Sustainable agriculture implies the exploitation of natural resources now, without compromising the natural resources stocks for the future generations. In the context of the paper, agricultural sustainability takes place at the interface between agriculture and the environment. The focus is on the interplay between farming systems and agri-environmental policies. Agricultural policies have major impacts on soil and water quality and on bio-diversity. Support commodity price policies have lead to serious problems of water pollution; high levels of soil erosion; nitrate losses and lost of biodiversity. The semi decoupeted income support policies and the introduction of the agri-environmental schemes under the 1992 CAP reform were the first attempts to correct the negative aspects of the production-orientated policies. For the first time farmers were regarded as countryside and landscape keepers and as environmental conservationists. Under the 2000 Agenda similar emphasis was given to the sustainability of agriculture. The objective of this paper is to evaluate the impact of the different agri-environmental policies on typical farming systems and consequently their effects on water pollution, soil erosion and bio-diversity/landscape. A bio-economic model, integrating a mathematical programming model and crop growth simulation model, is applied to estimated the changes in the levels of nitrogen leaching and soil erosion, and in the degree of bio-diversity under the current and proposed agricultural policy scenarios. The following farming systems are studied: dryland cereal farming systems (intensive and extensive), livestock and irrigated farming systems using conventional and conservation farming technologies. The results show The results show that the main changes on water pollution, soil erosion levels and biodiversity are mainly due to changes in price and arable compensatory payments. The agri-environmental measures are more important as farm income source than as a policy instrument to influence environmental parameters.