Designing Soil Carbon Contracts for Farmers in Developing Countries

There has been considerable discussion in the literature about how contracts for soil sequestration might be designed in the context of the United States (Antle et al., 2003; Antle and McCarl, 2002). Some discussion of how carbon sequestration incentives could be created for farmers in developing countries (Antle and Diagana, 2003) is also now in the literature. In a country with well-defined property rights and corresponding financial institutions, farmers can participate in domestic or international markets for tradeable emissions reductions credits. Farmers might enter contracts, with either private or public entities, to adopt specified practices for a specified period of time. They could earn per hectare payments or could be paid per metric ton of carbon sequestered. To verify compliance with contracts, it would be necessary to monitor farmers' practices and to measure the quantities of carbon being sequestered over time. It is likely that third-party intermediaries would consolidate contracts with farmers, thus aggregating enough land units to make a commercially tradeable contract. Such arrangements could possibly deal with various problems affecting the feasibility of this kind of scheme.

In developing countries, the participation of small-scale farmers in this kind of carbon credit market would be inhibited by several factors. First, the transactions costs associated with aggregating land units to create a marketable contract would be large because of the smaller scale of production. In addition, verifying compliance with contracts by, for example, monitoring land use and management practices, could be more costly for a number of small farms. Second, significant issues would arise if land property rights are not formalized. It is not clear how contracts would work if farmers did not hold legal title to the land they manage. For example, in many parts of the developing world, farmers have use rights given by village authorities that can change over time. Third, many parts of the developing world lack well-functioning legal and financial institutions. If contracts are not enforceable, buyers of carbon contracts will have little recourse if farmers are found to be violating the terms of their contract.

In countries that lack financial markets, farmers may not be able to borrow to make the investments needed to adopt practices that sequester carbon. The carbon market could function as a form of financing for these investments, by paying in advance all or part of the capitalized value of the carbon expected to be sequestered. But this would only be attractive to carbon buyers if they are confident that farmers possess property rights and/or other sufficient assets for collateral. If governments incorporate the promotion of soil carbon sequestration into their agricultural policies, they could provide "carbon loans" that could be repaid either by adopting practices that sequester certain amounts of carbon, or by repaying in cash. This type of program could serve as a financing mechanism for adoption of carbon sequestration practices.

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