareoftotalconsumption–haveincreasedfrom17percentto24percentoverthesameperiod.Meatimportshaveincreasedaswell(Figure2b).Figures2a&2b:Importsaspercentofglobalconsumptionof(a)Cropsand(b)Livestockproducts
Source:USDAForeignAgriculturalService
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BaselineforecastsbytheUSDepartmentofAgriculture(O’DonoghueandHansen,2017)andOECD-FAO(2017)suggest,thatthesetrendsarelikelytocontinueoverthenexttenyears.Figures3aand3bshowprojectedimportsaspercentoftotalglobalconsumptionformajorgrainsandmeatproducts.Allyears,showmodestincreasesinimportpenetration(definedastheshareofimportsinconsumption).NeithertheUSDAbaselinenorOECD–FAObaselineexplicitlytakeintoaccounttheimpactsofclimatechangeonproduction.Figure3:Projectedimportsaspercentofconsumptionofcropsandmeats
Source:USDAERSInternationalBaselineDataSince2005therehavealsobeensignificantchangesinthecompositionoftrade.Inparticular,wehaveseenthegrowingimportanceofdevelopingcountries,bothintermsoftheirgrowingshareofglobalimportsandtheirgrowingshareofglobalexports(Figure4).Forexample,Brazilhasbecomethenumberonesoybeanexporter,surpassingtheUnitedStatessince2011.Expansionofmaizearea,particularlydoubledcroppedarea,hasboostedBrazil’sshareofmaizeexportsaswell.TheBlackSearegionoftheFormerSovietUnion
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(Kazakhstan,RussiaandUkraine)nowaccountsforalmost30percentofworldwheatexportsandhasbecomeasignificantexporterofmaizeandothercoarsegrains,aswellassoybeans.Figure4:GrowthofSouth-Southtrade
Source:UNCTADStatOntheimportside,abouttwo-thirdsofsoybeanstradedgloballyareimportedbyChina,andthatsharecontinuestogrow.Chinahasbecomeagrowingmarketformaizeandothercoarsegrains,aswellasswineandpoultry(Gale,HansenandJewison,2016).AfricahasbecomealargeandgrowingmarketforriceexporterssuchasIndia,Pakistan,VietnamandThailand(Nigatuetal.,2017).South–Southtrade–asashareoftotalagriculturaltrade–hasgrownfrom13percentin2000toalmost25percentin2014(UNCTAD,2017).Thattranslatestoaboutonequarterofthegrowthoverthepast15years,duetoSouth-Southtrade.Howclimatechangewillaffectfuturetradepatternsislesscertain,althoughitwillalterthecomparativeadvantageofsomeregionsoverothers(Huangetal.,2011).Itisimportanttorecognize,thatacountry’scomparativeadvantageinproducingacropisnotstatic,butchangeswithrelativechangesinregionalyields,costs,andotherfactors(Leamer,1984).WorkbyNelsonetal(2010)suggests,thatwhiletrademaynotbeabletofullyoffsettheimpactsofclimatechange,itcanpartiallymitigateitsimpactbybalancingsupplyanddemandacrossregions.SimilarresultshavebeenconfirmedinmorerecentanalysisbyMartinezetal.(2017),whoconcluded,thatwhileregionalyieldswillbeadverselyaffected,consumptionismoremodestlyaffected,becauseoftrade.Inadditiontopotentiallyalteringregionalcropandlivestockproduction,climatechangewilllikelyresultinmorevariableweather,whichwillexacerbateyieldvolatilityandincreasevulnerabilitytoinsectsandotherpests,someofwhichmaybeexacerbatedbypropagationofinvasivespeciesthroughtrade(FAO2013;Westphaletal.,2008).
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Tradehelpsmitigateregionalproductionshortfalls,thoughaswasseeninthefoodpricespikesof2007/08and2010/11,concernsarise,thattrademayexposeexportingcountriestoincreasedpricevolatilityindomesticmarkets.ResearchbyMinot(2014)andCeballoset al.(2017)foundlittleevidence,thatinternationalpricevolatilitywastransmittedtodomesticmarketsexceptinthosecases,whenexportswerelargerelativetodomesticconsumption.However,tradeintegrationinmanydevelopingcountriesislikelylimitedduetohightransportationandothertransactionscosts,whichlimittradeflows(Bouët,CosnardandLaborde,2017).Concernsoverheightenedinternationalpricevolatilityin2007/08and2010/11promptednumerouscountriestoimposeexportrestrictionsorotherinsularpolicies(Demeke,PangrazioandMaetz,2009).Manyofthosepolicies–whilepotentiallydampeningpriceincreasesindomesticmarkets–onlyservedtoincreasepricesandpricevolatilityininternationalmarkets.Moreover,suchbeggar-thy-neighborpoliciesresultedinothercountriesadoptingsimilarpolicies,furtherexacerbatingpricevolatilityandhurtingnetimportingcountries(Anderson,IvanicandMartin,2014).
4.WTOdisciplinesaffectingdomesticsupportpoliciesSincecompletionoftheUruguayRoundin1994andcreationoftheWorldTradeOrganizationthefollowingyear,agriculturehasbeenbroughtintoasystemofmultilateralrulesanddisciplines,includingmarketaccess,exportcompetitionanddisciplinesgoverningagriculturalsupport(Josling,TangermanandWharley,1996).Agriculturalpoliciesdesignedtoaddressclimatechangewouldbesubjecttothoseandmanyotherrules.AsthefocusofthepaperisprimarilyonCSApolicies,abriefdescriptionofthedomesticsupportprovisionsoftheUruguayRoundAgreementonAgriculturefollows.AmoredetailedlegalanalysiscanbefoundinHäberli(2018).14.1SupportmeasuresandtheAgreementonAgricultureDomesticsupportdisciplinesundertheWTOAgreementonAgriculture(AoA)distinguishbetweenprogramsthatareviewedasnon-orminimally-tradedistorting(so-calledGreenBoxsubsidies)andthosethatarenot(AmberBoxsubsidies).GreenBoxsubsidiesarejudgedtohaveno,oratmost,minimaltrade‐distortingeffectsandareexemptfromreductionundertheAoA.TobeincludedintheGreenBox,programsmustnotbetiedtocurrentproductionorcurrentmarketprices,andmustmeetspecificpolicycriteriaspelledoutinAnnex2oftheAoA.AmberBoxsubsidiesarejudgedtohavemorethanminimaltrade‐distortingeffects,andarecappedunderthetermsoftheAoA.AmberBoxsupportincludespaymentsto
1 Border measures are discussed in Blandford (2017).
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producersthataretiedtocurrentproductionlevels,marketpricesupportprograms,andotherpoliciesthatmakepaymentsbasedoncurrentoutputandcurrentmarketpricessuchascountercyclicalincomesupportprograms.Thesesubsidiesareconvertedintoanaggregatemeasurementofsupport(AMS)usingamethodologysetoutinAnnex3andAnnex4oftheAoA(Effland,2011).UndertheAoA,eachcountrywhichreportednon-exemptdomesticsupportduringthe1986-88baseperiodcommittedtobinditstotalAMSataveragelevelscalculatedoverthebaseperiodandthenreduceitbyaprescribedpercentage(fordevelopedcountries,by20percentover6years;fordevelopingcountries,by13percentover10years).AmberBoxsubsidiesarefurtherclassifiedintotwogroups—product-specificandnon-product-specificsupport—andbothcategoriesaresubjecttodeminimisteststhatexemptsupportbelowaspecificshareofthecurrentvalueofproductionfromthereportedAMS.Fordevelopedcountries,iftheestimatedlevelofsupportislessthan5percentofthevalueofcurrentproduction,supportisconsidereddeminimisandexcludedfromcalculationsofthetotalcurrentAMS.Thedeminimisthresholdfordevelopingcountriesis10percentofthevalueofcurrentproduction.2WTOmemberswhohadlargersubsidiesthanthedeminimislevelsatthebeginningofthepost–UruguayRoundreformperiodwerecommittedtoreducethesesubsidiesinaggregate(by20percentfordevelopedcountriesand10percentfordevelopingcountries).Countrieswithoutdomesticsupportreductioncommitmentsareeffectivelyboundbydeminimislevels.Athirdcategoryoftrade–distortingsupport,calledBlueBoxsupport,isaddressedinArticle6.5oftheAoA.AnysubsidiesandotherformsofincometransfersthatwouldnormallybeincludedintheAmberBoxareplacedintheBlueBoxiftheprogramunderwhichthoseincometransfersoccuralsorequiresfarmerstolimitproductionandbasepaymentsonfixedareaandyieldsormadeon85percentorlessofabaselevelofproduction,or,inthecaseoflivestock,suchpaymentsarebasedonafixednumberofhead.UndertheAoA,BlueBoxexpendituresarenotcappedand,therefore,notsubjecttoanylimitationorreductioncommitments.Therearealsoexemptionsfordevelopingcountries(sometimescalleda“SpecialandDifferential(S&D)Box”),coveredunderprovisionsinArticle6.2oftheAoA.Theseexemptionsincludegovernmentmeasuresofassistancetoencourageagricultureandruraldevelopment,generallyavailableinvestmentsubsidies,andagriculturalinputsubsidiesgenerallyavailabletolow-incomeorresource-poorfarmers.Lastly,asdemonstratedintheUS–UplandCottondispute,non–GreenBoxsupportmeasuresmaybechallengedundertheWTOAgreementonSubsidiesandCountervailingMeasures,ifthosemeasureswereshowntocauseseriousprejudicetoanothermember’sinterest,for
2 As a condition of its accession to the WTO, the de minimis threshold for China is set at 8.5 percent of the value of production.
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example,bydisplacingexportstothird–countrymarkets,significantpricesuppressioninworldmarketsorincreasedmarketsharebythesubsidizingcountry.4.2DefiningGreenBoxsubsidiesExemptpoliciesundertheGreenBoxmustmeetspecificcriterialaidoutinAnnex2oftheAoA.Toqualify,GreenBoxsubsidiesmustnotdistortproductionortrade,oratmostcauseminimaldistortion(Annex2,Paragraph1).Subsidiesmustbegovernment–funded(notthroughindirectsupportsuchashigherconsumerprices)andmustnotinvolvepricesupport.Inaddition,asreflectedinTable1,Paragraphs2through13ofAnnex2detailspecificcategoriesforgovernmentserviceprograms.Table1:GreenBoxCategories
Paragraph Description2 Provisionofgeneralservicesthatprovidebenefitstoagricultureortheruralcommunity
suchasresearchandextension,pestanddiseasecontrol,inspectionservices,marketingandpromotionservicesandinfrastructuralservices
3 Publicstockholdingprogramsforfoodsecuritypurposes4 Domesticfoodaidprograms6 Decoupledincomesupporttoproducers7 Governmentfinancialparticipationinincomeinsuranceandincomesafety–netprograms8 Payments(madeeitherdirectlyorbywayofgovernmentfinancialparticipationincrop
insuranceschemes)forrelieffromnaturaldisasters9 Structuraladjustmentassistanceprovidedthroughproducerretirementprograms10 Structuraladjustmentassistanceprovidedthroughresourceretirementprograms11 Structuraladjustmentassistanceprovidedthroughinvestmentaids12 Programsforenvironmentalprograms13 Paymentstoproducersindisadvantagedregionsunderregionalinvestmentprograms
In2013,MembersagreedaspartoftheBalipackagetoaddthefollowingactivitiestogeneralservicesprogramstopromoteruraldevelopment,foodsecurityandpovertyalleviation,particularlyindevelopingcountries.Includedwereprogramsrelatingtolandreformandrurallivelihoodsecurity,suchas:landrehabilitation;soilconservationandresourcemanagement;droughtmanagementandfloodcontrol;ruralemploymentprograms;issuanceofpropertytitles;andfarmersettlementprograms.
5.ThepotentialimpactofinternationaltradingrulesonclimatepoliciesUndertheUNClimateAgreementconcludedinParisinNovember2015,countriesagreedtotakeactionstokeeptheriseinglobalaveragetemperaturethiscenturyfrompre-industriallevelstobelow2°C(UNFrameworkConventiononClimateChange,2017).WithAFOLUemissionsaccountingfor24percentoftotalglobalGHGemissions,policymakerswillneedtoaddresstheprojectedgrowthinAFOLUemissions,ifthe
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objectivesoftheParisAgreementaretobemet.Moreover,reductionsmusttakeplace,whilemeetingSustainableDevelopmentGoalsofeliminatinghungerby2030.TherearebasicallythreepolicyapproachestoreducenetGHGemissions:1)taxingGHGemissionsdirectly;2)subsidizingpracticesthatwouldreduceGHGemissionsorsequesterCO2;and3)reducingGHGemissionsorsequesteringCO2throughregulation.Inaddition,therearepoliciesthataretargetedatmitigatingthefinancialimpactsofclimatechange,suchasagriculturalinsurance.ThissectionexaminessuchpoliciesinthecontextofhowtheymightimpactproductionandpotentiallybeviewedbyWTOagreements,includingtheAoA.5.1TaxingGHGemissionsIneconomics,anexternalityisthecostorbenefitthataffectsaparty,whodidnotchoosetoincurthatcostorbenefit.Unregulatedmarketswithsignificantnegativeexternalitiesareconsideredinefficientinthat,marketpricesdonotreflectthetrue(societal)costofthatgoodorservice.Becausethecostofthenegativeexternalityisnotincluded,producersproducemore(andconsumersconsumemore),thantheywouldhad,hadthecostoftheexternalitybeenreflectedintheprice.Taxingtheproducerforthecostoftheexternalitywould,intheory,“internalize”theexternality,sothatcostsandbenefitswillaffectmainlyparties,whochoosetoincurthem.CarbontaxeshavebeenproposedtoaddressthesocietalexternalitiescausedbyGHGemissionsthroughglobalwarming.Acarbontaxappliedtoagriculturalemissions,wouldhaveanumberofconsequences.Theimmediateeffectwouldbetoraisepricesofagriculturalproducts.Table2showstheeffectsofaUSD20/tonnesCO2epriceoneffectivecarbontaxesforgrains(wheat),rice,beefandchickenforselectedcountries.ThedataonGHGemissionsweredrawnfromrecentworkbyBlandfordandHassapoyannes(2017)thatderivesdirectGHGemissionspertonneofproductproducedforvariouscountries,usingFAOSTATdata.Thetaxeswerethencomparedtoaverageannualcommoditypricesfor2016(WorldBankGroup,2017)todemonstratetheirrelativemagnitudes.Table2—EffectsofaUSD20/tonnescarbontaxonselectedagriculturalpricesforselectedcountriesCountry Wheat Rice Beef Sheepmeat ChickenAustralia 3.0% 3.4% 11.0% 13.4% 0.2%Brazil 2.2% 2.5% 16.5% 16.7% 0.2%China 2.6% 4.0% 12.5% 5.9% 0.6%Ethiopia 1.2% 7.1% 71.5% 25.2% 2.8%EuropeanUnion 2.4% 13.1% 8.2% 10.1% 0.2%India 3.6% 3.5% 54.4% 22.4% 0.5%Indonesia 2.4% 5.6% 22.6% 22.3% 2.9%NewZealand 2.4% --- 8.9% 8.1% 0.2%UnitedStatesofAmerica 2.4% 5.6% 6.0% --- 0.2%
Source:BlandfordandHassapoyannes2017,WorldBankGroup2017
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BecauseoftherelativeGHG–inefficiencyofextensivelivestockproduction,beefpriceswouldriserelativetograinsandpoultry,likelyshiftingconsumptiontowardsbeefsubstitutes.Note,thatpriceimpactswouldbelesssevereforcountrieswhereagriculturalproductionismoreefficientvis-à-visGHGemissions.Intheexamplehere,theimpactofaUSD20/tonnesCO2ecarbontaxwouldhaveaproportionategreaterpriceimpactongrass-andrange-fedbeefproducers(India,Indonesia,Ethiopia),thanincountrieswhereconfinedfeedingwasmoreprevalent(EUandU.S.).WhileTable2isusefulforillustrativepurposes,inpractice,acarbontaxwouldbemuchmoredifficulttoimplement,sinceGHGemissionsdependonnumerousfactors,includingpractice,cropandregion(Eveetal.,2014).Anyestimatesderivedforacarbontaxwouldbefraughtwithuncertainty,sinceemissionsareoftenfromnon-pointsourcesandthisisthereasonwhytheyaredifficulttomeasure.Amorelikelyapproachwouldbeforcountriestoimposeamoretargetedtaxonaspecificsector,suchasfossilfuelproductionthatwouldthenhaveindirectimpactsinenergy–intensivesectorssuchasagriculture.Alternatively,capandtradeschemescouldbeintroducedthatlimitthetotalamountofemissionsandallowtradingofemissionpermits.Capandtradeschemeswouldpenalizehigheremittingproductsandservices,whileprovidingincentivesforadaptionofmoreefficienttechnologies.Butcapandtradeschemeswouldstillbechallengingforagriculture,duetothehighcostsofmonitoring,necessarytoensuretheintegrityofthetradingscheme.Domestictaxesaretypicallynotcoveredunderinternationalagreementssincetheyarelikelytodepress,ratherthanenhanceoutput.Nonetheless,asBlandford(2013)pointsout,exemptingsectorslikeagriculturefromemissionscaps,couldraisetheissueofimplicitsubsidizationbyallowingexemptsectorstosellemissionscredits.Likeacarbontax,thevalueofcarbonoffsetswouldbesubjecttosimilaruncertaintyinmeasurement,aswellasmonitoringandenforcementissues.Offsetscouldalsopresentfoodsecurityconcerns,forexample,ifcroplandweretakenoutofproductionforcarbonsequestrationpurposes.5.2ProvidingsubsidiestoincreaseGHGefficiencyinproduction UndertheCSAapproach,mitigationmeasuresforclimatechangearepromotedthatareinlinewiththe“foodsecurityfirst”objective.Oneapproachistoimproveefficiencybydecouplingproductiongrowthfromemissionsgrowth.Thisinvolvesreducingemissionsperkilogramoffoodoutput–includedinthiscalculationaretheeffectsofemissionsfromreduceddeforestationperkilogramoffood.Thesecondwayistoincreaseresourceefficiencybyincreasingproductivity.Publiclyfundedresearchisanotherwaygovernmentscanhelpmitigatetheimpactsofclimatechange,throughincreasingtheproductivityandGHG–efficiencyofplantandanimalproduction.Publicfinancingofagriculturalresearchanddevelopmenthasledtolargeandsustainedagriculturalproductivitygains(Alstonetal.,2010;AlstonandPardey,2014).Figure5showsUSagriculturalproductivitysince1948.Whileproductivityhasincreasedover150percentsince1948,inputusehasremainedmoreorlessconstant.
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Figure5:U.S.TotalFactorProductivity
Source:USDAandEconomicResearchServiceFuglie(2017)argues,thatthepublic–goodsnatureofknowledgecapital,namelythenon-excludabilityoffreeridersinenjoyingthebenefitsofResearchandDevelopment(R&D);andthesmall–holderstructureoffarming,haveimpliedamajorroleofgovernmentininvestinginagriculturalR&D.AndwhileprivateinvestmentinR&Dhasgrown,asrecentlyas2011,publicinstitutionsaccountedforaboutthree–quartersoftotalglobalspendingonagriculturalresearch(Fuglie,2017).ResearchbyBaldosandHertel(2014)pointstotheroleoftotalfactorproductivitygrowthinmitigatingGHGemissionsbyincreasingcarbonefficiency(amountofproductionperGHGemission).WorkbyWiseetal.(2009)shows,thatifproductiontechnologieswerefrozenat2005levels,land–usechangecarbonemissions(assumingnomitigationstrategies)wouldbemorethan70billiontonsCO2ehigheroverthe21stcentury,becausegreateramountsoflandwouldhavebeennecessarytoproducethesameamountoffood.However,duetotheso-calledreboundeffect,someoftheproductivitygainsmaybepartiallyoffsetbyincreasedproduction,atleastatthenationallevel,duetoimprovedprofitability.Atthegloballevel,reboundimpactsarelikelysmaller,sincedemandelasticitiesandmostproductivitygainswillbepassedthroughintermsoflowerprices.PublicexpendituresforCSAResearchandDevelopmentwouldlikelybeconsistentwithParagraph2ofAnnex2oftheAoA.Otherexamplesofgeneralservicespolicieswouldbetechnicalassistanceprogramsaimedathelpingcropandlivestockproducersdevelopandimplementnutrientmanagementplans;andresearchactivities,thatpromotesoilhealthandreduceGHGemissionsfromcroplandandlivestock.Thesepoliciesdonotinvolvedirectpaymentstoproducersorprocessors,noraretheseactivitiesfundedbytransfersfromconsumers.Butiftheydo,thesepolicieswouldbeconsideredamberandsubjecttodiscipline.
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InputsubsidiestoencourageadoptionofnewGHGtechnologieswouldgenerallybeconsideredAmberBoxprograms,sincetheyaretiedtoproductionortheinputitself.Theexceptionwouldbeforresourcepoororlowincomefarmersindevelopingcountries,whocouldclaimthesemeasuresunderArticle6.2oftheAoA.
5.3ProvidingsubsidiestoreduceGHGemissionsorsequestercarbonClimatesmartpoliciesthatprovideproducersfinancialincentivestoadoptpolicieswhichreduceGHGemissionsorincreasecarbonsequestration,mustmeetspecificcriteriatobeconsidered“GreenBox”undertheAoAandthisiswhytheyareexemptfromWTOdiscipline.Forexample,consideraclimatesmartpolicythatwouldpaylivestockproducerstoinstallanaerobicdigesterstocaptureGHGemissions.Toqualifyasanenvironmentalprogramconsistentwithparagraph12ofAnnex2oftheAoA,theamountofthepaymentmustbelimitedtothe“extracostsorlossofincomeinvolvedwithcomplyingwiththegovernmentprogramme”(Paragraph12(b)).Totheextentthatsuchpoliciesalsoprovideanincentivecomponenttoencourageadaptation,thismaymakethemineligibleforGreenBoxprotection.Cost-shareprogramsforestablishingconservationpracticesonagriculturallandhavesupportedimplementationoffarmingpracticesandstructuresthatreducelossoffertilitythroughsoilerosion;facilitateimproveddrainage,waterstorage,andmoreefficientirrigation;andprovidemanurestorageandassistancewithmeetingnutrientmanagementregulations(Claassen,DuquetteandHorowitz,2013).IntheUnitedStatesofAmerica,programsliketheEnvironmentalQualityIncentivesProgramandtheConservationStewardshipProgram–thathelpcoverinputcostsandincomeforegoneforenvironmentallyfriendlypractices–mayreduceproductivityortakesomeyearstoachievefullproductioncapacity.Theproductioneffectsofcost–shareprogramsaredifficulttocalculatefortworeasons.First,theadditionalityofsuchprogramsisoftenuncertain,whichmeansthatsomeproducerswouldhaveadoptedsuchpracticeswithoutincentivepaymentsorcost–share(McFarland,2011;Claassen,DuquetteandHorowitz,2013;Mezzatesta,NewburnandWoodward,2013).Shouldsubsidiesbeprovidedforallproducers,whouseapracticeorforjustthose,whonewlyadoptsuchapractice?Intheformercase,the“additionality”gainedbythesubsidymaybesmall,inwhichcase,themarginalcostofadoptionisquitehigh.Ifthesubsidyisrestrictedtojustthose,whonewlyadoptapractice,producerswhohadpreviouslyadoptedthepracticemayhaveincentivesnowtodiscontinuethepractice,iftheybelievetheywillbepaidforre–enrollingintheprogram.Second,althoughtheimpactofsomeofthesepracticesoncropyieldsmaybebeneficialoverthelongrunbyimprovingsoilfertility,plantingconditions,andwateravailability–thatcouldpotentiallyleadtoincreasedproductionandlowerprices–intheshortruntheimpactsarelikelyminorand,forsomepractices,productivitywillremainbelowconventionalpractices.
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CSApoliciestoencouragecarbonsequestrationincludeputtingcroplandintolongtermsetasides.Forexample,theUnitedStateshasoperatedtheConservationReserveProgram(CRP)since1986.UndertheCRP,producersarepaidayearlyrentalpaymentinexchangeforremovingenvironmentallysensitivelandfromagriculturalproductionandplantingspeciesthatwillimproveenvironmentalquality.CRPcontractsarecompetitivelyawardedonthebasisofenvironmentalbenefitsandtypicallyextendfor10to15years.Sinceitsfirstyearofoperationin1986,theCRPhasidledonaverage12.6millionhectares(ha)annually,butinrecenthigh–priceyears,contractsmaturedandmanyfarmersoptedtobringlandoutofretirement.The2014farmbillrestrictstheenrollmentoflandintheCRPto10.1millionhectares(ha)–equivalentto25millionacres–,andasofSeptember2017,only9.5millionhectares(ha)wereenrolledintheCRP,downfrom13millionhectares(ha)atitspeak.Thereductioninlanduseintensity,providedbytheCRP,canprovidemultipleenvironmentalbenefits,includingsubstantialGHGmitigation,=thatoccursascarbonissequesteredinsoilsorvegetation(USDA,2016).RecenteffortsbytheUSDepartmentofAgriculturetoaugmentbenefitsundertheCRP,haveincludedenrollinglandsintopermanentorlong-termeasementswithintheAgriculturalConservationEasementProgram(ACEP),withStateEasementProgramsundertheConservationReserveEnhancementProgram,andwithprivatepartners.Othereffortsincludetargetingeligiblelandstoenrolladditionalriparianbuffers,wetlands,andotherconservationpracticeswithlargeGHGmitigationbenefitsintoCRPandenrollingorganicsoils–ahighlyconcentratedsourceofGHGemissions–intoCRPorACEP.Twoconcernsarisewithlandsetasideprograms.First,idlingcroplandcouldpotentiallyexacerbatefoodsecurity.Bakeretal.(2010)considertheimpactofacarbonoffsetprogramthatpaysproducerstoconvertcroplandtoforestland.AssumingacarbonpriceofUSD50/tonnesCO2e,theyfoundthatproducerswouldafforestasmuchcroplandas15.8millionhectares(ha).Whilefarmincomeswouldrise,consumerswouldlose.Second,afforestingcroplandmayencourageindirectlanduseeffectselsewhere.Tothedegreethatretiringcroplandreducessupply,theresultingpriceincreasesmayencourageproduction(reboundeffect),particularlyincountrieswherecropproductionmaybelessGHG–efficientorwhereexpansionofproductionoccursthroughdeforestationorpastureconversion.Tothedegreepossible,carbonsequestrationeffortsviaafforestationofcroplandshouldbetargetedtowardscroplandwiththepoorestandleastefficientyieldsfromaGHGperspective.5.4Measurestoincreaseresiliencetoproducerstotheeffectsofclimatechange UndertheAoA,theGreenBoxaccommodatesanumberofmitigationmeasuresthatcanhelpproducersadjusttoincreasedweathervolatilitythatwilllikelyaccompanyclimate
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change.Agriculturalinsuranceisavailableinover100countries(MahulandStutley,2010).Annex2oftheAoAalsoaccommodatespublicreserveprogramsthatcanhelpbuffertheimpactsofproductionshortfallstomeetfoodsecurityneeds.Forproducers,whoselivelihoodsareadverselyaffectedbyclimatechange,Annex2allowsstructuraladjustmentprograms,suchasproducerretirementprogramstotransitionproducers,tomoreeconomicallyviablelivelihoods.And,throughtheBaliDecision,Annex2wasextendedtoincludeactivitiestopromoteruraldevelopmentandlandreform,suchaslandrehabilitation;soilconservationandresourcemanagement;droughtmanagementandfloodcontrol;ruralemploymentprogrammes;issuanceofpropertytitles;andfarmersettlementprogrammes.5.4.1Agriculturalinsuranceanddisasterassistance Agriculturalinsuranceanddisasterassistanceprogramscanpotentiallymitigatetheeffectsofincreasedclimatevariabilityduetoclimatechange(SkeesandEnkh-Amgala,2002;FAO,2013).Disasterprogramsaretypicallypaymentprogramsthatcompensateproducersforlossesincurredduetoanaturaldisaster.Suchprogramsoftenareinitiatedexpost,whichmeans,thataproducermayhavenoguaranteeofreceivingsuchapaymentattimeofplanting.Insurance,bycontrast,guarantees,exante(typicallypriortoplanting)apaymentcontingentonaqualifiedloss.Inreturn,theproducertypicallypaysapremiumforsuchprotection,thoughthepremiumisoftentimessubsidizedbythegovernment.3IndevelopedeconomiessuchastheUnitedStates,Japan,Canada,andEurope,agriculturalinsuranceisgenerallycharacterizedbyindemnity–basedprogramsthatprovidecropandlivestockcoverageagainstnamedperils,multipleperils,and,morerecently,priceandrevenuerisks.Individual–basedcoverageisexpensive,becauseofthehighcostofadministeringcontractsandadjustinglosses.Moreover,individual–basedpoliciesarepronetomoralhazardandadverseselectionproblems,whichaddtothemonitoringcosts4(Kalra,2013).Becausethesecostsaregenerallyhighrelativetootherriskmanagementstrategies–suchascropdiversification,futuresmarkets,oroff–farmincome–,demandforagriculturalinsuranceproducts,intheabsenceofsubsidies,tendstobelow.Thisexplainswhyprivateunsubsidizedmarketsformultipleperilinsurancehavegenerallyfailed(WrightandHewitt,1994;GoodwinandSmith,1995)andwhythelargerinsuranceprogramsintheUnitedStates,Canada,andJapanaregenerallyhighlysubsidized.Intheircomprehensivereviewofagriculturalinsuranceprograms,MahulandStutley(2010)found,thatalmosttwo-thirdsofthecountriessurveyed,reportedthattheysubsidizedpremiumcosts.Thesecountriesaccountedformorethan90percentoftotalpremiums,atanaveragesubsidyrateof47percent.Forexample,thepubliccostsoftheUSprogram,whichareestimatedataboutone-thirdof2014totalglobalpremiumvolume,areprojected
3 Not all disaster assistance programs are ex post. Some countries offer producers ex ante disaster protection. In such a case they operate effectively like a fully subsidized insurance program (Glauber, 2004). 4 Moral hazard problems arise when insured producers alter their behavior after purchasing insurance to affect their likelihood of collecting an indemnity. Adverse selection problems arise when risks vary across insurance buyers and buyers know more about the risks they face than does the insurer who sets the rates (Hirshleifer and Riley, 1992).
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toexceedUSD8billionannuallyoverthenext10years,anexpenditureofalmost90centsforeveryUSD1premiumwritten(CBO,2017).Withsuchhighprogramcosts,itislittlewonder,thatthelargeragriculturalinsuranceprogramsaregenerallyfoundindevelopedcountries,orincreasingly,inlargeemergingeconomies,likeIndiaandChina.Thehighcostsofcontractingwithlargenumbersofdispersedsmallholders–whentherearefixedcoststocontractingandpoorlydevelopedlegalinstitutionsforenforcingcontracts–haveledmanytoconclude,thatconventional,indemnity–basedinsurancedoesnotworkforsmallholderfarmersindevelopingcountries(Hazell,1992).Toaddresstheseconcerns,index–basedinsuranceproductsbasedonspecificperilsorevents(forexample,regionalyieldloss,drought,orflood)andrecordedataregionallevel(forexample,byregionalweatherstations)havebeenpromoted.Examplesofsuchproductsincludearea–yieldinsurance,wherepremiumsandindemnitiesarebasedontheaverageyieldinaregion,orweather–basedindices,suchasrainfallinsurance,whereproducersreceiveapaymentifrainfallintheregionfallsbelowadesignatedlevel(Skees,Hazell,andMiranda,1999;Carter,2012).Suchcontractstypicallyminimizemoralhazardandadverseselectionissues(Miranda,1991)andcanbeprovidedatlowercosts,becauselossadjustmentandmonitoringcostsaresomuchlower(Skees,BlackandBarnett,1997).Indexinsuranceschemeshavebeenpilotedinanumberofdevelopingcountries,withsomewhatlimitedsuccess(MirandaandFarrin,2012;Carteretal.,2014).Participationinpilotprogramshasbeengenerallylimited(Binswanger-Mkhize,2012).Smith(2016)pointsout,thatsmall–holderfarmersalreadyhavewaysofmitigatingrisk,includinginformalcommunity–basedinitiatives,enterprisediversification,andoff–farmemployment.Anotherdrawbackistheexistenceofbasisrisk;thatis,thedegreetowhichtheregionalyieldorweathervariableiscorrelatedwiththeindividualfarmyield.Producers,whoseyieldsarepoorlycorrelatedwiththeaggregateindexmayfindsuchinsuranceofferstobeinsufficientriskprotection;thus,basisriskcanacttolimitdemand.OneexceptionisIndia’sWeatherBasedCropInsuranceScheme,anindex–basedinsuranceprogramthathasgrownconsiderablysinceitsintroductionin2007toincludemorethan9millionIndianproducersin2010–11,withacombinedcommercialpremiumvolumeofaboutUSD260million(Clarkeetal.,2012;Mahul,Verma,andClarke,2012).However,theprogramisheavilysubsidized,andparticipationismandatory,ifproducersparticipateingovernmentcreditprograms.RecentworkbyBertram-HuemmerandKroehnert(2018)oflivestockindexinsuranceinMongoliaconcludes,thatinsurancemitigatedtheimpactsofdroughtforproducers,whoparticipatedinthepilot.Somebelieve,thatthepotentialmarketforweather–basedinsuranceproductsismorelikelylimitedtoinsuringrelativelylargegroupsoffarmers,eitherdirectlyorindirectlythroughaggregators,suchasinputproviders,creditproviders,orbuyersincontractfarmingsituations(Binswanger-Mkhize,2012;Smith,2016).Anotherpotentialuseofweather–basedcontractswouldbebynationalgovernmentstomitigatewide–spreademergencieslikedroughts(MirandaandFarrin,2012).
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AgriculturalinsurancehaswitnesseddramaticgrowthsincethelaunchoftheUruguayRound,largelytheresultofsubstantialgovernmentsupportmeasures.Thelevelsofsupportformanyprogramshaveraisedconcerns,thatinadditiontoprovidingriskmitigation,subsidiesmaybedistortingproductionandtrade.Whencropinsuranceisavailableandpriced,sothatthefarmcanacquirecoverage,riskaversefarmsproducemore.Butthepuresubsidyimpactalsomatters.RecentpapersbyBabcock(2015)andDu,FengandHennessy(2017)pointout,thatifproducersareparticipatinginthecropinsuranceprogramprimarilyto“harvest”subsidies,theyarenotactingoptimally.Thismeans,thattheyarenotchoosingoptimallevelsofcoveragetomaximizesubsidies.Theirstudiesconclude,thatfarmers’decisionsabouthowmuchcropinsurancetobuy,arenotgenerallyconsistentwitheitherexpectedprofitorsimplemodelstakingriskaversionintoaccount.Farmersdonotpickcoveragelevelsthatmaximizeexpectedsubsidynordotheydemandfullinsurancecoverage.However,overtime,producershavetendedtosignupforhighercoveragelevels,wheretheperunitsubsidiestendtobehigher.Glauber(2013)shows,thatintheUnitedStatesofAmericatheaveragecoveragelevelsformostrowcropshavegrownsignificantlyandcontinuouslysincethelate1990s,whensubsidieswereincreasedforhighercoveragelevels.MeasurementofimpactsoftheUScropinsuranceprogramhavefocusedonplantedareaandtheeffectsofinsuranceoninputuse.Goodwin,Vandeveer,andDeal(2004)examinedMidwesterncornandsoybeanproducersandwheatandbarleyproducersintheNorthernPlainsandfound,thata30percentdecreaseinpremiumcostswerelikelytoincreasebarleyacreagebyabout1.1percentandcornacreagebylessthan0.5percent.Soybeanandwheatacreageshowednostatisticallysignificantimpact.Ligon(2012)analyzedtheimpactofcropinsuranceonspecialtycropsandconcluded,thattheintroductionofcropinsurancehadalargeandpositiveimpactontreecrops,butanegligibleimpactonnon–treecrops.GoodwinandSmith(2012)havequestioned,whethertheresultsofearlierstudiescontinuetoberelevant,giventhatsubsidylevelsaremuchhighernowthanwhenearlierresearchwasconductedandrevenuepolicieshavelargelyreplacedyieldcoverages.Forexample,theGoodwin,Vandeveer,andDealstudyexaminedtheeffectsofinsurancesubsidiesovertheperiod1986–1993,priortoenactmentofmajorlegislationin1994and2000,thatdramaticallyincreasedsubsidylevels,andpriortotheintroductionofrevenueinsurance(Glauber,2004).Morerecently,Yu,SmithandSumner(2018)found,thatincreasedcropinsurancesubsidyrateshavehadsignificantlypositiveimpactsonproductionofmajorfieldcrops,butthemagnitudeoftheoverallproductionincreaseshavebeensmallasashareoftotalproduction.Theaforementionedstudieshavemostlyindicated,thatcropinsurancesubsidieshavehadsmallimpactsonproductionoverallinareas,whereinsuranceisbroadlyavailableacrosscrops.Cropinsurancelikelyhaslargerimpactsoncropchoicewheninsuredcropscompeteagainstuninsuredcrops,orwhencrops–whererevenueinsuranceisavailable–competeagainstcrops,whereonlyyieldinsuranceisavailable(WuandAdams,2001).Glauber(2017)pointedout,thatmeetingthestrictcriteriainparagraph7(incomeinsurance)orparagraph8(naturaldisasterandcropinsurance)ofAnnex2oftheAoAmay
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makeitdifficulttoreportinsuranceprogramsintheGreenBox.Forexample,bothParagraphs7and8,limitcoverageto70percentofexpectedincomeoryieldandestablishguaranteesbasedon5yearsorlessofhistoricaldata.Mostarea-basedyieldprogramsorweather-basedderivativeproductstendtoofferhighercoveragelevelsandcoveragelevelstendtobebasedonexpectedyieldorincomeoutcomes,whichmaydifferfromaveragesofpastoutcomes.Moreover,the70percentcoveragelimitisarguablyoverlystringentforindexproducts,sinceindexvolatilityistypicallysubstantiallylessthanvolatilityforindividualyieldorrevenue-basedcoverage.Glauber(2017)noted,thatbecauseofthevariancewithAnnex2criteria,mostcountries–thatnotifyinsuranceprogramstotheWTO–notifythemasAmberBoxprograms.Increasedyieldvariabilityduetoclimatechangewillincreasethecostsofinsuringtheserisks,aspremiumcostswillrise.Thismayreducetheattractivenessofagriculturalinsuranceasamitigationoption,unlessgovernmentscontinuetosubsidizealargeshareofthepremiumcosts.Andinsurancecompaniesmaybelesswillingtounderwriteriskswithoutlargepublicsupportintheformofreinsurance(Glauber,2004).5.4.2Publicstockholdingprograms Liketrade,stocksservetomitigatetheimpactofproductionshortfalls(WilliamsandWright,1991).Privatestockholderstypicallyholdinventorieswhenexpectedspeculativeprofitsarenon–negative.Thishappens,whenexpectedpricesequalorexceedthecostofpurchasingandstoringthecommodity.Whensuppliesareabundantandpricesarelow,stockholderstendtopurchaseandholdmorestocks.Duringperiodsofscarcity,whenpricesarehigh,stockholdersreleasestocksontothemarketandinventorylevelsfall.Stocks,muchliketrade,tendtobuffertheimpactsofsupply.Unliketrade,whichmaybenegative(imports)orpositive(exports),stocksarelimitedinthat,onecanstoreforfutureshortfalls,butcannotborrowfromthefuturetomitigatecurrentshortfalls.Publicstockholdingprogramsdatebackatleasttwothousandyears(Sumner,AlstonandGlauber,2010).Forexample,intheBiblicalstoryJosephtellsthePharaohtostoregrainduringtimesofabundancetoforestallshortagesduringtimesofdrought(Genesis41:53–57).Chen(1974)describedstockholdingschemesinChinainthefirstcenturyBCE.Morerecently,theUnitedStatesofAmericaintroducedgovernmentstockpilingprogramsinthe1930s(GlauberandEffland,2017)andtheEuropeanUnionintroducedpriceinterventionschemesunderitsCommonAgriculturalPolicyinthe1960s(Josling,1974).SubsequentreformsintheUnitedStatesofAmericaandtheEuropeanUnionhavegreatlydiminishedtheroleofthosepublicstockholdingprograms,butlargenationalreserveprogramsexistinmanydevelopingcountriessuchasChinaandIndia(G20,2011).Large-scalepublicstockholdingprogramshavebeencriticizedforanumberofreasons(WrightandPrakash,2011).First,theytendtobecostly,bothintermsofcostsofprocurementandthecostsofstorage.Second,stockholdingprogramsoftenoperateonpre–announcedprocurementpricesthatwhensethighrelativetocurrentmarketpricescanleadtolargestockacquisitionsanddistortproductiondecisions.Theexperienceofthe
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EuropeanUnion,UnitedStatesofAmericaandmorerecently,China,hasbeenthatsuchpoliciescanleadtoburdensomegovernmentstockpilelevels.Thosestockscanfurtherdistortmarketswhengovernmentsdecidetodrawdownpublicstocksbydumpingthemonworldmarkets.Lastly,publicstockholdingprogramsoftenoperateinamannerthatdiscouragesprivatestockpiling,whichreducestheeffectivenessinstabilizingmarketprices.Unlikelargescalebufferstockschemes,smallpublicreservesforpurposesofmeetingshort–termemergencyfoodneedscanhelpmitigateproductionshortfalls,particularlyincountries,wheretransportationcostsmaylimitordelayimportsofneededsupplies.Inaddition,theiroperationislesslikelytodisruptstockholdingbymerchants,andotherprivatesectormarketparticipants.OnesuchexampleistheWorldFoodProgramme’s(WFP)ForwardPurchasingprogramthataimstoachievemorerapidandcost-effectivefooddeliverytobeneficiariesacrosscountriesinvariousregions(WFP,2010).TheAoAallowsforcertainpublicly-fundedgovernmentprogramswithno(oratmostminimal)tradedistortingeffectsoreffectsonproduction,tobeexemptedfromdomesticsupportreductioncommitments,providedtheyalsomeetpolicyspecificcriteriathatarelaidoutinparagraph3ofAnnex2oftheAoA.Ofparticularconcernis,howcountriesprocuregrainorotherfoodstuffsforthereserve.Ifprocurementisbasedonpre-announcedstatutorypricesthatexceedbase-periodreferenceprices,thencountriesmustreportthesemeasuresasAmberBox(andifthesupportforthosecommoditiesexceeddeminimislevels).Theprovisionsinparagraph3havebeencontroversialintheWTOwithsomedevelopingcountriesseekingtorelaxcriteriaintheprovisionstoallowforpublicstockholdingprogramsindevelopingcountries.Thechangeshavebeenstronglyopposedbyanumberofdevelopedcountriesandexportingdevelopingcountries,whichexpressedconcern,thatifadministeredpricesaresethighenough,theywoulddistortproducerproductiondecisions,potentiallyleadingtosurplusesthatcoulddepressglobalmarketprices.5.4.3Structuraladjustmentpayments Climatechangecouldhavesevereadverseimplicationsforproducersinaffectedregions.Incaseswhereclimatechangehasdramaticallyaffectedcropsorlivestockproduction,structuraladjustmentprogramscouldhelpcountriesmitigatethoseimpactsbyprovidingaidtobuildregionalinfrastructuretosupportalternativecrops,orevenbytakinglandoutofcroporlivestockproduction,orinmoreextremecasesbyassistingproducerswholeaveagriculturealtogether.Structuralmeasuresthataredesignedtoassistpermanentlydisadvantagedproducersorregions,arecoveredinAnnex2oftheAoAunderParagraph9(producerretirementprograms),Paragraph10(resourceretirementprograms),Paragraph11(regionalinvestmentaids)andParagraph13(regionaladjustmentprograms).Duetothecostsofsuchprograms,themeasures–coveredunderParagraphs9,10,11and13–havebeen
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largelyusedbydevelopedmembers,suchastheEuropeanUnionandtheUnitedStatesofAmerica.Internationalfundingwilllikelybenecessarytoassistpoorercountriesinmakinglargestructuraladjustmentsofthiskind.5.5Regulatorypoliciestoaddressclimatechange Inadditiontosubsidiesandtaxes,climatechangemitigationcanalsobeimposedthroughregulation.RestrictionscouldbeplacedoncertainpracticestoreduceGHGemissions(forexample,regulatinghowmanureismanaged)orbyregulationsthatmandatetheproductionofproductsthataremoreGHGefficient.Biofuelmandateshavebeentoutedasclimatesmartpolicies,thoughtheyremaincontroversial,becauseoftheirpotentialimpactonGHGemissions,whenagriculturalproductionpracticesanddirectandindirectlanduseeffectsareconsidered(USDA,2016).UnitedStatesofAmericabiofuelpolicieshavestimulateddemandforbiofuelsandtheirfeedstocks.From2005to2011,USproductionofcorn-basedethanolincreasedfrom3.9billiongallonsto13.9billiongallons,atanannualgrowthrateofalmost24percentperyear.Cornuseforethanolgrewbyabout3.4billionbushels,accountingformorethan40percentoftotalcornusein2011/12.UnitedStatesofAmericabiodieselproductionrosefromjust90milliongallonsin2005tomorethan1.2billiongallonsby2014.About25percentofsoybeanoilusegoestobiodieselproduction;otherimportantfeedstocksincludeanimalfatsandothervegetableoils.
AsBabcockandFabiosa(2011)pointout,anumberofotherfactorswerecriticalforethanol’sgrowth.First,thephase-outofMethylTertiaryButylEster(MTBE)asagasolineadditivein2004and2005boosteddemandforethanolasitsreplacementinoxygenatedfuelmarkets.Thisgrowthinethanoldemandcombinedwithexistingdemandsubsidiesandalimitedsupplyofethanoltogreatlyincreaseethanolprices,ledtothewideprocessingmarginsin2006and2007.Largemarginsfurtherspurredinvestmentinethanolproductioncapacity.Second,therapidriseinoilpricesbeginningin2006encourageddiscretionaryblendingofethanolasasubstituteforgasoline.Therapidriseincornandothercommoditypricesin2007–2008promptedconcernsabouttheimpactofethanolonfoodpricesbothintheUnitedStatesofAmericaandabroad.Manycritics,likeWright(2014),blamedbiofuelproductionforincreasedpricesandvolatility.Condon,KlemickandWolverton(2015)reviewedawiderangeofstudiesthatconsideredtheimpactofethanolproductiononcornpricesduringtheperiod2007–2010.Theirmeta–analysisconcludesthataboutone-thirdofthepriceincreaseincornpricesovertheperiodwaslikelyduetoincreasedethanolproduction.Since2011,UnitesStatesofAmeriicacornethanolproductionhasremainedrelativelyflatatabout14to15billiongallons,reflectingautomobileperformanceconstraintsthatlimitethanolpenetrationinmotorfueluseat10percent(theso–calledblendwall).Today,theblendertaxcreditsforethanolhavebeeneliminatedashavethehighsupplementalduties
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onethanolimports.TheRenewableFuelStandard(RFS)mandatesestablishedundertheEnergyIndependenceSecurityActof2007havebeenrelaxedreflectingtheblendwallconstraint.Asaresult,cornuseforethanolremainsatabout5.1billionbushelsperyearandisnotprojectedtogrowmuchoverthenext10years(O’DonoghueandHansen,2017).TheRFS’simpactoncurrentcornpricesislikelysmall.Ethanoliscurrentlypricecompetitiveasanoctaneenhanceringasolineproduction(IrwinandGood,2015).Asaresult,evenwithloweroilprices,ethanolproductionmarginsremaincompetitiveandethanolproductionlevelshaveremainedabovemandatesundertheRFS.Thus,eliminationofthemandateswouldlikelyhavelittleimpactonethanolproductionandhencecornuseandprices,atleastintheshortrun.Overthelongrun,itscompetitivenesswouldlargelybedrivenbytherelativepricedifferencebetweencornandpetroleumabsentconsumptionmandates.Bycontrast,UnitedStatesofAmericabiodieselproductionisheavilydependentonthemandatesandthecurrentUSbiodieseltaxcredit,whichprovidesUSD1/galloncreditforblendersofbiodieselfuel.UndertherecentRFSfor2016,mandatesforbiodieselweresetat1.9billiongallons.Intheabsenceofthemandatesandtaxcreditsitisunlikelythatbiodieselproductionwouldbemorethanone-thirdofcurrentlevels,asanumberofstatesandmunicipalitiesmandatebiodieseluse.Lastly,concernshavebeenraisedabouttheimpactofbiofuelpoliciesonindirectlandusechange(Searchingeretal.,2017).ThemodestGHGemissionsreductionduetofirstgenerationbiofuel(suchasmaize)usemaybelargelyoffsetbytheimpactofhigherpricesonworldproduction,particularlyifproductionexpansionisaresultofdeforestationorpastureconversion.WTOdomesticsupportissuesarepotentiallyraised,whensubsidiesareusedtoencouragebiofuelproductionorconsumption,which,inturn,haspotentialimpactsonfeedstockproduction(forexample,cornforethanolproduction,soybeansforsoybeanoil-basedbiodieselproduction).Assuch,biofuelpoliciesdistortfeedstockproductionandthisisthereasonwhytheyareamberinnature.Forexample,underitsBiomassCropAssistanceProgram(BCAP)theUnitedStatesofAmericaprovidesfinancialassistancetoownersandoperatorsofagriculturalandnon-industrialprivateforestlandwhowishtoestablish,produce,anddeliverbiomassfeedstocks.TheUnitedStatesofAmericahasnotifiedBCAPexpendituresasAmberBox.
6.DesigningWTO-compatibleCSApolicies ClimateSmartAgricultureaimstoachievesustainableagriculturaldevelopmentforfoodsecurityunderclimatechange.Forthemostpart,thosegoalsarecompatiblewiththeWTOgoalsoffreeandopentrade.Indeed,aswasdiscussedinSection3,internationaltradeisitselfamitigatingstrategyinmeetingthefoodsecuritychallengesofclimatechange.An
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opentradingsystemwillbestservethepotentialneedsofbalancingfuturesupplyanddemandregardlessofhowthosefactorswillbeaffectedbyclimatechange.Tothisend,furtherprogressinloweringtariffsandotherbordermeasuresandeliminatingtrade-distortingdomesticsupportwillhelpfacilitatetimelyandappropriateexportstomeetfoodsecurityconcernsoverthelongrunandmoreimportantly,duringtimesofdistresscausedbyclimate–inducedcropfailures.Inaddition,progressshouldbemadetowardseliminatingtheuseofexportrestrictionsandotherdistortions.Ideally,theexternalitiescausedbyGHGemissionswouldbefullyincorporatedinmarketprices;inpractice,thiswilllikelyneverbethecase.Nonetheless,CSApoliciesaimedatreducingGHGemissions,orsequesteringCO2,ormitigatingtheeffectsofclimatechangeitself,shouldnotbebackdoorwaysofpromotingprotectionismordistortingdomesticproduction.Suchpolicies,whileattractivefromanarrowdomesticperspective,willlikelyhavemoreconsequentialadverseimpactsininternationalmarkets,particularlyfordevelopingcountrieswhowillbelesslikelytoaffordsuchsupportmeasures.Inthissense,CSApoliciesshouldbecompatiblewiththeoverarchingconditionsoftheGreenBoxofprovidingminimaltrade–orproduction–distortingsupport.ThatisnottosaythatreformstotheprovisionsinAnnex2shouldnotbeconsidered.AsGlauber(2017)pointsout,theAnnex2provisiongoverninginsurancearenotwelladaptedtocurrentinsuranceprograms,particularlyindexinsuranceandweatherderivatives,whichareincreasinglybeingusedindevelopingcountries(MirandaandFarrin,2012).Thatsaid,heavilysubsidizedinsuranceprograms,particularlythosethatprovidepriceandrevenueprotection,candistortproductionsincetheyaredirectlycoupledtoactualproduction.Increasingproductivity,particularlyindevelopingcountrieswhereyieldgapsareoftengreatest,shouldbeapriorityofanyCSApolicy.MorepublicR&DshouldbedirectedtowardsclimateresilientvarietiesandtowardsanaimofincreasingGHGefficiency.WhileArticle6.2oftheAoAallowsforsubsidizedinputusetoincreaseproductivityinresourcepoordevelopingcountries,inputsubsidiesfordevelopingcountriesthatpromotelessGHG–efficientproductiontechnologiesshouldbeviewedwithmorecaution.Resourceretirementprogramsmayoffersignificantopportunitiesforcarbonsequestrationthroughafforestation.However,theimpactofsequesteredcarbononGHGemissionsmustbeanalyzedinaglobalcontextintermsofindirectlanduseaswellasfoodsecurityconcerns.Likewise,biofuelmandatesshouldbelimitedtonon–foodandnon–feedfeedstocks,thoughlanduseeffectsofconvertingpotentialcroplandtobiofueluseremainanissueofconcern.
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7.Conclusions
AddressingclimatechangeinawaythatensuresmeetingtheUNSustainableDevelopmentGoalswillposesignificantchallengesintheyearsahead.Ofbroaderconsiderationiswhethertheexigenciesofclimatechangerequirerethinkingrulesunderlyingtheglobaltradingsystem,particularlythosegoverningdomesticsupport.ShouldmeasuresthatencouragetheadoptionofGHG–efficientpoliciesbeencouraged,eveniftheyincreaseproductionandtrade?Suchpoliciesmaybeefficientfromaglobalperspective,yetcouldleadtoadverseconsequencesforproducersattheregionalorcountrylevel—particularlypenalizingdevelopingcountrieswhoseresourcesmaybeinsufficienttomatchthatofmoredevelopedcountries.ClimateSmartAgricultureisanimportanttooltohelpmitigateagriculture’scontributiontoGHGemissionsaswellashelpproducersandcommunitiesbetteradapttotheconditionsbroughtonbyclimatechange.FreeandopentradeshouldbeseenasanintegralpartofanyCSAstrategy.Effortsatfurtherliberalizationthroughreductionsintariffandnon–tariffbarriers,trade–distortingdomesticsupport,andexportsubsidiesandrestrictionsshouldbevigorouslypursued.
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CA2332EN/1/11.18
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CA2422EN/1/11.18
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