Improving participation and the cost‐effectiveness of agricultural pollution control programs through the use of Pay‐for‐Performance Conservation

Jonathan R. Winsten

Winrock International Institute for Agricultural Development

Farmers not only produce our food and fiber needs, they are important stewards of our water resources. Farmers are highly effective at responding to price signals for the efficient production of food and fiber; now it  is  incumbant  upon  us  to  develop  appropriate  price  signals  for  the  protection  of  water  resources. Furthermore, inherent variation in topography, soils, farming systems, and farmer preferences dictates that a ”one‐size‐fits‐all”, practice‐based approach to agricultural pollution control is not likely to yield efficient nor cost‐effective solutions. Recent advances in modeling nutrient losses from agricultural land have allowed for the development of performance‐based conservation programs.

This presentation explores the solution of using pay‐for‐performance (PFP) conservation as an approach that can reduce nutrient and sediment loss from agricultural land in a cost‐effective manner. The ability of any given conservation practice to reduce nutrient loss varies very greatly from farm‐to‐farm and even from field‐ to‐field. With PFP, crucial  field‐specific data are utilized in a science‐based model  to provide estimates of nutrient loss  from very  specific conservation actions  that are of  potential interest  to a given  farmer. The farmer  receives  an  annual  performance‐based  incentive  payment  based  on  the  estimated  units  of phosphorus  (P),  nitrogen  (N),  or  sediment  (depending  on  the  specific  water  quality  needs  of  the  given watershed) that are reduced relative to the farm’s baseline level of losses. In a PFP program, participating farmers  are  motivated  to  find  and  implement  the  most  cost‐effective  actions  for  their  specific  fields. According  to  economic  theory,  farmers  will  start  with  the  most  cost‐effective  actions  and  continue  to implement conservation up to the point where the margincal cost of the last unit of nutrient loss reduction equals the payment per unit in order to maximize farm profits. Program administrators can set the payment level to optimize nutrient loss reductions given budget constraints.

Adding a secondary (i.e. BONUS) payment when in‐stream nutrient thresholds have been met based on water quality monitoring at  the mouth of  the watershed has several important properties  for program success. First, farmers, like all people, want to see that their actions are having a tangible impact toward a solution. Measuring load  reductions allows  farmers  to  see when  they  have  ”moved  the  needle”  toward improved water quality. Clearly defined and achievable goals are essential for human motivation. Second, to increase the probability that any participating farmer will collect the bonus payment, farmers are more likely to recruit participation of other farmers in the watershed, which is extremely valuable outreach for the program.  Third, measuring  load  reductions  at  the mouth  of  the  watershed  is  where  ”the  rubber meets  the  road”  and  is essential for understanding when improvements in ambient water quality have been achieved.

The U.S. federal government already spends in excess of $5 billion per year in an attempt to reduce nutrient loss  from  agriculture  using  practice‐based  programs.  Using  price  signals  through  PFP  conservation  will embed  environmental  quality  considerations  into  farmers’  business  decision‐making  processes.  This  will benefit farmers, water quality, and tax payers.