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Session ID 4714, Paper# 18430

This report highlights the importance of assessing emission mitigation from a multi-dimensional perspective. For this, a quantitative framework to analyse the potential contribution of different technological mitigation options in EU agriculture is described in this report. Within the boundaries of the analysis, the need to consider land use, land-use change and house gas mitigation targets is highlighted. The assessment of carbon dioxide emissions and removals is also important in light of the new flexibility introduced in the EU 2030 regulation framework. Regarding a possible ranking of mitigation technologies in terms of their mitigation potential and attached costs, the analysis clearly highlights the need to consider mitigation technologies as ‘a bundle’. It is important to avoid the simple aggregation of mitigation potentials by single measures without taking into account their interactions both from a biophysical and economic perspective. Moreover, the analysis quantifies how mitigation measures might influence differently the agricultural sector in different EU Member States, stating that there is no ‘one fits all’ rule that could be followed for selecting which mitigation technologies should be implemented at regional level. forestry emissions and removals for a comprehensive analysis of the sector’s potential contribution to achieve certain green, JRC.D.4-Economics of Agriculture

There is concern that unilateral climate action in the EU agricultural sector may cause higher emissions abroad (i.e. emission leakage) and harm the competitiveness of the EU´s agricultural sector. Applying the CAPRI model, this paper assesses the potential for border carbon adjustments (BCA) in the form of import tariffs to limit the leakage of emissions and preserve the competitiveness of the EU agricultural sector. Our results show that even though BCA reduces emission leakage, 92 % of the emission reduction in the EU is still offset by emission increases outside the EU. What limits the effectiveness of the investigated BCA measures is that these measures are unilateral, and thus they only adjust for the reduced competitiveness at the EU internal market, whereas EU exports are still largely replaced by commodities produced in less GHG-efficient countries. Therefore, BCA alone cannot solve the high risk of emission leakage in the agri-food sector as a consequence of unilateral EU climate action.

In this paper we conduct a simulation experiment to quantitatively assess the impacts of reallocating budgetary resources within Pillar 1 of the Common Agricultural Policy (CAP) from direct income support to a direct greenhouse gas (GHG) reduction subsidy for EU farmers. Although such a budgetary shift is not foreseen in the current political discussions on the future CAP post 2020, the analysis is motivated by calls for both an increased contribution from the agricultural sector to combat global warming, and a more incentive-based delivery system for direct payments. For the analysis, we apply a partial equilibrium model for the agricultural sector (CAPRI) covering both the EU farming sector with high geographical detail as well as global food commodity markets. An integrated emission accounting for EU agriculture and global agri-food products, as well as optional technological GHG mitigation options for EU farmers make CAPRI specifically suitable for the impact assessment. For the scenario we assess a policy that removes the basic direct payments under Pillar 1 of the current CAP and provides farmers a GHG-saving subsidy instead, without increasing the total budget for direct payments. A major empirical contribution of the paper is the calculation of budget-neutral subsidy rates for the hypothetical GHG-reduction subsidy, factoring in farmers' supply and technology-adjusting responses to the policy change. The subsidy rates are derived by combining the regional representative farm models of CAPRI with a Newton-Raphson numerical approximation method that guarantees budget-neutrality. We find that a budget-neutral re-allocation of financial resources towards subsidized emission savings can reduce agricultural non-CO2 emissions by 21% in the EU by 2030, compared to a business-as-usual baseline. Almost two-thirds of the EU emission savings are due to production decreases, and, therefore, part of this GHG reduction is threaten to be offset globally by emission leakage effects. At the aggregated level, the emission-saving subsidy and increased producer prices compensate farmers for the foregone direct income support, but the significant regional differences indicate both an accelerated structural change and heterogeneous income effects in the farm population. We conclude that the assumed regional budget-neutrality condition introduces inefficiencies in the incentive system, and the full potential of the EU farming sector for GHG emissions reduction is not reached in the scenario; leaving ample room for the design of more efficient agricultural policies to combat global warming.

Two tariff aggregation extensions to global trade models are proposed, taking advantage of international trade data at the tariff line level. The proposed methods correct for typical biases in tariff aggregation. Firstly, they take into account the substitution effects in an optimal consumption bundle at the tariff line level. Secondly, they also deal with the “water” in tariffs, i.e. the imperfect transmission of tariff cuts to domestic prices. Finally, they model Tariff Rate Quotas explicitly. The aggregators are tested for Swiss tariff dismantling scenarios towards imported EU beef products, after implementing them in a partial equilibrium model of the agricultural sector.

This paper presents potential effects of twelve free trade agreements (FTAs) under the current EU FTA agenda. With the help of two economic simulation models (the global CGE MAGNET and PE AGLINK), it sheds some light on relatively balanced cumulated impacts in terms of trade, production and price for the EU agricultural sector as a whole while quantifying also the market development for specific agricultural sectors. It compares a conservative and an ambitious FTA scenario with a business as usual (reference) scenario.

Scenar 2030 aims at identifying major future trends and driving factors for European agriculture and rural regions and the perspectives and challenges resulting from them. The use of a suite of economic simulation models allows for the construction of a well-founded and plausible reference scenario (baseline) and different policy scenarios resulting in a comprehensive set of outcomes depicting economic, social and environmental indicators., JRC.D.4-Economics of Agriculture

In the prospect of on-going EU trade negotiations, we investigate non-tariff measures (NTMs) on key EU dairy exports markets. After combining latest publicly available NTM datasets, we calculate frequency and coverage ratios in order to take stock of existing measures. Subsequently, we quantify the NTM impact on EU dairy exports by a gravity estimation. In our model, we explicitly single out SPS and TBT measures and find that they dominate the negative trade effect. Our results underline the need to address NTM issues in EU trade negotiations to secure potential export markets.

We present a further developed CAPRI modelling approach for technological (i.e. technical and management-based) greenhouse gas emission mitigation options. The model is employed to assess the potential of mitigation technologies in EU agriculture by 2030, and how their application could impact agricultural market and emission developments. Scenario results show that without incentives the uptake of the considered technologies is very limited. Setting a 15% emission reduction obligation for EU agriculture is an incentive that triggers technology adoption. Once technology uptake is subsidised, their share in mitigation increases substantially, which considerably decreases any adverse effects on EU production and emission leakage. The results underline the importance of activating and supporting the uptake of mitigation technologies in order to effectively increase agriculture's contribution to emission mitigation in the EU

The project 'Economic Assessment of GHG mitigation policy options for EU agriculture (EcAMPA)' is designed to assess some aspects of a potential inclusion of the agricultural sector into the EU 2030 climate policy framework. In the context of possible reductions of non-CO2 emissions from EU agriculture, the scenario results of the EcAMPA 2 study highlight issues related to production effects, the importance of technological mitigation options and the need to consider emission leakage for an effective reduction of global agricultural GHG emissions., JRC.J.4-Agriculture and Life Sciences in the Economy

This report presents potential effects of twelve free trade agreements (FTAs) under the current EU FTA agenda. It sheds some light on relatively balanced cumulated impacts in terms of trade, production and price for the EU agricultural sector as a whole, while quantifying also the market development for specific agricultural sectors. Different from a forecast exercise, it compares a conservative and an ambitious FTA scenario with a business as usual (reference) scenario., JRC.D.4-Economics of Agriculture

In this report we analyse the economic and environmental impacts of CAP greening introduced by the 2013 CAP reform. We use the CAPRI farm-type layer, an extension of CAPRI by farm group module capturing farm heterogeneity across the EU. Its main advantage in the context of our analysis is that it allows the current implementation of the CAP greening measures to be depicted in high detail, while also capturing the environmental effects and the market feedback of the simulated policy changes. The simulated results reveal that the economic impacts (land use, production, price and income changes) of CAP greening are rather small, although some farm types, sectors (fallow land and pulses) or Member States may be affected more significantly. Simulation results show that the CAP greening will lead to a simultaneous small increase in prices and a small decrease in production. The latter impact is due to the greening obligations that require farms to take out of production a small share of land and to the slight reduction in farm productivity driven by the land reallocation effects of greening measures. Farm income slightly increases because the price effects offset the production decline. The results indicate that EFA and grassland measures tend to induce slightly higher economic effects relative to the crop diversification measure, nevertheless some variation across crops and economic indicators is observed. Similarly to economic effects, the environmental impacts of CAP greening are small, although some regions may see greater effects than others. In general, effects at EU level are positive on a per hectare basis, but the increase in UAA can reverse the sign for total impacts. Overall, simulated GHG and ammonia emissions decrease in the EU, while the total N surplus, soil erosion and biodiversity-friendly farming practices indicator slightly increase due to the CAP greening. The crop diversification measure tends to have the lowest environmental impacts, while the grassland measure has mixed (both positive and negative) effects on the reported environmental indicators. The EFA measures have positive impacts on most environmental indicators, except for soil erosion., JRC.D.4-Economics of Agriculture

The objective of the JRC PESETA II project is to gain insights into the sectoral and regional patterns of climate change impacts in Europe by the end of this century. The study uses a large set of climate model runs and impact categories (ten impacts: agriculture, energy, river floods, droughts, forest fires, transport infrastructure, coasts, tourism, habitat suitability of forest tree species and human health). The project integrates biophysical direct climate impacts into a macroeconomic economic model, which enables the comparison of the different impacts based on common metrics (household welfare and economic activity). Under the reference simulation the annual total damages would be around €190 billion/year, almost 2% of EU GDP. The geographical distribution of the climate damages is very asymmetric with a clear bias towards the southern European regions. More than half of the overall annual EU damages are estimated to be due to the additional premature mortality (€120 billion). Moving to a 2°C world would reduce annual climate damages by €60 billion, to €120 billion (1.2% of GDP).

The objective of the JRC PESETA II project is to gain insights into the sectoral and regional patterns of climate change impacts in Europe by the end of this century. The study uses a large set of climate model runs and impact categories (ten categories: agriculture, energy, river floods, droughts, forest fires, transport infrastructure, coasts, tourism, habitat suitability of forest tree species and human health). The project integrates biophysical direct climate impacts (from eight of the impact categories) into a macroeconomic economic model, which enables the comparison of the different impacts based on common metrics (household welfare and economic activity). If the 2080s climate would happen today and without public adaptation, the EU household welfare losses would amount to around €190 billion, almost 2% of EU GDP. The geographical distribution of the climate damages is very asymmetric with a clear bias towards the southern European regions. More than half of the overall EU damages are estimated to be due to additional premature mortality (€120 billion). Moving to a 2°C world would reduce climate damages by €60 billion, to €120 billion (1.2% of GDP)., JRC.J.1-Economics of Climate Change, Energy and Transport

With the Doha Round of negotiations having come to a standstill, more countries opt for preferential trade agreements with only a limited number of partners. Starting two recent negotiations, the Trans-Pacific Partnership and the EU-US trade deal, might mark the beginning of a new era in multilateral trade negotiations in a sense that they connect the largest but geographically distant players of the world market. The impact of preferential agreements on welfare and trade patterns has been subject to economic investigation for decades. Applied equilibrium models are key analytical tools in the ex ante assessment of trade negotiations, but are often criticized as being sensitive with regard to underlying assumptions and input data. For trade related impact assessment, assumptions relating to the aggregation and presentation of border protection instruments are of specific interest. This study contributes to the assessment of equilibrium modelling techniques with a focus on tariff rate quotas (TRQ) by systematically comparing simulated impacts on traded volumes and welfare under different implementation of TRQs. In the equilibrium modelling literature TRQ instruments are either modelled explicitly (linking the variable tariff rate and the fill rate of the quota threshold) or transformed into an ad valorem equivalent (AVE) tariff rate. In the standard Vinerian framework of welfare analysis, trade diversion occurs when imports from low cost producers in the rest of the world are displaced by exporters benefitting from trade preferences. The simulated shift in imports in an equilibrium model depends on the third country policy representation. With binding tariff rate quotas in the initial point, for example, shifts in traded volumes will be significantly different if the TRQ instrument is modelled explicitly or by its AVE tariff rate. This study demonstrates the sensitivity of simulated results by both developing a simple three country model of international trade and by implementing an illustrative EU-US trade deal scenario with the Common Agricultural Policy Regionalised Impacts (CAPRI) modelling system. The focus is on whether the choice of modelling TRQ instruments with third countries explicitly or by their AVE tariff rates has a significant impact on simulation results. In default, most policy instruments in CAPRI – including border protection and market intervention mechanisms – are modelled explicitly. Tariffs subject to quota limits are approximated with a smooth function mimicking the switching mechanism between preferential and out of quota rates. For the sake of this study this mechanism is optionally replaced with the AVE representation. CAPRI is then calibrated under both TRQ representations and the results of the same trade deal scenario are compared.

In 2007, JRC-IPTS started to develop concepts for data consolidation, harmonisation and management together with external partners. Building on the experience of this project, JRC-IPTS began a second initiative in 2009, together with the PROGNOZ software company to design and implement a software platform for data harmonisation and management. The resulting product, DataM, is a database management tool intended to simplify the daily data work of analysts and modellers. DataM helpsfacilitates them feeding economic models with data, checking statistical information or analysing results., JRC.J.4-Agriculture and Life Sciences in the Economy

This report compares the production, market and trade outcomes of two alternative policy scenarios, namely expiry of EU sugar quotas in 2015/16 and extension of the current sugar quota scheme. All other EU policy measures pertaining to the sugar sector, and to agriculture more generally, are assumed the same in both scenarios. The year of comparison is 2020. The CAPRI model was used for the simulations. The report begins with a description of beet and sugar production within the EU, and outlines the policies applied in the sugar sector within the EU’s Common Agricultural policy. This is followed by a description of the workings of the EU market for sugar. A theoretical model is used to summarise the main functional relationships in the EU sugar market and related markets, and the EU’s trade in sugar, from which a number of theory-based predictions about the impacts of quota expiry are derived. There is then a very brief overview of the CAPRI model and the way it has been used in this study. Isoglucose quotas will expire along with sugar quotas, and there is much speculation about the extent of potential competitive substitution between the two sweeteners, which has until now been neutralised by the quota arrangements. Sensitivity analysis was performed to obtain greater insight into this issue. Two additional quota-expiry scenarios were run, in which isoglucose was assumed to take a 10% and a 20% share of the sweetener market at the expense of sugar. The main findings are: • production of sugar beet and white sugar increases by around 4%,. • there is little net impact on the production of cereals, • total ethanol production hardly changes, but the importance of sugar as an ethanol feedstock declines by a few percentage points, • raw sugar imports from high-cost third countries decline very substantially, but those from the low-cost producer Brazil decrease only slightly, • EU sugar exports fall, • EU human consumption of sugar increases only marginally, despite a fall of 15-16% in beet prices for sugar for internal human consumption, • there is a very small positive welfare change, although income accruing to sugar beet producers falls by over 17%, JRC.J.4-Agriculture and Life Sciences in the Economy

The current paper investigates the medium term impact of climate changes on EU agriculture. We employ CAPRI partial equilibrium modelling framework. The results indicate that within the EU, there will be both winners and losers, with some regions benefitting from climate change, while other regions suffering losses in production and welfare. In general, there are relatively small market effects at the EU aggregate. For example, the value of total agricultural income, land use and welfare change by approximately between -0.3% and 2%. However, there is a stronger impact at regional level with the effects increase by a factor higher than 10 relative to the aggregate EU impacts. The price adjustments reduce the response of agricultural sector to climate change in particular with respect to production and income changes.

In this paper the impact of possible input cost developments on the EU agriculture is analysed under ceteris paribus conditions. Two scenarios are developed with the partial equilibrium model CAPRI. The scenarios assume symmetric input price changes in positive and negative directions around a projected baseline in year 2020. The magnitude of the input price changes are based on observed volatility. To measure the volatility, the annual time-series of the CoCo database were analysed, which contains input cost estimates for a multitude of agricultural activities and cost categories at the geographical level of the EU countries. Our results suggest that the uncertainty in input cost development has a strong potential to affect commodity market balances and farm incomes. There is an ongoing discussion about possible policy measures to mitigate the negative impacts of price volatility on farm incomes. This study contributes to this discussion by estimating a share of 17 billion euros of EU agricultural income being put on risk every year. The analysis also identifies vulnerable regions and production technologies that are particularly affected by input price instability. It remains for further research to perform a systematic sensitivity analysis in order to explore the impact of input cost volatility fully on the model outcomes.

This paper provides an opportunity for the reader to get an insight into the current modelling work at the Research Institute for Agricultural Economics, Hungary (AKI). After giving a short summary of the applied econometric models in the past decade, our latest development, the farm group model FARM-T will be introduced. Before introducing FARM-T in details, we devote the second part of the paper to collect all the major challenges we faced during the model development process, when we tried to establish a model structure, with which the possible effects of the introduction of the Single Payment Scheme (SPS) in Hungary can be properly estimated. Therefore, this chapter is meant to explain our motivation for choosing the applied model concept. In the following part of the paper, we provide a detailed introduction into the model. First, we describe the general structure, and then we go into the details about supply and demand sides. We lay an emphasis on the supply side, and especially how the agricultural production is represented by farm groups. After describing supply and demand sides, we focus on how the equilibrium is reached. Here, we discuss the interrelationships between sectors in more details (e.g. connection between crop and livestock production). We also stress the importance of regionally differentiated export and import markets. This enables us to take the various transportation modes, distances and market positions on different external markets into account. Finally, we discuss special model building issues related to the 2003 CAP reform, especially how the effects of decoupling of direct payments from production are estimated. We close this paper with a short summary of the problems concerned.

In our paper, we briefly discuss the outlook for the main agricultural sectors in Hungary until 2013, and present some of the latest results of our modelling work at the Research Institute for Agricultural Economics (AKI). In addition, we provide a short methodological overview of the applied modelling tools. To strengthen the quantitative analysis capacity during the pre-accession period, AKI developed a partial equilibrium model (Hungarian Simulation Model or HUSIM) by the end of the 1990's. Since then, AKI has been regularly carrying out agricultural policy analyses by applying this economic model. After gathering experiences with HUSIM, strong demand was raised on a modelling tool that enables us to investigate the structural changes in agriculture in more depth by focusing on the main sectors and their interrelationships. According to this concept, a partial equilibrium model, FARM-T was developed, which uses farm groups as agents to investigate the changes in agricultural output and the underlying structural progress. The first part of our paper describes the concept and structure of this model in more detail. In the second part, we focus our investigation on the changes in production structure and competitiveness on domestic and foreign markets. Only a few years after EU accession, Hungarian farmers again face considerable challenges: due to the full or partial decoupling of Complementary National Direct Payments already in 2007, the expected introduction of the Single Payment Scheme (SPS) in 2009, the probable abolishing of the EU cereals intervention regime, and the compulsory blending of bio-fuels, major changes in the agricultural sectors are foreseen. But structural problems and the lack of capital for modernization may slow down the adjustment process.