The impact of modulation as a policy instrument

Peter Nowicki, Kaley Hart and Hans van Meij1

In the current situation of limited empirical evidence on the impact of modulation, a combination of modelling and non-modelling approaches is used in a study for Directorate General Agriculture and Rural Development in order to provide a comprehensive analysis of consequences on distribution of funds and budgets, farm structure, socio-economic conditions (competitiveness, farm income, employment, quality of life) and environmental quality. This chapter analyses a variety of economic outcomes achieved through a range of modelling methods.

Modulation as a policy instrument

The term modulation was first used in relation to the Common Agricultural Policy (CAP) during the 1992 MacSharry reforms, and was related to a proposal to impose a ceiling, or cap, on the amount of subsidy that an individual farmer could receive from the CAP. During the Agenda 2000 CAP reform, the meaning of modulation changed, to describe a policy mechanism for shifting funding from the part of the CAP budget dedicated to providing income support payments to farmers (Pillar 1) to the newly introduced Rural Development Regulation,2 known as Pillar 2. At the time, there was little support for such a mechanism being introduced on a compulsory European Union (EU)-wide basis, and the final agreement resulted in “voluntary modulation” being introduced, giving member states the option to redirect up to a maximum of 20% of Pillar 1 funds3 to their rural development programme (RDP) budgets.

The 2003 CAP reform initiated a shift away from support for agricultural production along with a greater emphasis on sustainability, the environment and rural development. Amongst a number of fundamental changes to the operation of Pillar 1 funds, an agreement was reached that made modulation a compulsory policy mechanism for all EU15 member states to implement, with later obligations for the new member states.

The legal basis for this, the current, form of modulation, was laid down in Article 10 of Council Regulation (EC) No. 1782/2003 of 29 September 2003, which specified that all farms within the current EU15 would be subject to compulsory modulation from 2005 at levels of 3% in 2005, 4% in 2006 and 5% for 2007-12, and that these resources would be allocated between member states according to a set of objective criteria to be spent on rural development measures. Compulsory modulation does not apply to the twelve new member states that acceded to the European Union in 2004 and 2007 until their Pillar 1 payments reach the same level as those for the EU15. This will be 2013 for the EU10, and 2016 at earliest for Bulgaria and Romania. Compulsory modulation does not apply to the French overseas departments, Azores and Madeira, or to the Canary or Aegean Islands.

The aim of this study was to explore the economic, social and environmental effects of introducing compulsory modulation, both under current rates and rules (the baseline scenario), and a potential future scenario (the Health Check scenario), based on the Commission’s proposals for increasing modulation as part of the CAP Health Check. The results should help to bring about a greater understanding on the degree to which these benefits are tangible, and how they might change under possible higher rates of modulation in the future. This paper builds on the Study on the economic, social and environmental impact of the modulation provided for in Article 10 of Council Regulation (EC) No 1782/2003 commissioned by the Directorate General for Agriculture and Rural Development of the European Commission (Contract No. 30-CE-0162480/00-47, Nowicki et al., 2009).

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