Modern agricultural production has a variety of side effects on human health and natural environments [1
]. To counter these effects, governments in many developed countries allocate significant funds to agri-environment schemes that compensate farmers for using more environmentally friendly farming practices [3
]. Nevertheless, substantial impacts on the environment and human health remain unaddressed, causing significant direct and indirect costs to society, for instance through water and air pollution [5
] or losses of biodiversity [7
]. Both the financial costs of the agri-environment schemes and the remaining impacts are external to the market economy. They do not show up in the market prices paid by consumers of agricultural products. In economic terminology, these side effects of production and consumption are known as external costs or externalities (e.g., [8
From the perspective of society as a whole, the externalities of agriculture are a serious issue from both efficiency and fairness perspectives. In the presence of negative externalities, the market prices do not reflect the full costs of production and thus signal to consumers that the costs of food are lower than they actually are. Accordingly, consumers buy and consume too many harmful products relative to a situation in which they pay the full costs of their consumption. In addition, those who consume less environmentally damaging products are equally affected by the damage, and those who produce in environmentally friendly ways may be outcompeted by inexpensive but environmentally harmful forms of production. The classical solution of these efficiency and fairness issues is to ‘internalize’ the externalities through environmental taxes on the activities that cause the externalities. To justify such taxes and to calculate appropriate tax rates, the external costs of agriculture need to be understood [9
Previous studies assessing external costs of agriculture at the national level have focused mainly on a comprehensive assessment of direct financial costs of environmental damage such as expenditures for treatment of polluted water, medical treatment of respiratory diseases, restoration of habitats, or monitoring programs (e.g., [10
]; see following section). The financial costs, however, do not represent the total external costs, since they do not account for any damage that goes untreated.
The present study takes a different approach. For each examined externality, it considers two cost components: The direct financial costs of agri-environment measures to avoid or reduce the externality and the additional costs to society arising from the current (remaining) externality. The valuation of the latter is based on what society is paying to reduce the externality by one unit. This amount is derived from the payment rates and effectiveness of the respective agri-environment measures. The value per unit of externality—a so-called shadow price, as it is not paid in a regular market—is then multiplied with the quantity of the externality to obtain the external costs of the current quantity of externality. This empirical approach benefits from a tendency in agricultural policies to increasingly address environmental issues through voluntary agri-environment schemes.
The approach is implemented with data for Switzerland. Important externalities of Swiss agriculture include emissions of greenhouse gases, ammonia, nitrate, and pesticides, soil erosion, habitat loss, and animal suffering. For each of these externalities, Swiss agricultural policy offers financial incentives for voluntary mitigation.
The paper contributes to the literature in three ways: (1) By structuring the approaches used in previous studies; (2) by proposing a framework for the valuation of agricultural externalities based on payments for agri-environment measures; and (3) by presenting a relatively comprehensive assessment of the external costs of Swiss agriculture.
The following section provides a review of the approaches and results of previous studies. Section 3
and Section 4
present the conceptual framework and methods. Section 5
contains the results, and Section 5
and Section 6
offer discussion and conclusions.
2. Literature Review
The existing literature on agricultural externalities comprises only five well-documented and comprehensive assessments at national or higher level. Table 1
provides an overview of these studies, the valuation approaches they followed, and the reported externality estimates per hectare of agricultural land. The first of these studies, by Pretty et al. [10
], largely defined the methodology that was pursued in the following papers, with the exception of FAO [9
Pretty et al. [10
] start from a list of physical damage categories such as “pesticides in sources of drinking water”. They then compile mainly financial costs arising from (water) treatment, medical treatment, restoration efforts, etc., for each category of damage. The implicit valuation is a social valuation as the action in most cases follows from political or administrative decisions. As an important consequence of the focus on financial costs, important portions of the damage remain unassessed. For instance, if polluted drinking water is not treated or remains polluted even after treatment, the remaining externalities do not give rise to any financial costs.
Only for selected categories of damage do the authors also assess additional damage to the environment or human health that does not give rise to any direct financial costs. The valuation of these externalities is based on an assessment of the quantity of emissions or damage, which is then multiplied with values (or shadow prices) obtained, with one exception, from survey studies of individual willingness to pay for reductions of environmental damage or negative health outcomes [10
] (p. 124). The mentioned exception concerns the valuation of losses of hedgerows and of drystone walls. For this category of externality, Pretty et al. [10
] derive external costs from actual expenditures for restoration. Based on agri-environment payments of £2–4 per meter for restoration of hedgerows and an annual loss of 24,260 km of hedgerows, they estimate annual external costs of £48.5–97.0 million [10
] (p. 126). The calculations for drystone walls are analogous. Hence, these external costs not only include direct financial expenditures, but extend to the entire losses, which are valued at the rate paid for restoration. A further paper by Pretty et al. [12
] updates the data reported for the UK as a basis for other calculations.
Tegtmeier and Duffy [13
] similarly compile detailed financial costs for partial prevention (including monitoring), restoration, and treatment costs. However, unlike Pretty et al. [10
] they dismiss the survey-based valuations of damage due to greenhouse gases and ammonia emissions. Ammonia emissions are not assessed at all and CO2
emissions are multiplied with a price of less than $
1 per ton obtained from a voluntary emissions trading scheme. Like Pretty et al. [10
] (p. 118), however, the authors note that the numbers may substantially underestimate the total external costs [13
] (p. 16). A similar approach is also applied in a working paper by Jongeneel et al. [14
]. The authors follow Pretty et al. [10
] in drawing on selected survey-based valuations—for ammonia and nitrate emissions. For greenhouse gases, they follow Tegtmeier and Duffy [13
] by relying on prices from a market for emission permits.
An entirely different approach is followed in a report by the Food and Agriculture Organisation of the United Nations [9
]. Unlike their predecessors, the authors do not even try to compile the myriad of financial costs arising from nitrate removal from drinking water, replacement of polluted bee colonies, or restocking of fish populations. Instead, they assess total emissions, use impacts models to assess losses of quality-adjusted life years and other categories of damage, and multiply these quantities with shadow prices from survey-based valuation. An important additional ingredient is this multi-country assessment is the transfer of estimates across countries.
The differences in methodology are reflected in reported estimates per hectare of agricultural land (see Table 1
, last column). The numbers vary substantially. One particularly important methodological aspect concerns the extent to which other than direct financial costs were assessed. Another important factor is the approach used for the valuation of greenhouse gases (see Table 1
, second to last column).
The present study (see Table 1
, last column) is methodically similar to the FAO study by establishing shadow prices for each major externality, which are then multiplied with the respective quantity of emissions. It differs, however, in that the shadow prices are based on politically determined actual payments rather than survey-based valuations of hypothetical avoidance or abatement measures. The valuation essentially follows the approach that Pretty et al. [10
] pioneered for the valuation of hedgerows and drystone walls (see above). A minor difference is that the approach used here relies on avoidance instead of restoration measures. Furthermore, the approach is applied to a broad range of agricultural externalities rather than only a few selected ones.
The present results for the agricultural externalities in Switzerland add to earlier findings that agriculture in Switzerland enjoys generous support from the public while placing a substantial burden on taxpayers and society at large [47
]. The computed external costs of CHF 3.5 to 5.5 billion compare with a total national-level budgetary support for agriculture of CHF 3.6 billion and an OECD total support estimate (including border protection measures) of CHF 6.8 billion [27
]. Adding the external costs to the total support estimate of the OECD results in a total burden in 2018 of CHF about 11 billion, which exceeds the gross market output of agriculture of CHF 10.7 billion [50
]. The external costs per hectare of agricultural land are about three to five times higher than recent estimates for other countries (see Table 1
). To put this in perspective, note that financial expenditures for agriculture are about five to ten times higher in Switzerland than in other highly developed countries [47
As in all assessment of externalities derived from expenditures for actual policy measures, the estimated values in this study are based on costs and not on preferences. Any interpretation in terms of societal preferences requires the assumption that the policy decisions are supported by the population, or more specifically, the taxpayers (cf. Section 3.2
). In the case of the Swiss agri-environment measures, this assumption seems to be reasonably well met. While categories of largely unconditional support for agriculture are currently under pressure from environmental NGOs and voter initiatives [51
], the agri-environment measures have rarely been questioned. This is remarkable, since these agri-environmental avoidance measures contradict the polluter-pays principle, which plays an important role in other policy areas in Switzerland (e.g., [54
]. One possible explanation is that a substantial part of the support for agriculture in Switzerland remains largely unconditional (cf. Table 2
and Supplementary Materials
) or based on output. Against this background, even measures with extremely modest cost-effectiveness (see Table 5
) may be perceived as “steps in the right direction”.
The estimates obtained in this study should be relevant in at least four areas. First, they provide a basis for policies to internalize the external costs of food [12
]. The externalities of Swiss agriculture conflict with both the polluter-pays principle of Swiss environmental legislation (Environmental Protection Act, Art. 2) and official policy objectives in the areas of environment and public health (e.g., [41
]). Based on a gross value (producer price) of food production of about CHF 7.7 billion [50
], budgetary support for agriculture of CHF 2.4 billion (excluding payments for services; see Table 2
), and externalities of CHF 4.0 billion (excluding the direct financial costs; see Table 6
), the consumers contribute a mere 54 percent of the costs of food. Adding various tax exemptions for agriculture and off-site externalities from feed imports, neither of which are accounted for in the present estimates, the consumers pay well below 50 percent of the bill. The present study highlights this large price distortion and provides a basis for determining appropriate tax rates on excessive emissions or on the production systems that cause them (see e.g., [57
A second application concerns the evaluation of agri-environmental policy measures. The estimated costs per unit of avoided emissions (see Table 5
) show that cost-efficiency of the agri-environment measures varies widely. In line with findings at the European level [26
], the figures suggest that expenditures could be invested in much to more effective measures to increase the cost-effectiveness of agri-environmental policy (cf. [24
A third policy implication concerns the existing cross-compliance regulations in Swiss agriculture. The estimated externalities suggest that these regulations are not sufficiently stringent (cf. [47
], p. 22). The current total of CHF 2.8 billion in direct payments conditional on cross-compliance seem difficult to justify given the levels and costs of negative externalities found in this study.
Finally, as mentioned in Section 3.3
, the concept of value applied in this study is compatible with national accounting frameworks (see [20
]). The reported numbers can be used for performance measurement in the public sector, for instance in augmented national accounting frameworks. Such frameworks can provide corrected measures of value added or labor productivity that account for public services as well as negative externalities and offer useful guidance for policy.
The present study used politically negotiated payment rates and expenditures for agri-environmental measures to derive estimates of the external costs of Swiss agriculture. This valuation approach does not rely on hypothetical avoidance costs or willingness to pay based on surveys but reflects what society is actually paying to reduce agricultural externalities. While earlier studies have used this approach for the valuation of selected externalities, the present study is the first to apply it to an entire range of relevant agricultural externalities at the national level.
The estimates of the external costs of Swiss agriculture are substantially higher than the costs reported in other recent studies from developed countries. Potential uses of the obtained estimates for Swiss agricultural policy include (1) strategies to internalize the external costs of food, (2) the evaluation of agri-environment measures with respect to cost-effectiveness, (3) the evaluation of cross-compliance requirements, and (4) augmented performance measures for agriculture and the public sector.
The results also raise questions regarding immediate actions that are needed to bring Swiss agricultural policy in line with national-level legal targets and official strategies in the domains of climate, biodiversity, and food policy [41
]: Which existing subsidies support environmentally damaging or unhealthy consumption patterns? Which production systems are causing particularly high external costs? Which internalization strategies and policy instruments should be implemented to effectively target these production systems? Answers to these questions would be an important basis for serious steps towards a sustainable food system and a cost-effective provision or agri-environmental services.