Contents

28.1 Policies and Incentives for Agricultural

Carbon Sequestration 681

28.1.1 U.S. Response to Climate Change and

Kyoto Protocol 684

28.1.2 Strength of Incentives for Agricultural Sequestration 686

28.1.3 Implications for Carbon Trading 687

28.2 Incentive Mechanisms for Agricultural Carbon Sequestration 687

28.2.1 Farmer Participation in Carbon Contracts ... 690

28.2.2 Contract Duration and Carbon Permanence 692

28.2.3 Designing Soil Carbon Contracts for Farmers in Developing Countries 694

28.2.3 Co-Benefits and Costs 696

28.3 Conclusions 697

References 698

Scientists agree that soil degradation continues to be a key limiting factor for agricultural sustainability, despite decades of research to improve soil conservation and other sustainable practices (Barrett et al., 2002; Scherr, 1999; Hudson, 1991; Sanchez, 2002). The prevailing economic explanation for the continuing loss of natural resources in many parts of the world is that economic incentives often encourage degradation and discourage conservation. In industrialized countries, with well-developed market institutions, these incentive problems are generally associated with what are known as "externalities" and "market failures." In developing countries, with less-developed market institutions, these incentive problems are often attributed to high discount rates that poor farmers apply when assessing the future, lack of capital markets, high transport costs and other market imperfections, adverse government policies, insecure property rights, and limited availability of fodder for livestock and domestic uses (Lutz et al., 1994; Scherr, 1999; Antle and Diagana, 2003). Thus, numerous important factors must be considered in assessing the potential for soil carbon sequestration in order to address the problem of agricultural sustainability and associated problems of soil degradation and poverty.

This chapter addresses two sets of issues related to soil carbon sequestration. First, greenhouse gases (GHGs) cause a global externality in the form of an enhanced greenhouse effect. Policies are needed to create appropriate incentives in order for carbon sequestration to be undertaken in industry or agriculture. We provide an overview of the current policy environment and deal with the following questions: What kinds of national and international policies are needed to create adequate incentives for carbon sequestration? How will those policies affect opportunities for agricultural carbon sequestration? Second, mechanisms must be devised to incorporate farmers into national or international efforts to reduce greenhouse gas emissions once incentives for farmers are in place. Appropriate and efficient incentive mechanisms for soil carbon sequestration need to be designed for both industrialized and developing countries. These incentive mechanisms are likely to take different forms, depending on the local institutions operating in each country. We discuss the forms that these incentive mechanisms are likely to take, recognizing that appropriate mechanisms must provide for the permanent sequestration of carbon in aboveground biomass or in soils.

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