It is argued that the ongoing CAP/GATT reforms provide a basis for the introduction of environmental cross‐compliance (ECC). ECC enables policymakers to restrict output‐related direct support payments to those farmers who comply with specified environmental guidelines aimed at reducing the external damage effects of agricultural production.This paper is an exploratory investigation of ECC and presents the results of a farm‐level linear programming analysis of 15 North‐West England arable farms. The environmental guidelines, which relate to permanent as opposed to rotational set‐aside and to levels of fertiliser use, are widely applicable to the extent that ECC can be implemented as a voluntary policy system. They are clearly effective in achieving policy goals since all but one of the farmers investigated would comply with the full range of restrictions considered. Within this range, gross margins are reduced by up to 10 per cent while area and output of seed crops are reduced by around 22 per cent and 12 per cent respectively. Row crops area and output are more robust, each falling by just under 4