Issued December 2003

A Montana dryland grain production study shows that soil carbon sequestered by grain produceers in the norhtern Great Plains region could compete in a national or international market for carbon.

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A Montana dryland grain production study shows that soil carbon sequestered by grain producers in the northern Great Plains region could compete in a national or international market for carbon.

There is a growing interest in carbon sequestration as a means for offsetting the effects of climate change. Carbon sequestration is the process of transforming carbon in the air (carbon dioxide or CO₂) into soil carbon. The removal of greenhouse gases from the atmosphere into “sinks,” such as soil, is one way of addressing climate change. Reductions in industrial emissions is another. Studies indicate that producers can sequester significant amounts of atmospheric carbon in soils by adopting no-till, minimum-till or continuous cropping practices. This MontGuide outlines the key factors that determine the cost per metric ton of carbon sequestered in agricultural soils and presents results from a study of carbon sequestration in Montana dryland grain production systems. These results indicate that grain producers in Montana could sequester as much as 20 million metric tons of carbon in soil over a 20- to 30-year period at a cost that is competitive with industrial emissions reductions or other sinks such as conversion of agricultural land to forests. The results also indicate that the cost per metric ton of soil carbon sequestered varies with soil and climate conditions and the type of practices used to increase soil carbon. Furthermore, the value of soil carbon contracts to producers depends critically on the terms of such contracts.

Factors in the cost of carbon sequestered in agricultural soil

Farmers entering into contracts to sequester carbon in soil would agree to adopt practices that “produce” carbon in the soil. In this sense, carbon contracts would be similar to existing commodity futures contracts. However, carbon contracts would be different from conventional commodity contracts in two important respects.

First, in the case of soil carbon, the buyer never actually takes delivery of the commodity; rather, the commodity is embodied in an asset (the soil) that belongs to the landowner. Moreover, unless the land is managed appropriately, carbon that is stored in soil may be released back into the atmosphere. In this respect, producers can be thought of as providing a carbon sequestration service rather than a commodity that can be physically removed from the farm.

Second, unlike other agricultural commodities, changes in soil carbon are not directly visible to either the producer or the buyer. The changes in soil carbon specified in contracts will need to be verified by appropriate field measurements.

Third, carbon is spatially and temporally variable, and therefore the quantity a farmer can sequester in the soil is uncertain at the time the contract is traded. The total cost of providing soil carbon services is therefore equal to the compensation that would be paid to the farmer for changing land-use or management practices, plus the costs of negotiating contracts and monitoring compliance. In some cases, such as changing land-use practices, compliance can be monitored visually at a low cost. In other cases, for example, changing management practices such as fertilization rates, monitoring compliance may be more costly.

Suppose that soil science research has established the annual average rate of carbon accumulation for each major type of soil, accounting for conditions such as climate and management practices. Further suppose that farmers could enter into contracts (either with the government or private firms) to provide carbon sequestration services for a specified time period. The contract pays the farmer an amount each year over the contract period to follow specified management practices that sequester additional tons of carbon per acre or hectare per year.

The buyer of the carbon values the contract according to how much carbon the farmer sequesters in soil and how long the process takes. As an example, let's assume that the buyer of the contract can take credit for 0.25 tons of carbon sequestered per acre per year; thus, if the value of carbon were $20 per ton, the value of the contract to the buyer each year is equal to $20 X 0.25 tons, or $5 per acre per year.

Buyers and sellers enter into a contract when the value to the buyer is equal to the value to the seller. This implies that on an annual basis, carbon contracts will provide the farmer with a payment equal to the value of the carbon sequestered.

How many acres or hectares of land would farmers be willing to put into this type of contract? The answer will depend on the payments made to farmers for changing practices as compared to the costs to the farmer of changing practices. We refer to the cost to farmers of changing practices as the farm opportunity cost (this is called the marginal cost in economics). Without the carbon market, farmers follow whatever practices maximize their profit. If farmers switch to alternative practices to enhance carbon sequestration, they will earn a lower profit; otherwise they would have already been following these practices. Thus farmers enter into carbon contracts when those contracts offer more money per acre than what is brought in by their current practices. Following our example, if the farmer’s current practices provide a return of $50 per acre, and the carbon contract pays $5 per acre, the alternative practice would have to provide a return greater than $45 per acre for the farmer to be willing to enter the contract.

Carbon sequestration can also be achieved through a government program rather than a carbon market. In this case, the government would pay farmers to adopt practices that sequester additional carbon. A supply curve for soil carbon can then be derived as the correspondence between payment offered for an additional ton of carbon and the total quantity supplied.

Cost of sequestration: results from a Northern Plains study

A recent study of soil carbon sequestration in the dryland grain production regions of Montana linked two computer simulation models—an economic model of farmers’ land-use and management decisions and a crop ecosystem model of soil carbon dynamics—to simulate the effects of farmers participating in a government program to sequester soil carbon or in a market for carbon. The study area consisted of the grain-producing region of Montana, and the analysis was based on data derived from a survey of 425 farms in the region and on various other soil and climate data needed to operate these models.

The analysis considered contracts that would pay farmers to switch from crop production to permanent grass (a CRP-style policy) and contracts that would pay farmers to switch from a crop-fallow rotation or permanent grass to a continuous grain crop (winter wheat, spring wheat or barley). The analysis showed that a policy that provides payments for converting cropland to permanent grass is a relatively inefficient means to increase soil carbon, with farm opportunity costs per metric ton of carbon ranging from $50 to over $500. By contrast, payments to adopt continuous cropping were found to produce increases in soil carbon at a farm opportunity cost ranging from $12 to $140 per metric ton of carbon. These values varied depending on soil and climate conditions and the profitability of the management alternatives.

Studies of the cost of reducing carbon through industrial emissions reductions and through the use of other sinks such as afforestation show that the cost per metric ton of carbon could be in the range of $20 to $200. Thus the Montana study shows that soil carbon sequestered by grain producers in the northern Great Plains region could compete in a national or international market for carbon.

In this analysis the entire opportunity costs associated with changing agricultural practices were attributed to a single environmental benefit—sequestering carbon. In many cases, changes in land-use and management practices produce multiple environmental benefits, such as reduced soil erosion, improved water quality and wildlife habitat, and visual amenities. If additional environmental benefits were incorporated into an analysis of soil carbon, the relative economic efficiency of alternative land-use and management options could be higher, and generally all options to sequester soil carbon would become more competitive with non-agricultural reductions in greenhouse gases emissions. The farm opportunity cost of providing agricultural sequestration services for carbon vary substantially with soil and climate conditions, as well as the profitability of farm management options. However, Montana dryland grain producers appear to be competitive with other suppliers in a potential carbon market.

This MontGuide is one in a series exploring the potential of agricultural sequestration of carbon. Soil carbon sequestration can be used to reduce the level of greenhouse gases in the atmosphere. Montana State University - Bozeman in collaboration with nine institutions will provide the data and analysis needed to explore the potential of this new market for agricultural producers. More information and accompanying publications can be found at www.casmgs.montana.edu.

http://www.montana.edu/wwwpb/pubs/mt200314.html

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Marketing Management E-8 (Strategies and Alternatives) -- Printed Dec. 2003