How effective can carbon credit programs be in reducing nutrient losses: an assessment of public and private conservation programs and their interactions
Issue
The emergence and development of carbon credit programs and the targeting of specific sustainable milestones by many private companies have the potential for greater adoption of conservation practices by injecting additional funding and bringing innovations in incentive mechanisms. In particular, the emerging carbon credit programs will profoundly impact nutrient reduction strategies because conservation practices that reduce nutrient runoff can have implications for carbon, and vice versa.
From a policy standpoint, carbon and nutrient reduction are inseparable for two reasons: (i) most conservation practices that reduce nutrient loss also sequester carbon; and, (ii) both government and private incentives can support the same set of conservation practices. However, some important questions arise: to what extent farmers will participate in carbon markets, how carbon markets will interact with existing nutrient focused conservation programs, and whether and how existing conservation programs can be modified to improve cost-effectiveness in light of the carbon markets. To answer these questions, it is critical that we understand farmers’ views and willingness to adopt conservation practices through the emerging carbon credit markets and the corresponding private companies’ willingness to pay for such practices.
Objective
The overarching objective is to investigate the effectiveness of carbon credit programs at reducing nutrient losses. Researchers will investigate how emerging carbon credit programs interact with existing conservation programs that focus on nutrient reduction by examining farmers’ views and participation decisions, their minimum willingness to accept (WTA), and private companies’ maximum willingness to pay (WTP) for carbon credits and conservation practices.
Approach
Researchers will investigate these questions with a team of cross-disciplinary researchers at Iowa State University and non-governmental organization partners including The Nature Conservancy, Practical Farmers of Iowa and Sustainable Food Lab. The ultimate long-term outcome of the project is improved cost-effectives of conservation investment that reduces nutrient losses and improves the sustainability of farms.
Project Updates
Note: Project reports published on the INRC website are often revised from researchers' original reports to increase consistency.
December 2022
Objective 1: The team has further studied the interactions between traditional conservation programs and the programs that target carbon. While existing Natural Resources Conservation Service programs like Environmental Quality Incentives Program (EQIP) and Conservation Stewardship Program (CSP) aim at providing multiple benefits, including mitigating soil and nutrient loss and improving water quality, the newly established Inflation Reduction Act investment (IRA) targets climate-smart agricultural practices. Of the NRCS’s climate-smart practices, many are also covered by EQIP and CSP. In particular, eight of the top-10 practices in terms of acreage enrollment in EQIP and CSP are also on the list of the climate-smart activities. So far, compared to private companies, the government continues to play the largest role in incentives for agricultural conservation and carbon sequestration. A simple comparison shows that the new IRA funding for EQIP climate-smart agriculture per year in 2021 ($2.11 billion) would be more than 500 times greater than the available Truterra payments ($4 million).
Objectives 2 and 3: The team has focused on the roles of uncertainty and farmers risk attitudes. Uncertainties are often modeled as having a probability distribution. This analysis recognizes that in the context of carbon sequestration in agriculture, the probability distribution is not known, i.e., there is ambiguity regarding the amount of carbon credits earned, and the total carbon payments farmers will receive. When ambiguity exists, an uncertainty premium (representing both a risk premium and ambiguity premium) will be required. An ambiguity-averse farmer is less willing to adopt a conservation practice that represents risky and ambiguous carbon payments compared to an unambiguous carbon payment (even if it is still risky). In this study, we extracted the risk aversion coefficient and ambiguity aversion coefficient from the existing literature. Results indicate that performance-based payment out-performs practice-based payment -- when there is no risk or ambiguity. However, carbon sequestration with practiced-based payment is more than twice the amount of carbon sequestration with performance-based payment when risk aversion and ambiguity aversion are considered. These results suggest that it is critical to thoroughly understand how farmers respond to different carbon payment systems when assessing the systems’ cost-effectiveness.
Objective 4: Feng has collaborated with a team, led by a researcher (Dr. Mike Tomen) at Resource For the Future (RFF), to produce a policy brief that lays out the challenges and opportunities of three policy approaches to voluntary carbon reduction. Looking forward, researchers will continue to quantify the impacts of risk and uncertainty on farmers’ willingness to participate in carbon payment programs. The research team will also gather data regarding the attitudes of agricultural companies toward various carbon initiatives targeting carbon sequestration in agriculture and related implications for nutrient reduction.
Other activities included two presentations and one workshop.
June 2022
Objective 1 - preliminary findings: With data of program participation and existing literature, the team explored the co-benefits of improved water quality and sequestered carbon by practices enrolled in EQIP. Three widely adopted and extensively studied practices were selected: cover crops (CC), no-tillage (NT), and reduced tillage (RT). The carbon impacts of CC, NT, and RT were estimated from 2012 to 2021 which ranged from about 346,000 tons to about 1.371 million tons in total for Iowa. Similarly, ballpark water quality improvement of CC, NT, and RT were estimated, as measured by NO3-N (nitrate-nitrogen) mass reduction. which were about 4.495 million pounds and 7.463 million pounds in total, respectively, for nitrate-nitrogen reduction in Iowa from 2012 to 2021. Based on back-of-the-envelope estimates, the three conservation practices seem to have generated much more carbon benefits than water quality benefits. The overall EQIP investment on the three practices seems to be comparable to the total carbon and water quality benefits ($14.6~$54.5 million).
Objectives 2 and 3 – progress: Identify and assess existing and emerging NGO and private company carbon initiatives and examine their impacts on nutrient reduction and Obj 3. Estimate farmers’ minimum WTA and private companies’ maximum WTP for conservation practices and assess the situational gaps between the two. Three basic types of common payment schemes were compared: practice-based payment (e.g., per-acre payment for conservation practices adoption), outcome-based payment (e.g., payment per tons of carbon sequestered), and commoditization of carbon benefits (e.g., a price premium for crops grown under certified climate-smart practices). Under expected profit maximization, the three payment mechanisms can lead to the same amount of carbon with appropriate payment rates. Situations become more complex under the expected utility and prospect theory. The curvature of the utility function leads to a smaller willingness to adopt and features of prospect theory make a risk-averse farmer even less willing to adopt a conservation practice. Thus, simple benefit-cost analyses will likely overestimate participation, resulting in overly optimistic predictions. In project’s
In the second year, researchers will continue to study the interactions of carbon-focused and nutrient-focused programs. Analysis of carbon payment systems will also continue by using simulation methods and economics experiments to shed light on willingness to pay and willingness to accept concerning conservation practices. Throughout the analysis of Objectives 1-3, researchers will simultaneous work on Obj 4 to identify general guidelines for nutrient reduction strategies to proactively use emerging carbon credit programs.
Other activities included one presentation.