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The Optimal Length of an Agricultural Carbon Contract

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  • Gulati, Sumeet
  • Vercammen, James

Abstract

In this paper we present the economic determinants of the optimal length of a carbon offset contract. We find that because of a declining capacity of the soil to sequester carbon, the optimal length of the carbon contract is finite (the marginal benefit of remaining in the contract is declining over time, whereas marginal opportunity cost is rising). We also explore the effect of varying key parameter values on the optimal length in the contract. If the contract requires the farmer to sequester at a higher rate, the farmer chooses the contract for a shorter length of time, and this may decrease rather than increase social welfare. If society places a higher value on carbon accumulation, the contract is chosen for a longer length of time. Finally, if both the farmer and society have a higher discount rate, the model provides a somewhat surprising result. The overall time in the contract, and benefits from carbon accumulation are higher when the common discount rate is higher.

Suggested Citation

  • Gulati, Sumeet & Vercammen, James, 2005. "The Optimal Length of an Agricultural Carbon Contract," Working Papers 37027, University of Victoria, Resource Economics and Policy.
    • Handle: RePEc:ags:uvicwp:37027
    DOI: 10.22004/ag.econ.37027
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    References listed on IDEAS

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    1. Heng‐Chi Lee & Bruce A. McCarl & Dhazn Gillig, 2005. "The Dynamic Competitiveness of U.S. Agricultural and Forest Carbon Sequestration," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 53(4), pages 343-357, December.
    2. G. Cornelis van Kooten & Clark S. Binkley & Gregg Delcourt, 1995. "Effect of Carbon Taxes and Subsidies on Optimal Forest Rotation Age and Supply of Carbon Services," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(2), pages 365-374.
    3. Antle, John & Capalbo, Susan & Mooney, Sian & Elliott, Edward & Paustian, Keith, 2003. "Spatial heterogeneity, contract design, and the efficiency of carbon sequestration policies for agriculture," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 231-250, September.
    4. Oscar J. Cacho & Robyn L. Hean & Russell M. Wise, 2003. "Carbon‐accounting methods and reforestation incentives," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(2), pages 153-179, June.
    5. Antle, John M. & Capalbo, Susan Marie & Mooney, Sian & Elliott, Edward T. & Paustian, Keith H., 2001. "Economic Analysis Of Agricultural Soil Carbon Sequestration: An Integrated Assessment Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(2), pages 1-24, December.
    6. Lecocq, Franck & Chomitz, Kenneth, 2001. "Optimal use of carbon sequestration in a global climate change strategy : is there a wooden bridge to a clean energy future ?," Policy Research Working Paper Series 2635, The World Bank.
    7. Paul J. Thomassin, 2003. "Canadian Agriculture and the Development of a Carbon Trading and Offset System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(5), pages 1171-1177.
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    Cited by:

    1. Gren, Ing-Marie & Zeleke, Abenezer Aklilu, 2016. "Policy design for forest carbon sequestration: A review of the literature," Forest Policy and Economics, Elsevier, vol. 70(C), pages 128-136.
    2. James F. Oehmke, 2017. "Re‐Examining the Reported Rates of Return to Food and Agricultural Research and Development: Comment," American Journal of Agricultural Economics, John Wiley & Sons, vol. 99(3), pages 818-826, April.
    3. Juutinen, Artti & Ollikainen, Markku & Mönkkönen, Mikko & Reunanen, Pasi & Tikkanen, Olli-Pekka & Kouki, Jari, 2014. "Optimal contract length for biodiversity conservation under conservation budget constraint," Forest Policy and Economics, Elsevier, vol. 47(C), pages 14-24.
    4. Timothy Capon & Michael Harris & Andrew Reeson, 2013. "The Design of Markets for Soil Carbon Sequestration," Economic Papers, The Economic Society of Australia, vol. 32(2), pages 161-173, June.
    5. Lennox, Gareth D. & Armsworth, Paul R., 2011. "Suitability of short or long conservation contracts under ecological and socio-economic uncertainty," Ecological Modelling, Elsevier, vol. 222(15), pages 2856-2866.
    6. James Vercammen, 2019. "A dynamic analysis of cost‐share agri‐environmental programs," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 67(1), pages 15-30, March.
    7. Juutinen, Artti & Reunanen, Pasi & Mönkkönen, Mikko & Tikkanen, Olli-Pekka & Kouki, Jari, 2012. "Conservation of forest biodiversity using temporal conservation contracts," Ecological Economics, Elsevier, vol. 81(C), pages 121-129.
    8. Sharma, Bijay P. & Khanna, Madhu & Miao, Ruiqing, 2022. "Designing Efficient Payments to Incentivize GHG Mitigation Using Energy Crops," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322361, Agricultural and Applied Economics Association.

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