Activity level, emission intensity, and optimal GHG abatement policy: An application to Norwegian agriculture

Despite the failure of the U.N. Copenhagen climate conference in December 2009 efforts are continuing to reach agreement on binding global commitments on greenhouse gas (GHG) emissions. At the same time, efforts are still underway to conclude the Doha Round of trade negotiations through the World Trade Organization (WTO). Both of these agreements could have a significant impact on the level of activity in agriculture and the GHG emissions that it generates. In this paper we explore strategies to comply with both trade liberalization and GHG emission reduction commitments. We examine the implications of trade liberalization and a carbon tax, both of which affect agricultural output, as means of achieving emission reductions. We emphasize two diametrically different responses to a carbon tax. One adaptation is to change the way agricultural commodities are produced, i.e., choosing less polluting techniques, which we argue will require more land per unit of output. The second response is to use agricultural land for carbon sequestration purposes (offsets), e.g., for perennial grasses or forestry. We show that when an offset option is introduced, production intensity tends to increase, such that emissions per unit of output rise. The theoretical results are illustrated by using a partial equilibrium model of the Norwegian agricultural sector.