Premium
The Optimal Length of an Agricultural Carbon Contract
Author(s) -
Gulati Sumeet,
Vercammen James
Publication year - 2005
Publication title -
canadian journal of agricultural economics/revue canadienne d'agroeconomie
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 37
eISSN - 1744-7976
pISSN - 0008-3976
DOI - 10.1111/j.1744-7976.2005.00024.x
Subject(s) - contract farming , offset (computer science) , marginal value , economics , marginal cost , carbon fibers , welfare , agriculture , microeconomics , carbon offset , social cost , social discount rate , value (mathematics) , natural resource economics , social contract , agricultural economics , cost–benefit analysis , greenhouse gas , mathematics , ecology , market economy , production (economics) , computer science , biology , statistics , algorithm , politics , composite number , political science , law , programming language
In this paper, we present the economic determinants of the optimal length of a carbon offset contract. We find that because of a declining capacity of the soil to sequester carbon, the optimal length of the carbon contract is finite (the marginal benefit of remaining in the contract is declining over time, whereas marginal opportunity cost is rising). We also explore the effect of varying key parameter values on the optimal length in the contract. If the contract requires the farmer to sequester at a higher rate, the farmer chooses the contract for a shorter length of time, and this may decrease rather than increase social welfare. If society places a higher value on carbon accumulation, the contract is chosen for a longer length of time. Finally, if both the farmer and society have a higher discount rate, the model provides a somewhat surprising result. The overall time in the contract, and benefits from carbon accumulation are higher when the common discount rate is higher.