Preserving ecosystem services and economic and environmental benefits will require future landscape policies to identify and incorporate specific landscape features. In this paper we define the term, agricultural landscape simplification, as the reduced compositional and configurational heterogeneity characterized by lower diversity and smaller numbers, sizes, and simpler arrangements of agricultural land uses, which can impair multiple regulating ecosystem services. To examine the causal effects of agricultural landscape simplification on grassland drought impact, we derive a novel remote-sensing product to measure spatial variation in the impact of drought in grasslands during a prolonged drought and heatwave in 2018, and relate it to a multidimensional index of landscape simplification based on landscape metrics. Our causal identification strategy relies on a spatially explicit fuzzy Regression Discontinuity Design (RDD) and uses Germany’s former inner border as an exogenous predictor of agricultural landscape simplification intensity. We identify that a 10 % increase in agricultural landscape simplification is associated with a 7 % increase in grassland drought impact at the former inner border, and quantify the potential forgone revenues associated with the decrease in grassland productivity at approximately 52 € per ha. Our results suggest that identifying the full range of agricultural landscape simplification’s adverse environmental and economic effects would improve preventive landscape policy designs enhancing drought resistance and fostering climate change adaptation strategies.