Authors: Luiza Martins Karpavicius, Katarina Elofsson
Status: Submitted
Abstract:
There is growing interest in policies for agricultural carbon sequestration and the associated need for monitoring. The purpose of this paper is to compare the cost-effectiveness of input- and output-based subsidies for increasing agricultural carbon sequestration in Denmark, considering direct carbon sequestration costs, private transaction costs to landowners for the adoption of such carbon sequestration measures, and public transaction costs for monitoring, reporting, and verification. Three sequestration practices are considered: cover cropping, reduced tillage, and conversion of arable land to grasslands. To this end, we develop a numerical optimization model that maximizes social net benefits from the chosen policy while accounting for the heterogeneity of Danish farms in terms of size, production orientation, and location. We find that output-based subsidies yield consistently higher net benefits and larger carbon sequestration. These findings are robust across varying carbon prices and parameter assumptions. The sensitivity analysis shows that input-based subsidies become preferred to output-based ones only if monitoring costs for output-based subsidies exceed those for input-based schemes by a factor of 3.5 at a carbon price of 250 €/tCO₂e. An even higher cost difference is required at higher carbon prices.
Preprint manuscript available upon reasonable request.
