Addressing the demand for and supply of ecosystem services in agriculture through market-based and target-based policy measures

Agricultural lands are managed or modified ecosystems that interact with the surrounding natural environment so as to supply while also to use a great range of ecosystem services (ES). In addition, agriculture is responsible for disservices that negatively affect natural ecosystems. In Finland, agricultural lands have undergone marked changes affecting a great number of vital ES. Traditional agri-environmental policy has been criticized for being inefficient in ensuring the provision of ES or limiting the disservices, while markets have been unable to reflect the demand for or supply of ES due to the public character of some ES. Market-based mechanisms as well as targeted policy measures may ensure effective and efficient ES provision. This dissertation explores the factors that determine the citizen demand for and landowner supply of ES, and considers examples of market- and target-based measures that may supplement or replace the current form of agri-environmental policy. The first part of the dissertation is focused on the demand for and supply of cultural ES provided by agricultural lands. A choice experiment was applied to evaluate a marketbased scheme, i.e. a Payment for Ecosystem Services (PES) scheme that provides certain landscape attributes in a typical agricultural area. The analysis revealed that the most valued attributes were the renovation of production buildings and the presence of grazing animals. The results demonstrated that citizen preferences were heterogeneous, a fact which may affect the level of transaction costs and the performance of the scheme. Landowners were skeptical towards the scheme, willing to provide ES that did not always match with the demand. They also demanded compensation in excess of their expenses. Nonetheless, cost benefit considerations revealed that the scheme may be feasible, as the aggregated welfare benefits outweigh the anticipated costs. The second part is focused on the supply of water conservation services and the avoidance of water eutrophication disservices. During the data collection, Finnish agrienvironmental policy set equal incentives for water conservation, not accounting for environmental conditions, which are spatially varied. Before suggesting any policy reform and the use of alternative measures such as target-based measures, where farmers are compensated for delivering certain ES, it is imperative to investigate the tendency of landowners to adopt water conservation measures. By combining survey data with GIS data, a binary choice model was employed. The model examined the adoption of special measures for water conservation if the soil quality implies a high leaching risk and if the water quality is already poor. Adoption in areas under risk was weakly supported by the study s estimates. This indicates that environmental awareness, assuming it increases with risk, is not strong enough to motivate adoption. Target-based which are spatially tailored measures can attract adopters in hotspot areas. The latter outcome leads to the last subject, which examines farmers participation in an agri-environmental auction scheme. According to the outcomes of the study, farmers who have previously participated in a pilot auction scheme were more likely to be participants in future auctions. The findings also suggested a strong relationship between attitudes and participation, particularly for attitudes related to specific environmental benefits attached to the auction scheme, novelty and financial features, as well as the complexity of the auction mechanism. The ES and disservices examined in this dissertation, i.e. landscape amenities and water eutrophication, are of priority. Finnish agricultural landscape has experienced severe stresses during the past years while the state of the Baltic Sea is largely affected by the eutrophication issues of water bodies. The empirical research findings enhance current knowledge in planning market- and target-based schemes in the years to come. These schemes are attracting increasing attention for being more effective and, if properly designed, more efficient. For agri-environmental auctions in particular, the findings are novel, since they were derived from the first auction experiment ever implemented in Finland.