An Economic Analysis of the Potential Influence of Carbon Credits on Farm Management Practices

The objective of the 1997 Kyoto agreement was to limit greenhouse gas (GHG) emissions among signatory countries and thereby slow global warming. Under the agreement, Canada has committed itself to reduce GHGs over the next decade by 6 percent from estimated 1990 levels. Debate has now begun on the appropriate government policies that will induce the desired GHG reductions. Regulations could be in the form of direct controls or economic incentives, such as a subsidy/tax system or an emission trading system. The success of the U.S. emission market for SO2 (Schmalenseeet al., 1998) has generated growing interest in the use of a similar market mechanism for carbon (Holmes and Friedman, 2000). The existence of a carbon credit market presents the agricultural sector with another potential revenue source (Sandor and Skees, 1999). While agriculture contributes approximately 10 percent of Canada’s greenhouse gas emissions, it also has the potential to sequester carbon through strategies such as zero tillage, reduced summer fallow and improved grazing. These sequestration activities could be incorporated into an emission trading system and create a “carbon credit” for each unit of CO2 that is removed from the atmosphere. Firms with high emission reduction costs could then buy these credits rather than bear the large abatement costs associated with reducing their GHG emission levels. The perception is that the marginal cost of abatement for agriculture is less than that for other sectors (McCarl and Schneider, 2000). Thus, farmers may be able to profit by selling credits for activities that sequester carbon. An example of such a transaction was the purchase of carbon credits from Iowa farmers who adopted no-till by a consortium of Canadian energy companies (GEMCO) (Lessiter, 1999). Whether the development of a carbon credit market will affect the management decisions of an Ontario crop farmer isthe focus of this study.