WP2 - The role of transaction costs for the cost-effective supply of carbon sequestration from cover crops in Denmark.

Authors: Luiza Martins Karpavicius, Katarina Elofsson, Gregor Levin and  Arezoo Taghizadeh-Toosi

Status: In submission. Presented at CERE Seminar Series (The Centre for Environmental and Resource Economics from the Unit of Economics at the Umeå Business School of Economics and Statistics, the Unit of Economic History, also at Umeå University, and the Department of Forest Economics at Swedish University of Agricultural Sciences) and  at the Swedish University of Agricultural Sciences (SLU), in many different seminar presentations while visiting the department of economics on a research stay abroad, in  Winter 2023/24. Will be presented in a parallel session at EAERE 2024.

Abstract:
Climate change suggests the use of carbon dioxide (CO2) removal technologies (CDRs), such as soil carbon sequestration in agriculture, to complement mitigation efforts. However, there could be challenges with implementing sequestration policies due to transaction costs for adopting measures, such as farm level expenses for research, information, and planning. The purpose of this study is to investigate how transaction costs affect the cost-effective supply of carbon sequestration from cover crops in Denmark. We develop a model of the optimal adoption of cover crops as a carbon enhancing practice, taking into account the spatial heterogeneity in carbon sequestration and the potentially nonlinear transaction costs that accrue to farmers adopting the scheme. Our findings indicate that in the presence of transaction costs and at a carbon price of 220 €/tCO2e, which has been suggested as an appropriate level of a CO2e tax for Danish agriculture, increased cover crop cultivation will only offset 15.4 tCO2e per year, corresponding to 0.002% of the Danish agricultural emissions reduction target. Assuming zero transaction costs overestimates the sequestration supply at the given carbon price by 13,030 tCO2e per year. We calculate total abatement and transaction costs for cover cropping to be on average 78 € per ha and find transaction costs can represent up to 90% of total costs for low carbon prices. Transaction costs are also found to alter the cost-effective distribution of carbon sequestration across space and farm size groups.

Preprint manuscript available upon request.