Policy Schemes for More Sustainable Dairy Farming: The Role of Financial Instruments and Policy Implementation Modes

Dairy farming is faced with environmental, social and economic sustainability challenges, which call for the uptake of moresustainable farming practices. Policy schemes involving public and private sectors can support the uptake of more sustainablefarming practices through the provision of incentives to farmers if designed appropriately. However, empirical research indesigning such policy schemes is scarce. This paper examines dairy farmers’ preferences for policy attributes in environmentalcompensation schemes for more grass-based feeding systems. Using data from a discrete choice experiment in Sweden and ahybrid latent class model, we find that while size of financial compensation matters, farmers’ likelihood of participation in grass-based feeding schemes is also driven by how the financial compensation is designed and by non-financial attributes of the policyschemes. Notably, we find three distinct groups of farmers who differ in their likelihood of participating and exhibit heterogeneouspreferences for schemes with private versus public sector-led implementation mode, and direct subsidy payment versus consumerprice premium and tax relief. Furthermore, findings demonstrate that behavioral factors, including farmer attitudes towarddifferent forms of compensation and risk aversion, partly explain the observed heterogeneous preferences. Overall, our findingshighlight the need to accommodate preference heterogeneity in policy design to improve participation, especially in settings wherethe transition to more grass-based feeding is challenging for farmers.