MANAGING JOINTLY DETERMINED AGRI-ENVIRONMENTAL AND PRODUCTION RISKS: AN APPLICATION TO AGRICULTURAL NONPOINT POLLUTION WITH CLIMATE CHANGE

Our long-term objective is to understand the importance of jointly determined environmental and farm production risk for managing environmental problems, and how policy instruments can be designed to better address these joint risks to (1) maximize economic values associated with agri-environmental service provision, (2) support farm income through provisioning these services, and (3) work in concert with other agricultural programs addressing private farm risks. Specific research activities (RAs) and questions that will be undertaken in support of this objective, and the activities to answer these questions, are:1. Conceptual design of agri-environmental policy instruments. How can instruments be designed to promote economic efficiency in the presence of joint environmental and farm risks, as well as asymmetric information between farmers and regulators? We will examine how instruments such as pollution-reduction incentives and pollution markets are optimally modified or augmented to account for correlated environmental and farm production risk, and also asymmetric information. We will also examine the potential role of new instruments that can manage these risks more directly.2. Numerical assessment of alternative risk-augmented policy instruments. How do well do alternative policy instruments improve economic performance, including both environmental impacts and farm income, when instrument design accounts for both environmental and farm production risk? Our numerical analysis will compare the environmental and economic performance of various risk-augmented instruments, while also providing comparisons to traditional designs based on a subset of risks. Special attention is given to the effects of increased climate change risks.3. Improved risk management. How well do risk-augmented instruments improve risk management to benefit farmers and the environment, and how can these instruments be made to better coordinate with other public or private farm programs (e.g., insurance) that address private risks? This component will involve conceptual and numerical/simulation analyses. Our primary focus will be on risks related to water quality management, especially in the face of climate change. However, at least some of our analysis we will be extended to consider the joint management nutrients and greenhouse gas emissions (N2O); these are jointly produced by agriculture and so there are gains from managing both simultaneously.