CAP measures, subsidies and the environment

A brief description of recent CAP reforms

In the early years of the CAP, market price support was the dominant way of subsidizing farmers; it was therefore consumers who were mainly supporting farm incomes. Domestic prices of major commodities were significantly higher than world market prices, which boosted production and made export subsidies necessary. When this system could no longer be sustained due to internal and external pressures, a substantial reform was implemented in 1992. A significant share of support was shifted towards direct payments coupled to certain crops and livestock heads. Such 'partly decoupled' payments were coupled to the use of land for arable crops and a given number of heads of livestock but not to the level of output.

Direct payments have been mainly financed by shifting funds previously used for export subsidies and market interventions. The relative importance of taxpayers in the support of agriculture increased after 1992 (see breakdown of CAP subsidies in

Figure 13.1). This process was further reinforced by the Agenda 2000 reform, agreed at the Berlin Council meeting in 1999 (see Wier et al., 2002, for details). Administrative prices of cereals, oil crops and beef were further reduced, and the corresponding direct payments were raised.

Apart from modifications of measures concerning farm commodities (now dubbed Pillar 1 of the CAP), an additional approach was established: the programme for rural development (Pillar 2 of the CAP). This programme integrated the “accompanying measures” of the 1992 CAP reform (payments for farms in less-favoured areas, agrienvironmental measures, programmes to facilitate rural adjustment), and introduced new instruments such as modulation (reduction of payments for larger farms) and crosscompliance (environmental standards for recipients of CAP payments).

In July 2002, the Commission published a mid-term review of the Agenda 2000 reform. A final compromise on the proposals of a further CAP reform was reached on 26 June 2003; see Greek Presidency, 2003). The key element is the introduction of a decoupled “single farm payment” (see decoupled aid in Figure 13.1). It was introduced in many EU Member States in 2005 and has since then replaced premiums formerly linked to heads of livestock or land (see income support / direct aid in Figure 13.1).

Figure 13.1. CAP expenditures between 1980 and 2009

Source: European Commission, Directorate General for Agriculture, Agriculture in the European Union, Statistical and Economic Information, various issues.

From 1 January 2005 on, farmers in most European Union member states no longer needed to sow certain crops or raise certain livestock in order to obtain financial support. Since then, production decisions are expected to be based on market signals, and consequently resource allocation is likely to improve. Single farm payments are calculated on the basis of direct payments received in the reference period 2000-02. Among other conditions, land has to be maintained in “good agricultural and environmental condition” (see Article 5 of Council Regulation (EC) No. 1782/2003). In some member states, the reform has been implemented only partially: countries may opt to retain a given percentage of direct payments for arable crops, sheep and goats, bulls and steers and suckler cows, or some share of the slaughter premium (see European Commission, 2010 for country details). As a consequence, the volume of production- related direct aids (the dark grey area labelled income support / direct aid in Figure 13.1) shrunk from EUR 32 billion to EUR 6 billion between 2005 and 2010.

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