Category Archives: Policy

321 – Communicating economics to policy makers

When it comes to communicating research results to policy makers, economists have some advantages over other disciplines. But economists commonly make a range of mistakes when trying to communicate to policy makers.

Included amongst the advantages that economists have are that economics can be used to clarify the pro’s and cons of different decision options, and this is exactly what policy makers need in many cases.

Secondly, a good economic analysis is holistic, bringing together all, or at least most, of the relevant elements, including social, biological, physical, financial, behavioural elements, accounting for risk and uncertainty.

Thirdly, economics tries to assess outcomes from the perspective of society as a whole, rather than a particular interest group, so it can be seen as more balanced and independent than some other disciplines.

On the other hand, economists often squander these advantages by making basic communication mistakes. Too often they fail to cut out the technical jargon that is meaningless and perhaps annoying to their audience. They focus too much on abstruse technical details of their analysis, rather than focusing on why it is important and what the results mean. They explain things in abstract, conceptual terms, rather than giving examples and telling stories to make things tangible and real. In short, they are often not tuned into, or don’t understand, the perceptions and needs of their policy-maker audience.

In July I attended the annual meeting of the Agricultural and Applied Economics Association, in Atlanta, Georgia. One of the highlights for me was the presidential address by new president Keith Coble from Mississippi State University. His address was on “Relevant and/or Elegant Economics”, but mainly on making sure economics is relevant. I got a nice surprise when, about half way through the talk, he started talking positively about an old paper of mine on communicating economics to policy makers (Pannell 2004).

In that paper, I reported results from a small survey, including responses from economists who work in the policy world, senior bureaucrats, past or present politicians and a former ministerial adviser.

The most strongly emphasised advice provided by these people was to understand the policy maker’s situation and perspective.

Other messages included to be practical and pragmatic, to be persistent, to understand the importance of timing, to establish networks in order to build support, to not tell your target audience that they are wrong, and to keep your communication brief and clear.

There are many other useful pieces of advice in the Pannell (2004) paper, so have a read.

Further reading

Pannell, D.J. (2004). Effectively communicating economics to policy makers. Australian Journal of Agricultural and Resource Economics 48(3), 535-555. AgEcon SearchJournal web page * IDEAS page

Gibson, F.L., Rogers, A.A., Smith, A.D.M., Roberts, A., Possingham, H., McCarthy, M. and Pannell, D.J., (2017). Factors influencing the use of decision support tools in the development and design of conservation policy, Environmental Science and Policy 70(1): 1-8. Journal web page * Pre-publication version * IDEAS page

319 – Reducing water pollution from agricultural fertilizers

I gave a talk to the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) on July 16, 2019, exploring ways to reduce water pollution from agricultural fertilizers.

Many methods have been proposed to reduce water pollution from agricultural fertilizers. The list includes use of nitrification inhibitors, land retirement, vegetation buffer strips along waterways, flood-plain restoration, constructed wetlands, bioreactors, cover crops, zero till and getting farmers to reduce their fertilizer application rates.

Last year, while I was at the University of Minnesota for several months, I reviewed the literature on these options and came to the conclusion that the option with the best prospects for success is reducing fertilizer application rates. It’s the only one of these options that is likely to be both effective and cheap.

In my talk, I made the case for agencies who are trying to reduce pollution to focus on reducing fertilizer rates.

In brief, I identified three key reasons why there are untapped opportunities to reduce fertilizer rates.

1. Some farmers apply more fertilizer than is in their own best interests. Surveys in the US suggest that something like 20 to 30% of American farmers could make more profit if they reduced their rates. If it was possible to identify these farmers and convince them of this, it would be a rare win-win for farmers and the environment.

2. Even those farmers who currently apply fertilizer close to the rates that would maximize their profits could cut their rates without sacrificing much profit. Within the region of the economically optimal rate, the relationship between fertilizer rate and profit is remarkably flat. New estimates by Yaun Chai (University of Minnesota) of this relationship for corn after corn in Iowa indicate that farmers could cut their rates by 30% below the profit-maximizing rate and only lose 5% of their profits from that crop. For corn after soybeans, the equivalent opportunity is for a 45% cut!

3. Some farmers believe that applying an extra-high rate of fertilizer provides them with a level of insurance. They think it reduces their risk of getting a low yield. However, the empirical evidence indicates exactly the opposite. When you weigh up the chances of an above-average yield and a below-average yield, higher fertilizer rates are actually more risky than lower rates. In addition, price risk interacts with yield risk to further increase the riskiness of high rates.

I think there is a real opportunity to explore these three factors in more depth and try to come up with policy approaches that could deliver reduced fertilizer usage in a highly cost-effective way. Some of it would just be about effective communication (e.g. the design of “nudges”, as popularised in behavioural economics) while some might require a modest financial commitment from government or industry. One idea is to offer something like a money-back guarantee to those farmers who agree to reduce their rates by a specified amount. If they lose money as a result, they get compensation. Because of the flatness of the fertilizer-profit relationship, the payments required would usually be very small.

I recorded the presentation to OMAFRA, and it’s available here.

Further reading

Pannell, D.J. (2006). Flat-earth economics: The far-reaching consequences of flat payoff functions in economic decision making, Review of Agricultural Economics 28(4), 553-566. Journal web page * Prepublication version here (44K). * IDEAS page

Pannell, D.J. (2017). Economic perspectives on nitrogen in farming systems: managing trade-offs between production, risk and the environment, Soil Research 55, 473-478. Journal web page

316 – Resources for agri-environmental schemes

I’ve been asked to present a talk in Ireland in two weeks, on the topic “The Design of Effective Agri-Environment Schemes”. In putting the talk together, it struck me that I (with help from colleagues) have developed quite a few resources in this space, so I’ve collected them on a new web site to make them easily accessible.

Agri-environmental schemes (or programs or policies) aim to reduce the adverse impacts of agriculture on the environment. There are many such schemes around the world, but often they are not very efficient or effective. We could often do a lot better if we did a smarter job of designing and implementing these schemes.

Not that it’s easy. There are so many aspects to consider: the effectiveness of different practices at reducing environmental damage, their attractiveness (or otherwise) to farmers, the mechanisms to be used to promote the best practices, the costs and risks of different approaches, which environmental issues are the priorities, and so on. In my view, most designers of agri-environmental schemes don’t appreciate what a difficult task they are trying to do, and make do with relatively quick and dirty approaches to the design.

The resources I’ve included on the web site address a wide range of relevant issues, including:

  • Lessons from past agri-environmental schemes
  • The selection of appropriate policy mechanisms
  • Measuring environmental values
  • Ranking projects, including the choice of an appropriate metric
  • Additionality
  • Understanding and predicting farmers’ adoption of new practices
  • Dealing with uncertainty and including systems for learning from experience
  • The need to pull off that together in a coherent framework

It includes journal articles, books, reports, frameworks, computer tools, web sites, and blog posts, plus links to my free online course on “Agriculture, Economics and Nature”.

Overall, if an organisation wanted to design and deliver an agri-environmental scheme that would really deliver outcomes, they could benefit greatly from the material on this site. The URL is www.resources4aes.net.

Further reading

Pannell, D.J. (2008). Public benefits, private benefits, and policy intervention for land-use change for environmental benefits, Land Economics 84(2): 225-240. Full paper (140K) * IDEAS page

310 – Additionality can be tricky to assess

Many environmental policies and programs pay public money to people or businesses (or give them tax breaks or discounts) to encourage them to adopt more environmentally friendly practices and behaviours. A seemingly common-sense rule for these sorts of programs is that we shouldn’t pay people to do things that they were going to do anyway, without payment. But it can be quite a hard rule to apply in practice.

The idea that we shouldn’t pay people to do things that they were going to do anyway goes under the name of “additionality”. (It is also related to the with-versus-without principle in Benefit: Cost Analysis, and the concept of market failure – see PD272).

The idea behind “additionality” is that, when a program pays money to people to change their behaviours, the environmental benefits that result should be additional to the environmental benefits that would have occurred anyway, in the absence of the payments.

The reason this matters is that, if we are able to target payments to those behaviours that do result in additional environmental benefits, we’ll end up with greater environmental benefits overall, compared to paying for non-additional benefits – we’ll get better value for taxpayers’ money.

Some environmental programs do a poor job of checking for additionality. As I noted in PD272, much of the money given to farmers in US agri-environmental programs is not additional. In Australia, the Direct Action program for climate change doesn’t consider additionality well when selecting the winning bids in their reverse auctions (it compares practices before vs after signing up to the program, not with versus without).

So, environmental programs that allocate money to people or businesses should worry about additionality, but how? It can be harder than it sounds. It’s all very well to say, “only pay people if they would not have done it anyway”, but how do we know what they would have done anyway?

Sometimes it’s reasonably easy. There are cases where we can be pretty confident that people would not have done the environmental action, and will not start doing it in future, without a payment or regulation. I suspect that most of the work on Australian farms to fence off waterways to exclude livestock would not have happened without payments to cover the cost of fencing materials.

In the US, the Conservation Reserve Program pays farmers to remove agricultural land from production and plant environmentally beneficial species. This is probably mostly buying actions that lead to additional outcomes.

The nature of these additional activities is that they are things that are not normally done by farmers. This is largely because they cost the farmer money.

Judging additionality can be much trickier for environmental actions that also generate enough private benefits to be potentially worth doing by the private individuals or businesses. Zero tillage is a good example. Widespread adoption by farmers of zero tillage in Australia, Canada, the US and some other countries has substantially reduced soil erosion, with a range of off-farm benefits. But the reason this practice has been adopted so widely is that it can be very beneficial to the farmers who adopt it. Paying Australian farmers as a reward for doing zero tillage would be pointless, because most of them are already doing it. The public benefits would not be additional.

But imagine how it was in the early days of zero tillage. From the time when it was first developed, it took several decades for zero tillage to be taken up by most farmers. For the first decade, there were very few adopters. A program looking at subsidising zero tillage in 1990 would probably have judged that the payments would lead to additional benefits, and I would not have blamed them.

In fact, at that time, before the systems and technologies to make zero tillage work as well as it does now had been fully developed, payments in many cases would have satisfied the additionality condition. But only temporarily. At some point, the payments would have needed to be switched off, but judging when to switch them off would have been incredibly difficult. Most likely the payments would have continued for quite a while after additionality was lost.

For some practices, additionality comes and goes. For example, planting perennial pastures sequesters more carbon in soils than is found under annual crops, so it might be worth paying crop farmers to convert. But only if they would not otherwise have done so. The area of perennial pastures in Australia rises and falls over time in response to the prices of livestock products, the performance of available perennial pasture varieties, and the economic performance of cropping. If an agency started to pay farmers to plant perennial pastures, ideally they would keep a close eye on the economics of perennial pastures relative to cropping, in case additionality was lost. If it was lost for a period, then payments for that period are achieving nothing, and could be cut without losing the sequestered carbon.

But how would the agency know? The economics of a mixed farming system are very complex, and highly context specific. I worked on nothing but the economics of mixed farming systems for about 15 years, and it would take me quite a bit of effort to assess the additionality of perennial pastures on a particular farm. It would likely vary from paddock to paddock within the farm. The agency could potentially pay consultants to regularly assess the economics, but the costs of doing so on an individual farm would probably outweigh the value of the additional stored carbon.

What the Australian Government’s Emissions Reduction Fund does instead is a before-vs-after comparison of soil carbon, and it assumes that all of the increase is additional for the life of the agreement. This works initially, but the longer the agreement goes on, the larger the chance that additionality will be lost. If it is lost, then the public money allocated for converting to perennial pastures will just be a gift to farmers who would have done it anyway. The gifts could be small and short term or large and long-term; it’s impossible to know in advance. If it turns out to be large and long term, it is the farmer’s good luck – there is no mechanism in the program to turn the payments off.

Should the program have been designed differently? As I said earlier, rigorously assessing additionality on each farm over time is probably not feasible for this practice. It would cost so much that the investment in soil carbon sequestration was not worthwhile.

Additionality could be assessed for a region, rather than for many individual farms. That would make it more affordable, but given the high heterogeneity of the economics of perennial pastures within a region, or even within a farm, the assessment would be wrong in many cases. Still it might be judged to be acceptable as a compromise.

The other alternative is not to provide payments for soil carbon sequestration at all. Personally, that would be my recommendation. There are other problems with paying for soil carbon as well – leakage and permanence, not just additionality (Thamo and Pannell 2017) – and I don’t believe it’s possible to develop a sound policy that is worth the transaction costs.

Although assessing additionality can be difficult, I’m not saying that it is irrelevant. It is always worth thinking it through carefully when setting up an environmental program, and sometimes it is feasible to do a reasonably reliable assessment of it at reasonable cost. But not always. If not, then the program managers have to judge whether the risk of non-additionality is so high that it is not worth proceeding with the program. That’s a difficult judgement that should not be made lightly.

Further reading

Thamo, T. and Pannell, D.J. (2016). Challenges in developing effective policy for soil carbon sequestration: perspectives on additionality, leakage, and permanence, Climate Policy 16, 973–992. Journal web page

309 – Why do fishers in Chile put up with poachers?

Fishers in Chile have been given exclusive rights to fish in particular areas, to give them an incentive to avoid over-fishing. In theory, they should be looking out for illegal poachers and reporting them to authorities, but they often don’t bother to do this. We wondered why.

Many fisheries around the world are over-fished, in some cases to the extent that the total catch of fish is less than it would be if fishing effort were reduced. Often, the over-fishing occurs because individual fishers have no incentive to reduce their own catch; if they do so, the fish they leave will be caught by other fishers, because the fishery is “open-access”.

Various policy approaches have been used to try to address this, including limits on fishing gear, limits on the length of a fishing season, and quotas on how many fish can be caught. A relatively recent approach has been the creation of Territorial User Rights for Fishers (TURFs). In this system, a group of fishers forms a cooperative, and they are given exclusive rights to catch the fish in a certain area (Wilen et al. 2012; Gelcich et al. 2012).

The idea is that, because other fishers outside the cooperative cannot come in and poach the conserved fish, members of the cooperative have an incentive to keep their own level of catch at a sensible level. Of course, this only works if the poachers are actually kept out.

One of my PhD students, Katrina Davis, was working on fisheries management in a part of Chile, and she found that fishers who were part of a TURF cooperative were often making no effort to detect poachers or report them to authorities. She wondered why.

One could imagine various reasons:

  • A judgement that the benefits of reducing poaching would be small. (Katrina’s previous research had shown that this was not true (Davis et al. 2015), but the fishers may have had a different perception.)
  • Concerns about the cost of monitoring TURF areas, especially those that were located at some distance from home.
  • Social norms that would make people uncomfortable about reporting others.
  • Concerns about personal safety if the poachers responded with violence.
  • Lack of action by government to penalise poachers who are reported.

Katrina conducted a survey of the fishers to get to the bottom of this (Davis et al. 2017). She’s pretty fluent in Spanish, which would have helped.

She found that it was mainly about failures of government.

Fishers believe that “the judicial process in Chile does not sufficiently recognise the negative impacts of poaching, and that punishments are not sufficiently severe to deter poachers. Fishers also complained that government institutions, such as the navy or fisheries service, do not always respond to their distress calls when they detect poachers in their management areas.” (Davis et al. 2017, p.676).

Thus the government often fails to meet their side of the bargain. It would be really frustrating to fishers who went to the bother of reporting poachers only to find that their report was ignored, or that the poachers got off with trivial fines. No wonder they stopped monitoring or reporting the poachers.

What this amounts to is that the rights that have been allocated to the fishers’ cooperative are greatly diminished. They are rights in name but not in reality.

It highlights that even where a kind of privatisation approach is used to manage a natural resource, there continues to be a critical role for government to protect and enforce the rights that have been created.

Further reading

Davis, K., Kragt, M., Gelcich, S., Schilizzi, S. and Pannell, D.J. (2015). Accounting for enforcement costs in the spatial allocation of marine zones, Conservation Biology 29(1), 226-237. Journal web page

Davis, K., Kragt, M., Burton, M., Schilizzi, S., Gelcich, S. and Pannell, D.J. (2017). Why are fishers not enforcing their marine user rights? Environmental and Resource Economics 67(4), 661-681. Journal web page

Wilen,. J.E., Cancino, J. and Uchida, H. (2012). The economics of Territorial Use Rights Fisheries, or TURFs, Review of Environmental Economics and Policy 6(2), 237-257. Journal web page ♦ IDEAS page

Gelcich, S., Fernández, M., Godoy, N., Canepa, A., Prado, L. and Castilla, J.C. (2012). Territorial User Rights for Fisheries as ancillary instruments for marine coastal conservation in Chile, Conservation Biology 26(6), 1005–1015. Journal web page