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The Optimal Length of an Agricultural Carbon Contract

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  • Sumeet Gulati
  • James Vercammen

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

  • Sumeet Gulati & James Vercammen, 2005. "The Optimal Length of an Agricultural Carbon Contract," Working Papers 2005-17, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
    • Handle: RePEc:rep:wpaper:2005-17
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    Cited by:

    1. Chen, Xiaoxuan & Ando, Amy Whritenour, 2006. "Optimal Contract Length for Voluntary Land Conservation Programs," 2006 Annual meeting, July 23-26, Long Beach, CA 21259, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.

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    More about this item

    Keywords

    carbon offset contracts; greenhouse gas policy; soil carbon;
    All these keywords.

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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