Green Business Rising: Market-based environmental initiatives may be an idea whose time has arrived - Private Agro-Environmental Management - Statistical Data Included

Choices: The Magazine of Food, Farm and Resource Issues, Fall, 2001 by David E. Ervin, Frank Casey

When household incomes increase, the demand for environmental services ("green" products and services such as organic foods, environmentally friendly packaging, environmentally friendly production and distribution processes) increases faster than the demand for agricultural commodities. As a result, environmental management plays a larger role in the food industry. The political process responds to these demands by setting standards and developing public programs. Market participants -- buyers and sellers -- also respond. Consumers and investors now reward farms and agribusinesses that supply desired environmental services along with food and fiber. These market participants are turning to "green" products and the firms that produce them.

Scholars and managers have devoted much effort to evaluating public environmental programs such as the Conservation Reserve Program (CRP), but little analysis has been directed at private agro-environmental management. The potential and limitations of private activities merit more study, especially during an administration that seems to favor voluntary and private industry actions. A lack of understanding of causes and consequences of these private efforts will hinder sound decisions about their roles in solving complex environmental problems, and failed private efforts may prompt stronger regulation. Building understanding of the different types of private environmental initiatives is a first step to using them to help achieve society's environmental objectives of meeting growing green market demand, and avoiding unnecessary cost and regulation.

The Search for Private Green

Today's farmers face a bewildering array of federal, state, and local environmental programs, as well as a market that is increasingly rewarding environmental quality. As the costs of participating in public programs grow, and as the market for green products expands, producers have new and increased incentives to pursue private environmental quality management initiatives.

Economic research on business environmental management (BEM) in industries outside of agriculture has grown rapidly of late. The literature identifies three types of BEM: unilateral initiatives by individual firms to control pollution or by industry groups to self-regulate, bilateral or negotiated agreements between the government and firms including a voluntary environmental target and a timetable for reaching it, and voluntary government programs to encourage individual firms (farms) to practice certain types of environmental protection.

The third approach, voluntary government programs, has been the mainstay for agriculture. However, when incentives end, environmental effort usually wanes. The potential for long-term environmental protection thus depends on continuing the public funding. Total expenditures on USDA voluntary incentive programs for soil erosion control, improved water quality, wildlife habitat, and other purposes have ranged from $3.2 billion to $3.7 billion per year in nominal terms since 1992 (Zinn).

The level of funding has declined in real terms. Congress may be unable to appropriate enough funds for incentives to satisfy the growth in the public's demand for agro-environmental improvements. Program reforms that foster unilateral initiatives or negotiated agreements may increase the effectiveness of the remaining public funds.

In our judgment, unilateral and negotiated environmental schemes in agriculture will increase in number because of unsatisfied public demands for environmental services, along with efforts by farmers and agribusinesses to avoid more stringent regulations. Five different but related motivations for private involvement in the production of environmental services are described here.

Improving firm productivity. The creation of production and marketing systems to implement BEM can lead to the discovery of cost reductions or opportunities for new products. Firms may find cost savings from using BEM information, management systems, and production techniques. Boggess, Johns, and Meline (1998) found productivity gains for some dairy farms that adjusted to higher nutrient pollution control standards for Lake Okeechobee. The regulations encouraged these dairy farmers to adopt new production technologies that simultaneously reduced water pollution and improved net returns. Other dairy farms moved to new locations to avoid the added regulatory costs

Satisfying the demands of "green" consumers and investors. Retail products and investment funds that emphasize environmental performance are multiplying. Investments in "socially responsible" investment funds grew from $40 billion in 1984 to $2.16 trillion in 1999 (Social Investment Forum, 1999), and mainstream food retailers are beginning to stock "natural" and "organic" foods.

Preempting or mitigating future environmental regulations. The incentive to avoid government regulation may increase as public demand for an improved environment grows. However, the costs of building coalitions among diverse farming interests may restrict effective BEM initiatives in farming.