Adoption of carbon farming schemes: risk matters

Ensuring that carbon farming credits accurately reflect actual carbon sequestration is a major challenge. Although activity-based schemes are the most common design in voluntary carbon farming schemes, the economic literature has shown that result-based schemes are more cost-effective. However, the risk induced by result-based schemes when carbon sequestration is not known with certainty ex ante is often overlooked. We propose a stylized economic framework that integrates soil science data and models to investigate how carbon accrual uncertainty affects farmers' adoption of carbon farming schemes. This framework is illustrated with a data set combining observations from a long-term experimental site (Ultuna, Sweden), multi-model ensemble simulations of soil organic carbon dynamics, and a wide range of economic assumptions. We investigate both analytically and quantitatively the conditions under which a farmer chooses to participate in a voluntary carbon farming scheme when the quantity of carbon eventually stored is uncertain. Various carbon are explored, farming schemes differing inmonitoring costs and accuracy, with contrasting risk implications for the farmer. In particular, hybrid schemes that are based on the expected SOC accrual, but include an uncertainty discount are examined. It is shown that the incentives to participate in a result-based scheme may decrease with increasing carbon prices, and that hybrid schemes may foster adoption by farmers.
Key policy insights(1)
Allocative efficiency is higher under result-based schemes: credits are issued based on the most accurate estimate of carbon sequestration according to our assumptions, directing resources where they have the greatest impact
(2) MRV costs and risk may hinder the adoption of result-based schemes
(3) Hybrid schemes may provide an interesting compromise, accounting for sequestration heterogeneity like result-based schemes, improving allocative efficiency while keeping monitoring costs low like activity-based schemes

Allocative efficiency is higher under result-based schemes: credits are issued based on the most accurate estimate of carbon sequestration according to our assumptions, directing resources where they have the greatest impact
MRV costs and risk may hinder the adoption of result-based schemes
Hybrid schemes may provide an interesting compromise, accounting for sequestration heterogeneity like result-based schemes, improving allocative efficiency while keeping monitoring costs low like activity-based schemes