CONTRACTING FOR SOIL CARBON CREDITS: DESIGN AND COSTS OF MEASUREMENT AND MONITORING

Many firms anticipate that a cap on greenhouse gas emissions will eventually be imposed, either through an international agreement like the Kyoto protocol or through domestic policy, and have started to take voluntary actions to reduce their emissions. If agricultural producers participate in the emerging market for tradable C-credits, it must be possible to verify that actions farmers take do increase the amount of C in soils and this increase can be maintained over the length of the contract. In this paper we develop a prototype measurement and monitoring scheme for C-credits sequestered in agricultural soils and estimate its costs for the small grain-producing region of Montana using an econometric-process simulation model. Three key results emerge from the prototype framework. First, the efficiency of measurement and monitoring procedures for agricultural soil C sequestration depends on the price of C credits. Second, we find that at all price levels, costs of measuring and monitoring are largest in areas that exhibit the greatest heterogeneity in carbon values. Third, in a case study application of our prototype measurement and monitoring scheme, we find that if we assume similar error and confidence levels as forestry contracts, the upper estimate of measurement and monitoring costs associated with a contract that pays farmers per tonne of C sequestered is 3% of the value of a C-credit. This cost is small relative to the estimated net value of the contract. Thus we conclude that measurement and monitoring costs are not likely to be large enough to prevent producers from participating in a market for tradable credits.