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Subsidies to the Use of Natural Resources

Environmental Economics Research Paper No.2
This report was prepared by a consultant,
the National Institute of Economic an Industry Research (NIEIR),
for the Department of the Environment, Sport and Territories.
Commonwealth of Australia, 1996
ISBN 0 642 24864 8

8. Agricultural chemicals

8.1 Introduction

Australia is a major producer and exporter of agricultural products which are mainly sold at world market prices and are produced at relatively low costs. In 1993–94 the gross value of agricultural commodities produced was (preliminary) ABARE $23.646 billion, made up of crops (approximately 49 per cent), livestock sales (29 per cent) and livestock products (21 per cent).(see Note 1 below)

About 60 per cent of Australia’s land area is used for agriculture — most is used for animal grazing; only about 10 per cent is under crops or improved pasture, a small proportion of which is irrigated.(see Note 2 below) The main environmental impacts of agriculture are degradation of land through clearing , overstocking, irrigation and overcropping, pollution of water from fertilisers, other chemicals and farm wastes, reduction of native species and introduction of non-native species. For example, together with clearing, irrigation has resulted in serious salinity and water logging problems in some areas.

Environmental costs may be incurred both on-farm and off-farm. On-farm costs may be regarded as externalities if the interests of future generations are not taken into account; off-farm costs are external to the financial interests of the farm.

In this study the focus is on financial and environmental subsidies to chemicals used in agricultural operations. Chemicals use covers the application of fertilisers, pesticides, herbicides and fungicides. Expenditure on chemicals (including fertilisers) represents around 10 per cent of farm operating costs (about 5 per cent for fertilisers), according to the ESD-A (p.79).

Trends in fertiliser use are indicated in Table 20.

Note 1 ABARE Commodity Statistical Bulletin, 1994, pp.19–20.
Note 2 Agriculture accounts for about 70 per cent of water used in Australia , Ecologically Sustainable Development Working Groups, Final Report — Agriculture (ESD-A), p.75.

8.2 Financial subsidies


The ESD-Agriculture study reported (p.55) that in Australia the agricultural sector is only lightly assisted, the effective rate of assistance being an estimated 9 per cent in 1988–89, and noted that farmers receive international market prices for most of their output. However, as this study indicates, input subsidies to irrigation water and possibly to diesel fuel are significant.

The rate of return on the market value of farm assets is low mainly because of acceptance of lower rates of return for lifestyle benefits (over 90 per cent of farmers are family owned), but also to some extent because of inefficient practices. Climatic and market conditions significantly affect year to year returns. Tax treatment of farming costs is often cited as favourable, through tax deductions to environmentally disruptive activities including the use of farm chemicals. The recent tendency has, however, been to more favourable tax and other financial treatment of environmentally beneficial practices.

The income tax system (Income Tax Assessment Act, ITAA, etc.) is now being used to some extent to encourage farmers to undertake appropriate land management practices:

On reviewing the tax system for its sustainable development neutrality, particularly with respect to agriculture, the ESD-A report concluded that:

“Tax biases are likely to be a minor contributor to any sustainable development problems compared with short sighted planning, a lack of understanding of environmental consequences and a conflict between individual goals and the community objectives of sustainable development, as likely to be more significant factors.”

Rebates of diesel fuel excises through the Diesel Fuel Rebate Scheme (DFRS) might represent a significant subsidy to agriculture. The subsidy (currently 30.8 cents a litre) to agriculture was estimated to cost $396.9 million in 1994–95. The DFRS can be viewed as encouraging the inefficient use of fuel in fuel intensive activities such as fertilizer and pesticide application relative to non-rebate fuel uses. Discussions with ABARE indicate that about 10 per cent of agricultural diesel fuel is used for the application of fertilisers and other agricultural chemicals; on this basis the DFRS would provide a financial subsidy to fertiliser, pesticide, etc. use of about $39.7 million per year. Whether, however, this rebate should be regarded as a subsidy is contentious as the main rationale for the rebate is that these users do not use public roads and should therefore not pay the excise tax on diesel fuel. As discussed in Section 2.2, in this study the DFRS is not treated as a subsidy to its beneficiaries.

Table 20 Artificial fertilisers: area and usage in Australia, 1986–87 to 1991–92


Year

Area fertilised

(‘000 ha)

Super-phosphate
used
(‘000 tonnes)

Nitrogenous
fertilisers used
(‘000 tonnes)

Other fertilisers
used
(‘000 tonnes)

1986–87

24 064

1 981

416

830

1987–88

26 651

2454

431

953

1988–89

27 871

2 523

438

971

1989–90

27 360

2 378

483

1 010

1990–91

23 627

(a)

(a)

(b)3 239

1991–92

19 517

(a)

(a)

(b)2 678


Notes:
(a) Not collected.
(b) Includes all fertiliser categories.
Source:Summary of Crops, Australia (ABS 7330.0) data,as cited in Australia Year Book, 1994,p.483.


The introduction in July 1989 of the Agricultural and Veterinary Chemicals Act 1989 established a national system for the clearance of agricultural and veterinary chemicals through the Australian Agricultural and Veterinary Chemicals Council (AAVCC). This process involved a detailed assessment of the efficacy, public safety, environmental safety, and occupational health and safety of individual chemicals. In June 1993 a National Registration Authority (NRA) was established and the NRA board replaced the AAVCC. After a long phase in period, the NRA formally took over responsibility for registration of these chemicals form the states and territories on 15 March 1995 when a series of seven acts replaced the 1988 act. The last four acts in the package contain the cost recovery mechanisms and in particular, the imposition, assessment and collection of a levy on sales of chemical products.

Commonwealth payments to the National Registration Authority (NRA) for Agriculture and Veterinary chemicals, and the National Residue Survey, are estimated to be $12.4 million in 1994–95. Industry levies of about $10.7 million will be collected to defray program costs, thus 86.3 per cent of the program costs are expected to be recovered from the private sector (Budget Paper, No. 1, 1994, p.3.165 and Scott Lydiard, NRA, pers . comm.).

The previous phosphate fertiliser bounty subsidy, which encouraged fertiliser use, was terminated in 1988.

On the basis of available information it is judged that there is no financial subsidy to agricultural chemical usage.

8.3 Environmental subsidies


It is argued that sustainable agricultural practices are encouraged by the high proportion of family successions among farming enterprises. This tends to prevent irreversible and major damage on the farm land owned by an enterprise. However, lack of knowledge of and/or regard for agricultural practice impacts on land and water resources has resulted in environmental disruption on a range of farm types. Also farm practices give rise to external effects on other farms and other activities, for example through impacts on water quality and wildlife.

Land care programs are being used to improve sustainability of agricultural activities; federal payments for the national program were an estimated $37.669 million in 1993–94. Total Landcare expenditures would be much higher because of contributions to the activities by other agencies, firms and non-governmental organisations, as well as internal activities of individual farmers. Some components of Landcare expenditures might be viewed as a subsidy by the community to the costs of controlling and repairing damage caused by unsustainable agricultural practices. It is difficult, however, to apportion Landcare program expenditures to particular environmental problems such as effects of over-use of pesticides, herbicides and other farm chemicals analysed in this report.

Agricultural chemical use and effects. Agricultural use of chemicals — pesticides, herbicides, fertilisers , fungicides and veterinary chemicals — affect soil, water and air quality and give rise to environmental externalities. The use of agricultural chemicals raises the potential for non-target and off-site contamination, particularly if the chemical is mobile in the environment and moves into ground or surface water. For example, human health, native wildlife and the landscape can be damaged, and economic losses incurred (fisheries, tourism ) , when these chemicals seep into water supplies.

Positive sustainability effects of chemicals come from the use of herbicides in less disruptive minimum tillage systems, and the use of fertilisers in replacing soil nutrients.

Most Australians soils are deficient in phosphorous. Because of this and the significant but less widespread deficiency of sulphur in many soils, phosphatic fertilisers, particularly superphosphate, account for the bulk of fertiliser usage. Over half of superphosphate is used on pastures in areas with moderate to good rainfall. Large quantities are also used on cereal crops. Nitrogen deficiency is also general in Australian soils and the use of nitrogenous fertilisers is increasing (see Table 20).

Run off from fertiliser use leads to reduced water quality for humans, stock and native flora and fauna, through algae growth and other water degradation effects (see Waste water section). No estimate of the relative or specific impact of fertiliser run-off on water quality appears to have been made.

Pesticides and fungicides are widely used to prevent damage to crops. A major contributor to the environmental impacts of pesticides and fungicides is the development of resistance by some pests and fungii, which results in more chemicals being applied to the problem. (See ESD-A, p.81 for a discussion of case studies on the use of pesticides in cotton producing areas).

Chemical residues in food including raw produce are regularly monitored by a number of organisations, but mainly through the National Residue Survey (NRS) and the Australian Market Basket Survey (AMBS). Survey data is measured against maximum residue limits (MRLs) set by the National Health and Medical Research Council (NH&MRC). MRLs are established with due regard to the acceptable daily intake (ADI) for that chemical which is derived from toxicological studies using laboratory animals. (An ADI is the daily intake which,during an entire lifetime, is assessed by the NH&MRC to be without appreciable risk on the basis of all the facts known at the time). MRLs are set as low as possible consistent with the effective use of a chemical under field conditions. Both the NRS and the AMBS show that for the most part Australian products meet the standards set for them. For example, the results of the 1990 NRS reveal that of some 50000 samples taken only 400,or 0.8 per cent, had not conformed to the MRLs. However, there are concerns over the adequacy of the standards, i.e. whether residue levels conforming to the standards are harmful to humans and wildlife.

Increasing attention is being given to strategies which aim to reduce or eliminate the adverse effects of chemical use. Integrated pest management (IPM) is one such strategy which through carefully controlled coordinated management combines, for example, the use of plant breeding for pest resistance, biological control through preservation of natural enemies of pests and minimum inputs of pesticides. IPM does not necessarily focus on eradication, but aims to stop insect damage going beyond an economic/ ecological limit. IPM has the potential for the development of acceptable pest control for sustained productivity systems. For example, an IPM system to control the pea weevil, which has become a major pest of field peas in three States, shows considerable promise. (see Note 3 below)

Apart from IPM strategies, research and development corporations dealing with products such as cotton, rice, grapes and apples have developed longer term research plans which include support for research to reduce the use of chemicals.

Soil acidification is of concern in all crop and sown pasture regions. It is of particular concern in susceptible (light, poorly buffered) soils planted to legume-based (e.g. clover) pastures and crops, or where nitrogenous fertilisers are used. While soil acidification is a natural process, increases in soil nitrogen create the potential for greatly accelerated rates of acidification. If nitrates are absorbed by plants no acidification occurs, but if the nitrate is leached beyond the root zone, acidity increases. As a result some nutrients such as phosphate and molybdate become less available and toxic manganese and aluminium dissolve, reducing plant growth. Subsoil acidity is particularly serious because it denies the plant roots access to reserves of water and nutrients. Contributing factors to soil acidification are over-use of nitrogenous fertilisers and irrigation, and general farming pasture and cropping practices.

The ESD-Agriculture final report indicates that about 25 million hectares of our best agricultural land are already acid or at risk and that soil acidity causes an estimated $350 million a year in lost production. Due to the gradual nature of the acidification process and the adjustment by farmers towards more tolerant species, full recognition of soil acidity effects on agricultural productivity is yet to emerge.

Unfortunately for this study, despite the concern for the environmental and health effects of agricultural chemicals, no monetary valuation of these effects appear to have been made nor is one possible with the data available.

This is similar to the conclusion reached in a 1990 paper(see Note 4 below) and again in a 1994 study by ABARE which reported that there are significant gaps in the ability to assess environmental benefits from use and reduction in use of agricultural chemicals.(see Note 5 below) The ABARE authors suggested that “one step toward addressing these issues is to develop data bases that account more explicitly for the links between different types of chemical use and farm financial, physical and management variables”. They did,however, estimate from ABARE survey data that the farm losses due to a 10 per cent increase in the cost of using farm chemicals in 1994 would be $33 million, or an average annual cost per farm of $430. The authors explicitly stated that no attempt was made to analyse any of the potential public benefits associated with a reduction in chemical use.

Nitrous oxide (N2 O) from nitrogenous fertiliser use (and from land disturbance, crop residues and legume pastures) contributes to greenhouse gas emissions. Estimates from the National Greenhouse Gas Inventory project (1994) indicate that about 15 per cent of total emissions not covered by the Montreal Protocol on ozone depleting substances come from agricultural production, a figure which includes about 3 per cent from fertiliser N2 O emissions.(see Note 6 below)

Note 3 ESD-A, op. cit., p.82.
Note 4 Wynen, E. and Edwards, G., Towards a comparison of chemical-free and conventional farming in Australia, Australian Journal of Agricultural Economics, Volume 34,No. 1, April 1990, pp.39–55,particularly pp.39–46.
Note 5 Dawn, T., Tulpule, V. and Toussaint, E., Agricultural chemicals — their use in Australian agriculture, Australian Commodities — ABARE, Vol. 1,No. 4,December 1994, pp.501–507.
Note 6 National Greenhouse Gas Inventory, 1988 and 1990: summary, 1994 (NGGI 1994),p.13.

8.4 Summary


The issue of financial subsidies to agricultural operations is inimically associated with competitiveness of Australian agriculture. In the chemical inputs area the diesel fuel rebate scheme would appear to encourage the application of the possible over use of chemicals and, thus, from an environmental perspective it needs to be reassessed. Environmental subsidies from farm chemicals use do not appear to have been valued. As the externalities associated with agricultural chemicals use could be significant, further work on their effects, and mitigation thereof, is needed. A summary of our findings on financial and environmental subsidies to agricultural chemicals is provided in Table 21.

Table 21: Summary of financial and environmental subsidies,1994, agricultural activities


Activity element Financial subsidies

(
$ millions,1994)
Environmental subsidies
($ millions,1994)
Subsidy removal

instruments
Fiscal implications

($ millions,1994)
Public agency1 costs Not estimated
Direct subsidies2 Not estimated — might be about $40 million through the DFRS. A portion (10 per cent?) of Landcare expenditures by the federal government to improve agricultural sustainability might be attributed to chemical damage repair and control of impacts.
Environmental subsidies3 Expenditure allocation on Landcare by the federal government was about $38 million in 1994–95; total expenditures on Landcare activities are higher when the contributions of others (States, individuals, etc.) are taken into account. Initially a charge could be imposed on chemicals for research into their effects and the valuation of these effects.
TOTALS

Notes

  1. As indicated in the text costs relating to the National Registration Authority for Agricultural and Veterinary Chemicals are 86.3 per cent recovered from industry. It is not possible to estimate what public agency costs,besides the above, are associated with the use of agricultural chemicals.
  2. Subsidies which might be associated with the Diesel Fuel Rebate Scheme are contentious because of the off-road nature of the fuel use. No other direct subsidies were found.
  3. Although environmental effects of the use of agricultural chemicals are of concern and may be significant no monetary valuation of these appears to have been made or attempted. As indicated Table 21, a portion of Landcare expenditures might be attributed to damage repair and control of the impacts of agricultural chemicals use in 1994–95. A review of State budgets indicates direct State contributions are nominal (probably about $1 million) but technical and administrative support is given to Landcare groups by departmental and agency personnel. No costing of this support is given in budget and agency papers, reports,etc.

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