Creating Incentives for the Adoption of Sustainable Agricultural Practices in Developing Countries:

1
Creating Incentives for the Adoption of
Sustainable Agricultural Practices in Developing
Countries The Role of Soil Carbon Sequestration
John Antle Bocar Diagana Montana State University
www.tradeoffs.montana.edu
Principal paper prepared for presentation at the
AAEA Annual Meetings, Montreal, July 28 2003.
2
Soil degradation is a key factor in unsustainable
production systems
We know that soil degradation causes a loss in
soil carbonand we know that soil conservation
and other practices increase the amount of
carbon in soil.
Can efforts to reduce GHG emissions through
carbon sequestration help create incentives for
adoption of more sustainable production systems
in LDCs?
3
Factors Affecting Incentives for Soil
Conservation

• With well-defined property rights and related
  market institutions, informed farmers have
  incentives to invest in soil conservation, and
  often do.
• But numerous factors may create adverse
  incentives, especially for poor farmers in
  marginal areas
• lack of property rights
• lack of human capital, technical knowledge
• lack of financial markets
• policies that discriminate against agriculture
• Implication soil organic matter may be more
  valuable to farmers when converted into biomass
  for use as animal feed, fuel, etc. than being
  maintained in the soil.

4
Productivity Dynamics, Adoption Thresholds and
Incentives

• When will farmers adopt practices that sequester
  soil C?
• Technical vs economic potential

5
Technical Potential Changing farm land use and
management practices can restore soil C lost from
use of conventional practices
Soil C
C0
CC
CV
Time
T0
T1
T2
6
Productivity Dynamics, Adoption Thresholds and
Incentives

• When will farmers adopt practices that sequester
  soil C?
• Expected returns of alternative practices, net
  of costs of adjustment (fixed costs, transactions
  costs, risk, etc.)
• Productivity effects uncertain, and with a lag
• Assume that at time of adoption, farmers believe
  conventional practice yields higher returns than
  conservation practices (otherwise they would have
  adopted the conservation practice!)

7
Productivity Dynamics, Adoption Thresholds and
Incentives
NPV of changing from system i to system s for T
periods is given by
T (1) NPV(i,s) ? DtNR(pt, wt, zt, s)
gt(i,s) Mt(i,s) I(i,s)
t 1 Dt (1/(1r))t NR(pt, wt, zt,
s) net returns per hectare for system s pt,,
wt crop and input prices zt capital
services gt(i,s) gt if a per-hectare
contract gt(i,s) Pt?ct(i,s) if a per-ton
contract Mt(i,s) maintenance cost per period
for changing from system i to s I(i,s) fixed
cost for changing from system i to system s.
8
Productivity Dynamics, Adoption Thresholds and
Incentives

• The farmer who maintains the conventional
  practice earns NPV(i).
• Farmer will enter carbon contract if NPV(i,s) gt
  NPV(i)
• Suppose NR(p, w, z, s), P, ?c(i,s), and M(i,s)
  are constant over time.
• fc(i,s) annual cost of financing fixed cost.
• Then a farmer will enter a carbon contract if
• NR(p, w, z, s) g(i,s) M(i,s) fc(i,s) gt
  NR(p, w, z, i)
• Or if
• (3) g(i,s) gt NR(p, w, z, i) - NR(p, w, z,
  s) M(i,s) fc(i,s)
• (C payment) gt (Opportunity cost of adoption)

9
Productivity Dynamics, Adoption Thresholds and
Incentives

• Implications
• if g 0, farmer adopts conservation practice
  only if it is more profitable
• Note if the productivity effect of the
  conservation practice is uncertain and lags
  adoption, farmers may perceive that adoption is
  unprofitable even though it is actually
  profitable.
• if g gt 0, then farmer adopts if payment is
  greater than opportunity cost of adoption
• With carbon payments, conservation practice need
  not be more profitable than conventional practice

10
Carbon Permanence as an Emergent Property of
Conservation Technologies

• Most forms of biological sequestration are not
  necessarily permanente.g., reverting to
  conventional ag practices can return sequestered
  C in soil or biomass to the atmosphere (key issue
  in Kyoto and related policy debates)
• Will soil C be permanently stored? I.e., will
  farmers permanently adopt conservation practices?
• yes if farmers perceive net benefits positive at
  end of contract, without carbon payments
• no if farmers only adopt to receive carbon
  payments
• Also an important question in the soil
  conservation literature often conservation
  practices are NOT maintained by farmers after
  adoption subsidies are removed.

11
Carbon Permanence as an Emergent Property of
Conservation Technologies

• If cons practice remains less profitable than
  conventional practice for the duration of the
  contract (T1), then farmers are likely to revert
  to conventional practice at the end of the
  contract

Opportunity cost of adoption
Case 1 Opportunity cost always positive
Time
T0
T1
Case 2 Opportunity cost declines but is positive
at end of contract
12

• But if at some time t lt T1 productivity
  increases and the conservation practice becomes
  more profitable, the farmer will not dis-adopt at
  the end of the contract.
• Permanence may be an emergent property of the
  system, i.e., farmers are willing to maintain
  adoption if carbon payments are sufficient to
  induce adoption and are maintained long enough
  for farmers to realize positive productivity
  gains.

Opportunity cost of adoption
Time
t
T1
T0
13
Designing Soil Carbon Contracts for Farmers in
Developing Countries

• With well-defined property rights and suitable
  institutions, farmers should be able to
  participate in a GHG emissions trading system, as
  discussed in the literature (Antle McCarl,
  etc.)
• In LDCs several factors may create adoption
  thresholds and hinder participation in a carbon
  market
• higher transactions costs with many small land
  units
• poorly defined property rights (Who receives
  payments? Who is liable in case of default?)
• lack of legal institutions to enforce contracts
• lack of institutions to finance investments

14
Designing Soil Carbon Contracts for Farmers in
Developing Countries

• Institutional innovations are need to help
  farmers overcome adoption thresholds.
• Example carbon loan program
• farmers receive loan based on expected C credit
  generation to make conservation investment
• farmers repay loan with generation of credits,
  or must repay loan with cash if they default on
  the carbon contract
• but this would require institutions needed to
  monitor compliance and reclaim loan in case of
  default

15
Co-Benefits

• A carbon contract for GHG emissions is paying
  farmers to reduce a global externality
• Conservation practices generate other local
  benefits besides carbon and higher productivity,
  e.g.,
• off-site environmental benefits
• regional development

16
Co-Benefits

• Global carbon markets will not account for local
  co-benefitsthe price of GHG emissions will
  understate the social value of conservation
  investments
• This fact may justify subsidy policies that
  operate in addition to GHG emissions markets
• e.g., conservation programs in the U.S. and
  other industrialized countrie
• but poor countries governments are not likely
  to pay for these local benefits

17
Conclusions

• Soil degradation is a significant problem in the
  developing world and is often linked to poverty.
• There is also a long history of attempts to
  solve this problem through development of
  improved agricultural practices and related
  conservation technologies.
• These technologies have been successful in some
  parts of the world and not others.
• There is clearly a need for a better
  understanding of the causes of chronic land
  degradation in the places where existing
  technologies have not been adopted, and ways in
  which incentive mechanisms could help address the
  problem.

18
Conclusions

• Emerging policies to mitigate GHG emissions
  could provide incentives for farmers to adopt and
  maintain more sustainable soil management and
  agroforestry practices that would have long-term
  benefits to them individually while also
  contributing to the global goal of reducing net
  GHG emissions.
• A number of significant challenges would have to
  be overcome
• adverse economic and policy environments in LDCs
  
• profitability and adoption thresholds
• institutions to link small farms to GHG trading
  systems and reduce transactions costs

19
Conclusions

• Pilot projects are needed to demonstrate
  economic and institutional feasibility!
• This presentation and related publications are
  available at
• www.climate.montana.edu
• www.tradeoffs.montana.edu