PHASING OUT OF ENVIRONMENTALLY HARMFUL SUBSIDIES: EFFECTS OF THE CAP 2003 REFORM

A core element of the recent Common Agricultural Policy reform is to decouple payments that are merely linked to production from 2005 on. These subsidies are classified as environmentally harmful by OECD. An agricultural sector model, using a modified version of the positive mathematical programming method, depicts the political, natural, and structural complexity of Austrian farming. Environmental effects of indicators that are linked to production and management measures are estimated. Simulation results show that the recent CAP reform will not only reduce the cost of production, but also improve the environmental condition of natural resources.