The reform process for a Common Agricultural Policy (CAP) post-2020 has begun. The challenges are considerable and the need for impact analysis is urgent. In this report direct payments in the first pillar of the Common Agricultural Policy (CAP) are analysed, with focus on the CAP objectives of improved competitiveness and incomes in the agricultural sector and sustainable management of the environment and natural resources.

The analysis is conducted using two simulation models; the CAPRI model simulates development in the European agricultural sector, while a case study of Sweden is performed with the AgriPoliS model. The results indicate that the payments have substantial effects on the structure of European agriculture, holding back the development of a competitive sector in the productive regions, in favour of small, low-income farms. The environmental effects of the payments are predominantly negative, as the policy drives production and hence pollution and emissions. The direct payments do however prevent land abandonment and thus preserve biodiversity in marginal regions.

Finally two potential alternatives to direct payments are analysed to test their ability to outperform the direct payments.

The project was partly financed by the World Wildlife Fund (WWF).