CAP Subsidies and Technical Efficiency Including Environmental Outputs: The Case of European Farms

Farm technical efficiency is a global productivity indicator in the sense that it considers all outputs produced and all inputs used by the farms. The Common Agricultural Policy (CAP) aims at promoting farm competitiveness, and hence a legitimate question is whether the CAP subsidies received by farms contribute to enhance their technical efficiency. Studies investigating the effect of subsidies on technical efficiency so far have considered only marketed outputs, that is to say, food (and fibre and feed) sold and generating revenue. Non-marketed outputs such as environmental and social outputs are not considered. Here we contribute to this issue by incorporating environmental outputs in the calculation of technical efficiency and performing the analysis of the effect of CAP subsidies on technical efficiency for more than one thousand farms across nine countries of the European Union, with Farm Accoutancy Data network (FADN) data of 2014/2015 and additional data collected via the FLINT project. Results indicate the effect of subsidies on farm technical efficiency changes when environmental outputs (namely greenhouse gas emissions, nitrogen balance and ecological focus areas) are taken into account in the efficiency calculation. Accounting for environmental outputs may thus change policy recommandations, but it is important to account for such outputs when possible so that farms producing such outputs are not penalised in the calculation of technical efficiency