The State of Food and Agriculture 2023

Chapter 4 Mainstreaming True Cost Accounting to Support the Transformation of Agrifood Systems

Considerations when choosing policies

The results and discussions of this report, as presented in Chapter 2 and Chapter 3, underscore how agrifood systems must be transformed to become sustainable. The results presented in Chapter 2 show how agrifood systems have substantial hidden costs that differ by context. In striving to reduce them, trade-offs will emerge. Agrifood systems must become environmentally sustainable, but they also must ensure food security and nutrition for all, provide livelihoods for farmers and others along the food value chain, and promote inclusive rural transformation.67 Policymakers need to be able to navigate the trade-offs that emerge from this triple challenge and understand how actions in one area may affect outcomes in another.

Chapter 3 described the need to conduct targeted assessments and how such assessments should be scientifically rigorous and sociopolitically inclusive. It emphasized how policymakers should avoid focusing on one dimension and adopt a holistic approach to policymaking that considers the interdependencies of the economic, social and environmental dimensions of sustainability. This is essential to capturing potential synergies, so that trade-offs are minimized. For instance, a policy to promote healthier diets by changing the level and composition of food demand could lead to lower or higher GHG emissions, depending on the food items included in the healthy diets proposed. To ensure healthy diets while caring for the environment, policies should target diets with sustainability considerations. Such objectives will have implications for the policy measures required to address the trade-offs and achieve sustainability targets for both food security and nutrition, as well as the environment.67 Similarly, a policy to reduce resource stress could result in lower yield, which could increase food prices and harm the most vulnerable.2 In this case, policies should navigate all available options to avoid such a scenario. Innovations and technologies may have a role to play in reducing the stress on natural resources without lowering yields, but in other cases, the need for social protection policies to mitigate possible short-term income losses might be inevitable.

A partial view of hands wearing gloves attentively caring for a plant, delicately watering and fertilizing it.
Fruit market.
©Thomas Ulrich/Pixabay

When making decisions about agrifood systems, it is also important to recognize the interdependence of humans, animals and the environment. Not doing so may have disastrous consequences, as recently demonstrated by the COVID-19 pandemic. For this, the One Health approach – promoted by FAO, UNEP, WHO and the World Organisation for Animal Health (WOAH) – calls for a holistic and systems-based approach that recognizes the interconnection between the health of humans, animals, plants and the environment.68 The approach mobilizes multiple sectors, disciplines and communities at varying levels of society to promote a sustainable and healthy future through collaboration, communication, coordination and capacity building. If backed by appropriate regulatory frameworks, One Health can negotiate trade-offs and identify win–win solutions.

Against this backdrop, this section explores how to choose between policies and balance multiple policy objectives, so the transformation levers deployed work with, rather than against, each other.

Will addressing hidden costs raise the price of food?

A commonly asked question is whether addressing the hidden costs of agrifood systems will raise food prices. The answer is that it does not have to, but it will depend on the hidden cost being addressed and the instruments being used. A more comprehensive question might be whether people will be better off if these hidden costs are addressed. To answer this, it is helpful to consider the distinct categories of hidden costs being investigated: social hidden costs associated with distributional failures, which result in poverty and undernourishment; environmental hidden costs from damages linked to externalities; and health hidden costs due to dietary patterns that lead to obesity and NCDs. The way in which each of these categories is addressed has distinct implications for incomes and food prices.

Addressing the social hidden costs from distributional failure, for instance, could enhance productivity in the food and agriculture sector. Alleviating poverty and undernourishment would empower a segment of the population to become more productive, potentially leading to greater food supply. This rise in productivity could exert downward pressure on food prices, broadly benefiting consumers. However, taxpayers would shoulder the cost for such interventions, so it is important to design social protection programmes and investments that are effective in reaching population segments that most need support.

When it comes to environmental hidden costs, much will depend on the measures adopted and who bears the cost. There are two principles for addressing these externalities: the polluter pays principle, whereby the costs of achieving desired outcomes are borne by those responsible for creating them in the first place;69 and the beneficiary pays principle, whereby the costs are covered by beneficiaries – usually the public, but also specific groups particularly affected by activities in which they are not involved.

Under the polluter pays principle, polluters are made to pay for the costs they impose on third parties, for example, through regulations stipulating less environmentally harmful farming practices, taxes or the creation of markets for the right to pollute or to gain access to resources such as fisheries. Examples of applications of the principle include levies and taxes on pesticides and fertilizers in some countries of the Organisation for Economic Co-operation and Development (OECD); the development of fishing licences in Namibia, Uganda and the United Republic of Tanzania; taxes on organic discharges in Colombia; and charges for wastewater in China and Malaysia.70 The introduction of such measures normally raises production costs and, consequently, food prices. However, if these measures are accompanied by actions to support farmers in lowering their production costs, such as advice on better management practices, food price increases can be avoided. The issue of farmer support is critical, as many environmental hidden costs may be due to unsustainable farming practices, even though the private economic benefits of such practices are distributed along the value chain, all the way to consumers. Consequently, the polluter pays principle, if not complemented by advice on how to limit costs where the externality occurs, will be either absorbed further down the value chain or passed on to consumers in the form of higher food prices.

The alternative is to apply the beneficiary pays principle, which places the burden of covering the true costs of agrifood systems activities on the beneficiaries. In such cases, policies should not result in an increase in the price of food. One example is payment for environmental services (PES), where the beneficiary pays those parties whose activities may be damaging to the environment to modify their behaviour.

Examples of PES schemes relevant to agrifood systems are those linked to watershed protection, biodiversity conservation, carbon sequestration and landscape services. Similarly, governments can support and even subsidize the adoption of cleaner and less polluting practices without necessarily linking them to the environmental services provided. For example, in OECD countries where PES schemes are widely used, farmers receive tax discounts for investing in pollution reduction, and subsidies for investing in water-saving devices.71

In low- and middle-income countries, these mechanisms are less widely applied. When choosing a policy instrument to reduce hidden costs, governments need to analyse carefully the distributional implications. They also have to consider that subsidy-based schemes place a burden on already scarce fiscal resources and competing objectives might lead to trade-offs between, for example, social and environmental dimensions. The choice between the policy instruments will depend on equity implications, which, in turn, depend on who the beneficiaries are. Priority should be given to situations where synergies exist. For example, if a policy to reduce resource stress also raises agricultural productivity, food price increases can be avoided.67, 72

One set of policies involving a mixture of the polluter pays principle and the beneficiary pays principle is the repurposing of agricultural subsidies. Shifting underperforming agricultural subsidies to protect and restore degraded farmland can better support local communities and help countries achieve their climate, biodiversity and rural development goals. It is unclear, however, to what extent the costs of such policies fall on current polluters (who lose their subsidies) or on beneficiaries. Yet, repurposing can be designed in such a way that it does not result in losses for smallholder farmers;73 for example, when objectives are led by local needs,74 take into account how the incentives are perceived, and ensure participation of relevant parties.

Repurposing current public support for food and agriculture, if carefully designed and targeted, also has the potential to increase the availability and the affordability of healthy diets, in particular those that are environmentally sustainable. This can be an effective pathway for tackling the hidden costs associated with unhealthy dietary patterns, which this report has revealed to be substantial. For example, fats and sugars currently provide dietary energy at very low market prices, in part due to consumer subsidies in many low- and middle-income countries, fuelling the burgeoning obesity epidemic.2

Targeted TCA assessments can inform the design of taxation and repurposing schemes to change the relative prices of foods in favour of more nutritious and sustainable options. When tax revenues are directed to promote healthy and sustainable diets, household food budgets might remain unchanged. Moreover, in the long term, there will be an improvement in public health leading to increased productivity that could translate into higher household incomes. In this case, even if healthier diets may be costlier, the increase in incomes could help offset this additional expense. However, more research is needed to understand the cost of transitioning to healthy and sustainable diets, and its distributional effects.

Leveraging true cost accounting for handling multiple policy objectives

When there are multiple policy objectives, which is generally the case, compromise may be necessary. However, the extent of the compromise can be minimized if there are at least as many policy instruments as there are objectives. This is sometimes referred to as the Tinbergen Rule.75 It is, therefore, desirable to have a policy package that allows different objectives to be addressed. So, for example, if a country seeks to restore fish stocks, but also address rural poverty, a one-measure blanket ban on catch could create an increase in poverty in artisanal fishing communities. Introducing a second measure, such as income support or alternative employment opportunities (or an exemption for small-scale fishers), would allow both objectives to be met.

Where the activation of levers might lead to trade-offs that negatively affect some stakeholders, social protection policies may be necessary, particularly to mitigate short-term income losses or negative effects on livelihoods.2 In this regard, TCA – and, in particular, scenario analysis (see Chapter 3) – offers a way of capturing interdependencies and assessing trade-offs. The TEEBAgriFood rice study in Thailand (Box 11) is a case in point. In this study, a scenario analysis was carried out to demonstrate the potential synergies and trade-offs of extending organic rice production practices in Thailand. The results showed that organic rice practices generated positive externalities through health and environmental improvements, although yields were slightly lower. To compensate for the loss of income, the study showed that the price of organic rice should be at least 3.5 percent higher than that of conventional rice – and possibly much higher – as some uncertainty exists as to the extent of yield reduction when converting to organic. To induce farmers to adopt organic practices, subsidies also need to be reoriented, conditional on the adoption of sustainable agricultural practices.76

Furthermore, there needs to be coherence among policy responses. Here, TCA can also play a role. For example, policies can be leveraged to promote initiatives that sustain and maintain the ecological infrastructure upon which agriculture and rural livelihoods depend, as in the case of Uganda (Box 23). However, these should not be stand-alone efforts while support for unsustainable initiatives continues or even increases. In Uganda, subsidies for chemical fertilizers increased, while the government simultaneously invested in the restoration of watersheds, forests and land.

Box 23Scaling public financing towards sustainable natural resources management – the case of Uganda

Agriculture and livelihoods in Uganda rely heavily on natural resources – from pastureland to cropland, forests and water. However, population growth, agriculture and biomass energy use have increasingly degraded these crucial assets. The agriculture sector is both a driver and a victim of natural resources degradation. While the sector has accounted for 85 percent of land degradation in recent decades, environmental degradation has generated significant productivity losses in agriculture.78

In response, the country has committed through different initiatives to sustain these natural resources and is scaling up public expenditure for the sustainable management of forestry, land and environment (FLE).15 Ugandan total FLE expenditure increased threefold from 2008 to 2017 (see the figure). The highest increase was in forestry expenditure, mainly from funds to the National Forestry Authority, which manages central forest reserves, including natural forests and commercial plantations.78 This increase in expenditure may have contributed to the decline in the country’s deforestation rate since 2017, which, after increasing from 28 400 hectares (ha) in 2006 to 117 000 ha in 2017, gradually decreased to 49 000 ha in 2021.79 Restoration efforts are also seeing tangible progress, with an in-depth assessment of the country’s restoration potential carried out in 2016 identifying over 8 million ha of land for restoration, primarily focusing on agroforestry.80

FIGURE Public expenditure on FORESTRY, land and environment in Uganda, 2008–2017

A stacked bar chart and a trend curve plot the public expenditure on forestry, land, and Environment in Uganda from 2008 to 2017.
NOTE: Forestry, land and environment (FLE) expenditures considered here are those directly linked to the food and agriculture sector in a broad sense, including expenditure from various ministries and public entities beyond agriculture.
SOURCE: Adapted from FAO. 2021. Uganda. In: MAFAP Monitoring and Analysing Food and Agricultural Policies. [Cited 27 July 2023].

Despite efforts to improve sustainability, however, Ugandan expenditure on agricultural input subsidies more than doubled, peaking at 24 percent of total agricultural expenditure in 2016.81 This was partly due to the country’s aim to incentivize staple food production and the export of commodities such as coffee, cotton, tea and cocoa, which, in addition to sugarcane and tobacco, have been associated with higher rates of deforestation.82

To fully realize Uganda’s development and climate objectives, increased policy coherence is needed both within and across sectors. Efforts are ongoing to increase traceability and certification of Uganda’s exports in order to eliminate deforestation from supply chains,83 and projects are increasingly designed to strengthen the synergies between agriculture, forests and natural resources, such as the Farm Income Enhancement and Forest Conservation project. The project was implemented by the Ministry of Water and the Environment and aims to improve livelihoods through irrigation, agribusiness and sustainable natural resources management.

Another area for improvement involves early warning, early action systems, which are important mechanisms for mitigating the impacts of disasters. Assessing the true cost of disaster response is challenging, however, due to a lack of reliable data in affected countries. Yet, FAO’s Data in Emergencies Impact (DIEM-Impact) assessments provide a granular and rapid understanding of the impact on agriculture and agricultural livelihoods and an estimate of damage to and losses incurred by the agriculture sector.77 Drawing on the 2019–2021 desert locust upsurge in the Horn of Africa, which threatened the region’s already fragile food security, Box 9 underscores the need for TCA to become part of the planning and preparation for disasters and emergencies. It can help explore the various options available and their potential impacts in all dimensions (environmental, social, health and economic) before a threat occurs. This can improve preparedness for threats by guiding investments in disaster risk reduction towards more sustainable solutions that can prevent economic losses without harming the environment and health.

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