Spatial Heterogeneity, Contract Design, and the Efficiency of by tracy14

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									      Spatial Heterogeneity, Contract
       Design, and the Efficiency of
     Carbon Sequestration Policies for
                Agriculture


                      John Antle
               Dept of Ag Econ and Econ
               Montana State University

                  With the collaboration of:
Susan Capalbo and Sian Mooney, Montana State University
         Edward Elliott, University of Nebraska
       Keith Paustian, Colorado State University
         Acknowledgements
 This research was funded by the USDA National
Research Initiative Competitive Grants Program, the
NSF Methods and Models for Integrated Assessment
      Program, and the EPA STAR Program.
                   Objectives

In this paper we develop methods to investigate
the efficiency of alternative types of policies or
contracts for C sequestration in cropland soils,
taking into account:
1. the spatial heterogeneity of agricultural
production systems, and
2. the costs of implementing efficient contracts
                 Objectives (2)

We describe per-hectare and per-tonne
contracts for soil C, and use a model of farmers’
decisions to participate in soil C contracts to
derive the on-farm opportunity costs for each
type of contract.
We also describe a prototype soil C
measurement scheme based on statistical
sampling methods and show how the costs of
implementing these measurements can be
estimated.
                 Objectives (3)

We present an integrated assessment modeling
framework, based on coupled site-specific
biophysical simulation models and site-specific
economic data and models, that can be used to
simulate farmers’ decisions to participate in both
per-hectare and per-tonne contracts.
                  Objectives (4)

Using this coupled modeling framework in a
case study of the dryland grain production
system of the Northern Plains region of the
United States, we
•quantify the inefficiency of per-hectare policies
vis-a-vis per-tonne policies
•examine the degree of inefficiency of the per-
hectare contracts and the costs of implementing
more efficient per-tonne contracts.
     Related Papers available at www.climate.montana.edu

Antle, J.M., and S.M. Capalbo, “Econometric-Process Models for
Integrated Assessment of Agricultural Production Systems.”
American Journal of Agricultural Economics 83(May 2001): 389-401.

Antle, J.M., S.M. Capalbo, S. Mooney, E. Elliott and K. Paustian,
“Economics of Agricultural Soil Carbon Sequestration: An
Integrated Assessment Approach.” Journal of Agricultural and
Resource Economics 26 (2001): 344-367.

Mooney, S., J.M. Antle, S.M. Capalbo, and K.H. Paustian, “Contracting
for Carbon Credits: Design and Costs of Measurement and
Monitoring.” Staff Paper 2002-01, Dept. of Ag Econ & Econ, Montana
State University.
                How to sequester soil C?
• Command and control
   – Legislate “best” management practices
• Incentive mechanisms
   – Emissions targets + trading C credits
   – Spatially varying Bs or Cs  efficient policy or contract is
     site-specific
   – Soil C benefits not spatially variable  efficient policy only
     needs to account for spatial variability in Cs

• BUT…are the costs of implementing “efficient”
  contracts prohibitive?
        Designing Contracts for Soil C

• Per-hectare contract: payment for use of BMP
   – Payment independent of quantity of C
   – Must monitor practices for compliance with contract
   – Farmers enter contract if g > ji – js
• Per-tonne contract: pays farmer $P/tonne/yr for
  duration of contract
   – Payment independent of practice
   – Must quantify amount of C
       • Establish baseline
       • Measure accumulation of C
      Designing Contracts for Soil C (2)

• To implement per-tonne contracts we assume:
   – Buyers specify P
   – Buyers and sellers agree on estimates of expected C
     accumulation for feasible production systems
   – Payments are adjusted if actual C accumulation deviates
     from expected accumulation
• Farmers enter contract if P > (ji - js)/cjis , I.e. if
  price per tonne is greater than opp cost per tonne
Proposition:
 For each quantity of C sequestered, the
 marginal opportunity cost of the per-hectare
 payment mechanism (MCH) is greater than or
 equal to the marginal opportunity cost of the
 per-tonne mechanism (MCT), i.e., MCH  MCT,
 and MCT /MCH is decreasing with spatial
 heterogeneity.
Marginal cost functions for per-hectare and
           per-tonne payments

    $/tonne




              MC H



                     MC T


                                  C
      0                     KUB
        Costs of Measuring Soil C (2)
• Procedure to implement per-tonne contracts:
   – Determine agroecozones
   – Determine baseline carbon levels
   – Sample land units within each agroecozone for C
     measurements.
• Stratified sample design shows that per-tonne
  meas. costs are MT(P, ε ,Z) = n(P, ε ,Z)·S·Y/C
   – P = price per tonne
   – ε = measurement error
   – Z = Level of confidence
   – n = population size
   – S = cost per sample
   – Y = measurement frequency
      Integrated Assessment Paradigm

• Economic data  economic production models

• Soils & climate data  crop ecosystem models

• Output of crop ecosystem models 
   economic models and environmental process
   models

• Output of economic models 
                 environmental process models
       Design of Econometric –Process
              Simulation Model

• Estimate econometric production models (system of
supply and input demand fcns) for each activity.

• Simulate econometric models with site-specific data
to obtain expected returns.

• Use structure of decision making process to make
land use and management decisions.
     Simulation of Land Use Using
 Econometric-Process Model of Montana
       Dryland Grain Production
• 1995 MT Cropping Practices Survey

• statistically representative sample of MLRAs in
grain producing regions of MT

• useable data from 425 commercial grain farms
Figure 3. Montana Dryland Grain Study Sub-MLRAs

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                                                                                                                                                                                                                                                                                                                               #


        58a high

        58a low

        Other
        Soil Carbon Simulations
       Performed with the Century
       Model for each Sub-MLRA

• model parameterized for each sub-MLRA
using various sources of data for soils, climate,
and cropping practices

• model executed over 50 years for each
cropping system for each sub-MLRA to achieve
new equilibrium soil C levels
•Link economic simulation model to Century
ecosystem model
•Assess the costs of inducing changes in
levels of soil C (opportunity costs)
•Three policies:
  •CRP- style policy -- convert crop-land to
  grass
  •per acre payments for continuous
  cropping– nontargeted and targeted
  •per tonne payments
                             Figure 3. Soil C Levels Predicted by Century Model for Cropping Systems in
                                                               Montana

                 55



                 50



                 45



                 40
Carbon (mt/ha)




                 35



                 30



                 25



                 20



                 15
                      52_h          52_l       53a_h      53a_l       54_h          54_l   58a_h      58a_l

                                                 SW-F   W-F   G4crp   SW     W   GCPcrp
                                                                             180                                                                                                                     180


                                                                             160                                                                                                                     160


                                                                             140                                                                                                                     140


                                                                             120                                                                                                                     120
                                                                                                                                                                                                                                                                    Per acre payments
                                                                                                                                                     Per acre payments                               100
                                                                             100




                                                                                                                                                                                              $/MT
                                                                      $/MT
                                                                                                                                                                                                     80
                                                                              80
                                                                                                                                                                                                                                                                                    Per tonne payments
                                                                                                                                                                                                     60
                                                                              60
                                                                                                                                                             Per tonne payments
                                                                                                                                                                                                     40
                                                                              40

                                                                                                                                                                                                     20
                                                                              20

                                                                                                                                                                                                       0
                                                                               0                                                                                                                           0.0                0.5           1.0               1.5            2.0                  2.5             3.0
                                                                                   0.0                  0.5           1.0           1.5               2.0           2.5           3.0
                                                                                                                                                                                                                                                          Carbon (MMT)
                                                                                                                              Carbon (MMT)

                                                                                                                             52 high                                                                                                                  52 low
                                                                                                                                                                                                                                                                                                180

       180
                                                                                                                                                                                                                                                                                                160

       160
                                                                                                                                                                                                                                                                                                140

       140
                                                                                                                                                                                                                                                                                                120

                                                                                                                                                                                                                                                                                                                          Per acre payments
       120
                                                                                                                                                                                                                                                                                                100




                                                                                                                                                                                                                                                                                         $/MT
       100
                                                                                                                                                                                                                                                                                                 80
$/MT




                          Per acre payments                                                                                 Sub MLRA                                                                                                                                                                                                          Per tonne payments
       80                                                                                                                                                                                                                                                                                        60
                                                                                                                                          52 high
                                               Per tonne payments
       60                                                                                                                                 52 low                                                                                                                                                 40


       40
                                                                                                                                          53a high
                                                                                                                                                                                                                                                                                                 20

                                                                                                                                          53a low
       20                                                                                                                                                                                                                                                                                         0
                                                                                                                                          54 high                                                                                                                                                     0.0         0.5          1.0            1.5           2.0    2.5   3.0

         0                                                                                                                                                                                                                                                                                                                             Carbon (MMT)
                                                                                                                                          54 low
             0.0   0.5   1.0          1.5         2.0           2.5                 3.0
                                Carbon (MMT)                                                                                              58a high                                                                                                                                                                                   53a low
                                                                                                                                          58a low
                               58a high                                                                                                   Other


                                                                                            180                                                                                                               180


                                                                                            160                                                                                                               160


                                                                                            140                                                                                                               140

                                                                                                                    Per acre payments
                                                                                            120                                                                                                               120

                                                                                                                                                                                                                            Per acre payments
                                                                                            100                                                                                                               100



                                                                                                                                                                                                       $/MT
                                                                                     $/MT




                                                                                             80                                                                                                                  80

                                                                                                                                        Per tonne payments                                                                                        Per tonne payments
                                                                                             60                                                                                                                  60


                                                                                             40                                                                                                                  40


                                                                                             20                                                                                                                  20


                                                                                              0                                                                                                                   0
                                                                                                  0.0         0.5            1.0              1.5            2.0          2.5           3.0                           0.0           0.5             1.0             1.5            2.0                      2.5         3.0

                                                                                                                                        Carbon (MMT)                                                                                                          Carbon (MMT)

                                                                                                                                   58a low                                                                                                                  53a high
                                Marginal cost of per-hectare and
                                per-tonne payment mechanisms

              180                                                                                         180
              160                                                                                         160
              140                                                                                         140
              120                                                                                         120
$/T o n n e




                                                                                            $/T o n n e
              100                                                                                         100
               80                                                                                          80
               60                                                                                          60
               40                                                                                          40
               20                                                                                          20
                0                                                                                           0
                    0.0   0.5   1.0   1 .5      2.0     2.5       3 .0   3.5   4.0   4 .5                       0.0   0.5   1.0    1.5      2.0     2.5       3 .0   3.5   4.0   4.5
                                             C arb o n (M M T )                                                                          C arb o n (M M T )



                                Sub-MLRA 52 high                                                                                  Sub-MLRA 52 low

                                                      Per-tonne payment                                               Per-hectare payment
                              Marginal cost of per-hectare and
                              per-tonne payment mechanisms

              180                                                                                 180
              160                                                                                 160
              140                                                                                 140
              120                                                                                 120
$/T o n n e




                                                                                    $/T o n n e
              100                                                                                 100
               80                                                                                  80
               60                                                                                  60
               40                                                                                  40
               20                                                                                  20
                0                                                                                   0
                    0   0.5    1   1 .5       2      2.5       3   3.5   4   4 .5                       0   0.5   1    1 .5       2      2.5       3   3.5   4   4 .5

                                          C arb o n (M M T )                                                                  C arb o n (M M T )



                              Sub-MLRA 53a high                                                                       Sub-MLRA 53a low

                                                  Per-tonne payment                                         Per-hectare payment
                              Marginal cost of per-hectare and
                              per-tonne payment mechanisms

              180                                                                              180
              160                                                                              160
              140                                                                              140
              120                                                                              120
$/T o n n e




                                                                                 $/T o n n e
              100                                                                              100
               80                                                                               80
               60                                                                               60
               40                                                                               40
               20                                                                               20
                0                                                                                0
                    0   0.5   1   1.5       2      2.5       3   3.5   4   4.5                       0   0.5   1    1.5       2      2.5       3   3.5   4   4.5

                                        C arb o n (M M T )                                                                C arb o n (M M T )



                              Sub-MLRA 58a high                                                                    Sub-MLRA 58a low

                                                Per-tonne payment                                        Per-hectare payment
 Relative efficiency (MCT/MCH) of per-hectare payments
and spatial heterogeneity of opportunity cost per tonne C
                                                 1.0
  Relative Efficiency of Per-Hectare Paym ents




                                                 0.9

                                                 0.8


                                                 0.7

                                                 0.6


                                                 0.5

                                                 0.4


                                                 0.3

                                                 0.2
                                                    100   150    200          250          300           350         400      450   500
                                                                Coefficient of Variation of Opportunity Cost per tonne C


                                                                52_high   52_low    53a_high   53a_low   58a_high   58a_low
                                 TABLE III
Marginal Costs and Measurement Costs, by Sub-MLRA, for $30 per-tonne Payments

                                                                            Marginal
                                Marginal Cost     Sample       Population   Cost per-
            Sub-     Carbon      per-tonne      Measurement   Measurement    hectare
           MLRA      Quantity      Policy          Cost          Cost        Policy



                     (MMT)        ($/tonne)      ($/tonne)     ($/tonne)    ($/tonne)



          52-high     2.23           30            0.020         8.150       33.21



          52-low      2.58           30            0.041         9.875       40.52



          53A-high    0.92           30            0.052         9.404       83.69



          53A-low     1.00           30            0.176        12.921       50.20



          58A-high    2.54           30            0.022         7.012       65.56



          58A-low     1.44           30            0.054        10.598       72.96
Relative measurement cost of per-tonne contracts
(M/MCH) and relative efficiency cost of per-hectare
contracts (1 - MCT/MCH), Sub-MLRA 52-high

           45

           40

           35
                                       0 percent error
           30
 Percent




           25

           20

           15

           10

           5
                    10 percent error
           0
                0   10       20          30        40    50     60     70     80     90     100
                                                  Payment ($/tonne)


           –––––– Relative measurement cost                     ------- Relative efficiency cost
Relative measurement cost of per-tonne contracts
(M/MCH) and relative efficiency cost of per-hectare
contracts (1 - MCT/MCH), Sub-MLRA 58a-low

          80

          70

          60

          50
Percent




          40

          30
                   0 percent error
          20

          10
                    10 percent error
          0
               0   10      20        30   40       50    60        70   80   90   100    110
                                               Payment ($/tonne)


           –––––– Relative measurement cost                   ------- Relative efficiency cost
            Conclusions
• The case study confirms that the relative
inefficiency of per-hectare contracts varies
spatially and increases with spatial
heterogeneity.
• Contracts based on BMPs are as much as
5 times more costly than efficient contracts
that pay per tonne of C, a degree of
inefficiency similar to that found in studies of
industrial regulation.
         Conclusions (2)
• The payoff to spatially-explicit contracts
depends on contract design: both on-farm
opp costs and contract costs must be
assessed to determine the most efficient
contract design.
• Buyers of soil C would have a strong
economic incentive to invest in the
measurements needed to implement per-
tonne contracts.

								
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