Spatial heterogeneity, contract design, and the efficiency of carbon sequestration policies for agriculture

In this paper we develop methods to investigate the efficiency of alternative contracts for Carbon (C) sequestration in cropland soils, taking into account the spatial heterogeneity of agricultural production systems and the costs of implementing more efficient contracts. We describe contracts being proposed for implementation in the United States and other countries that would pay farmers for adoption of specified practices (per-hectare contracts). We also describe more efficient contracts that would pay farmers per tonne of soil C sequestered, and we show how to estimate the costs of implementing these more efficient contracts. In a case study of a major agricultural region in the United States, we confirm that the relative inefficiency of per-hectare contracts varies spatially and increases with the degree of spatial heterogeneity. The results also show that per-hectare contracts are as much as five times more costly than per-tonne contracts-a degree of inefficiency similar to that found in assessments of command-and-control industrial emissions regulations. Measurement costs to implement the per-tonne contracts are found to be positively related to spatial heterogeneity but are estimated to be at least an order of magnitude smaller than the efficiency losses of the per-hectare contract for reasonable error levels. This finding implies that contracting parties could afford to bear a significant cost to implement per-tonne contracts and achieve a lower total cost than would be possible with the less efficient per-hectare contracts. (C) 2003 Elsevier Science (USA). All rights reserved.