Economic Analysis of Carbon Sequestration

Hypothesis: By adopting more sustainable practices, farmers can sequester C in soil at a cost competitive with other sources of GHG emissions reductions. How will it work? cap on GHG emissions, tradable emissions reductions credits (carbon trading) institutions to link small farmers in LDCs to carbon trading govt. agencies (ISRA?) NGOs

Technical Potential: Changing farm land use and management practices can restore soil C lost from use of “conventional” practices Soil C Time C0C0 CVCV C T0T0 T1T1 T2T2 Permanence: What happens after T 2 ? Annual average rate of C accumulation = (C C – C V )/(T 2 – T 1 )

Factors Determining the Cost of C Sequestered in Agricultural Soil Farm Opportunity Costs: What does the producer have to do to increase soil C, and how does that affect profitability? –Change tillage practices –Change crop rotation –Change fertilizer rates –Invest in terraces, other conservation practices Transactions Costs: –Organizing & negotiating contract or project –Verifying compliance (monitoring practices, measuring soil C accumulation) Adapting contracts/projects to local institutions –Property rights –Intermediaries to negotiate & enforce contracts

Decision rule: choose practice to max NPV i =  t  it /(1+r) t, i = conVentional, Conservation If  it is constant over time, then the decision rule is to choose practice to max  i If an informed farmer initially chooses V (and there are no signif market distortions), then  C <  V So to induce adoption give incentive payment g such that  C + g >  V Payment could be in cash or in kind

Let  C = (C C – C V )/  T, and let g = P  C, where P = value of carbon ($/tonne C). Then the decision rule is to adopt the C-practice if  C + g >  V or g >  V -  C or P > (  V -  C )/  C Value of carbon Farm opportunity cost Carbon rate

Fertilizer-Based Carbon Contracts Farmer agrees to apply a minimum amount of fertilizer (X6C in the simulation model) Also may assume farmers incorporate some crop residue into soil –Additional residue above what was produced before contract –All residue Carbon payments provided in form of payment or credit equal to expected value of carbon sequestered Alternatively, carbon funds used to finance development of fertilizer supply and credit.

But if farmers do not maintain the C-practice, soil carbon may be returned to the atmosphere…the problem of permanence… Soil C Time C0C0 CVCV C T0T0 T1T1 T2T2 TrTr

Net return (  ) Carbon rate (  C)  C(P 0,  C )  C(P 0,  V ) System dynamics: productivity effects of carbon accumulation emerge over time  C (T 1 )  C (T 2 )  V (T 1 )  1  2 1 2

With emergence of higher productivity,  C >  V, therefore at that point a positive incentive payment g is not needed to ensure that the farmer maintains the practice C.  Permanence may be an emergent property of C- sequestration technologies.