Incentive Mechanisms For Agricultural Carbon Sequestration

Some policies that limit total GHG emissions have been put in place. Assuming that all scientifically credible forms of

GHG emissions reductions, including carbon sequestration, are allowed to be counted towards national GHG emissions reductions, we should consider how incentive mechanisms can be designed to implement agricultural carbon sequestration.

For industrialized countries, which have existing and efficiently operating financial markets, we assume that trad-able emissions reductions credits will be used to implement caps on GHG emissions. We also assume that sources of emissions reductions will have to satisfy criteria which ensure that the reductions are verifiable over the duration of the contract. Under these conditions, contracts for agricultural carbon sequestration can be formulated along the lines presented in Antle et al. (2003). We will now review carbon contract design, and discuss whether this type of carbon contract would be likely to work in developing countries.

Soil science has established that the amount of soil C at a given point in time and space is a function of the biophysical conditions at the site, including soils, topography, microclimate, and the land use history at the site. We let Cj1 denote the soil C stock (metric tons of C per hectare) on land unit j that has been managed with production system i. Thus, if a farmer uses a production system i associated with a relatively low equilibrium soil C stock (e.g., conventionally tilled corn, or wheat in a crop-fallow rotation), then the stock of soil C can be increased over time to a new level of Cjs > Cj1 by adopting an alternative system s that is associated with a higher equilibrium level of soil C (e.g., corn produced with reduced tillage, or wheat in a continuous rotation).

The time path between Cj1 and Cjs is generally nonlinear and may follow a hyperbolic or logistic-shaped trajectory, converging on a maximum level attainable with practice s in T years. Simulations with the CENTURY model show that, in a number of cases, this attainable maximum is reached in 20 to 30 years after the change in practices occurs. We assume that, for purposes of implementing soil C contracts, the annual average rate of soil C accumulation per hectare, Acjis = (Cjs - Cji)/T, will be used to estimate the amount of C that a particular change in practices will provide.

Another important issue is the size of the spatial unit over which Ac¡is is either estimated before a contract is agreed to, or measured to verify compliance with a contract. Thus, the index j may refer to the spatial unit at which a farmer makes management decisions (i.e., a single field), or to a larger spatial unit at which measurements may be made with a sampling scheme, as discussed in Mooney et al. (2002).

We consider two types of contracts for soil C sequestration, namely, per-hectare contracts and per-ton contracts. The per-hectare contract provides incentive payments to producers for each hectare of land that is switched from a production system associated with a relatively low equilibrium level of soil C to a system associated with a higher equilibrium level of soil C. Thus, the key feature of the per-hectare contract is that the payment per hectare is the same for all land under contract that uses a specified technology — often referred to as a best management practice — regardless of the amount of C that is actually sequestered as a result.

Typically, we would expect that per-hectare contracts (1) will require that farmers establish what practices they have used in the past, (2) will specify which practices the farmer must adopt over the duration of the contract, and (3) will specify the payments made for compliance with the terms of the contract. In order to enforce compliance with the contract, land use and management practices specified in the contract will be monitored on a periodic basis.

The per-ton contract pays farmers a specified price P for each metric ton of C that is accumulated and maintained in the soil for the duration of the contract, regardless of what management practices are used. Allowing farmers to choose the most efficient production technology at each site, rather than specifying a best management practice, means that the per-ton contract is more efficient than the per-hectare contract, as demonstrated by Antle et al. (2003). To implement per-ton contracts, it is necessary to quantify the amount of C added to the soil over the duration of the contract. Hence, it is necessary to establish the baseline amount of C in the soil at the beginning of the contract, and the time path of soil C accumulation over the duration of the contract. Because soil

C cannot be observed directly, procedures for measuring the baseline levels of soil C and the amount accumulated must be established. Moreover, because of the typically low annual rates of soil C accumulation, it is only possible to measure soil C changes periodically, such as every 5 years, with a reasonable degree of accuracy (Watson et al., 2000). Therefore, farmers entering into per-ton soil C contracts face the problem of estimating how much they will earn from the contracts, and buyers of C credits from farmers face a similar challenge of estimating how much soil C that they can expect to take credit for.

To resolve this ex ante uncertainty about the amount of soil C that will be produced under a per-ton contract, we assume that the contracts operate as follows:

1. Buyers of soil C credits specify a price per metric ton of carbon, P, that they are willing to pay. For this discussion, we assume this is a constant for the duration of the contract, but it could also be specified to change over time.

2. Based on available data from independent entities such as a government agency, farmers, and buyers agree upon a schedule of expected C accumulation rates for all production systems i actually in use, and for all feasible production systems s that farmers could adopt. Based on this schedule, farmers choose what practices they will use and receive P dollars for each expected metric ton C they produce per time period according to this schedule. Subsequently, measurements are made to estimate actual C rates Acjis, and farmers receive additional compensation if Acjis is greater than the expected accumulation, or refund some of the payments that they have received if Acjis is less than the expected accumulation.

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