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This paper focuses on the compatibility of U.S. agri-environmental programs with the Green Box provisions of the Uruguay Round Agreement on Agriculture (AoA). If a new WTO agreement is concluded under the current Doha round of negotiations, it is likely that the amount of payments that can be provided to farmers under the Amber and Blue box categories will be reduced. As a result, greater attention will be directed to the use of the Green Box, which is unlikely to be subject to such a requirement. Payments under the Green Box are supposed to generate no or minimal distortions in production or trade. Those made under environmental programs are restricted to providing compensation for the additional costs incurred or income foregone in meeting program standards or conditions. Payments that are designed to provide incentives for producers to participate in environmental programs are not covered and appear potentially subject to legal challenge. More generally, a recent WTO panel ruling appears to imply that a strict interpretation of decoupling will be applied to Green Box payments. Income support payments that can be shown to be linked to production or land use decisions also appear potentially subject to challenge. These two factors imply that it may be difficult to design WTO-compatible programs that result in the appropriate supply of environmental attributes, when that supply is linked to the volume of agricultural production or land use. If Green Box payments are to be used to achieve environmental objectives, current criteria will have to be modified. The difficulty is how to achieve this without the risk that environmental programs will become the preferred mechanism for providing production and trade distorting subsidies to farmers. Several modifications to existing Green Box criteria may help to avoid this. These include requirements for transparency, explicit (measurable) program criteria, and limits on incentive payments. Enhanced monitoring and surveillance could help to minimize abuse. These changes would impose some constraints on the design of environmental programs in the United States and other countries. However, the clarification of Green Box criteria would be in the long-term interests of those who would like to see the further development of agri-environmental programs, while limiting the potential for international trade distortions.


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