Indicator-based agri-environmental payments: A payment-by-result model for public goods with a Swedish application

Biodiversity, cultural heritage, and scenery are major public goods produced in the agricultural landscape. Theoretically, Indicator-based Agri-Environmental Payments have the properties of providing socially efficient production. A system of seven composite state indicators, expressing the public goods of the respective fields or field elements, was developed and tested to assess if the model worked in practical policy implementation. The evaluation indicated a more efficient resource allocation, better dynamic incentives and lower transaction costs, compared to the current Swedish payment programs. A disadvantage is that such value-differentiated payments do not comply with tailoring and with present WTO- or CAP-regulations of cost-based payments.

► A system of agri-environmental payments based on indicator estimates of the presence of environmental public goods at fields, pastures and landscape elements is developed and assessed.
► The concept and measure “quantitative hectare” is introduced, which simplifies analysis of the optimal amount of public goods in the agricultural landscape and settling an optimal price for agri-environmental payments.
► Value-differentiated agri-environmental payments are theoretically more efficient than (the present) cost-based, uniform payments for management measures, and the study indicates that such payment-by-result systems are also feasible in practical policy implementation.
► The evaluation indicated that the indicator-based agri-environmental payments have lower transaction costs, higher dynamic social efficiency and better control properties than the current Swedish payment programs, but do not comply with tailoring and with present WTO- or CAP-regulations demanding cost-based payments.