Payments for Carbon Sequestration in Agricultural Soils: Incentives for the Future and Rewards for the Past

According to several studies, agricultural carbon sequestration could be a relatively low cost opportunity to mitigate greenhouse gas concentrations. However the potential for storing additional carbon quantities in agricultural soils is critical, and depends on the past behavior of agricultural firms with regards to land heterogeneity. In this paper, we set incentive mechanisms to enhance carbon sequestration as a principalagent relationship between a regulator and agricultural firms. The potential for additional carbon sequestration is treated as an exhaustible resource, under the assumption that the sequestration costs increase with the amount of carbon already stored. We specify contracts in order to induce truthful revelation by firms regarding the characteristics of their intrinsic behaviour towards carbon sequestration, while analytically characterizing the optimal path to sequestering carbon as an exhaustable resource. Firstly, we take into account the impact of the co-effects on the sequestration path, due to carbon sequestering practices. Secondly, we show that incomplete information slows the sequestration process and increases the unexploited potential of carbon sequestration. Thirdly, our paper provides a sound basis for differentiated per-hectare subsidies, dynamically defined for the entire duration of the contract. A type-dependent participation constraint acknowledges the previous efforts of the farmers who have previously accepted policy to incur some sequestration costs, and this constraint prevents them from deciding to switch back to less sequestering practices. The proposed contract has the advantage of avoiding the inefficiency of per-hectare subsidies, as well as the excess costs of a uniform per-tonne subsidy. In addition, it does not penalize early adopters of practices with more intensive sequestration.