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Environmental Co-benefits and Stacking in Environmental Markets

Jussi Lankoski (), Markku Ollikainen, Elizabeth Marshall () and Marcel Aillery
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Markku Ollikainen: University of Helsinki
Marcel Aillery: United States Department of Agriculture

No 72, OECD Food, Agriculture and Fisheries Papers from OECD Publishing

Abstract: This paper investigates farmers’ incentives to participate voluntarily in carbon offset markets when environmental credit stacking is allowed, that is, farmers can stack water quality credits with carbon credits. The implications of stacking on additionality of environmental services in interlinked markets, market participation rates, and market equilibrium prices are analysed by developing a conceptual framework of environmental credit stacking, which is applied with data estimates for the US Corn Belt. Analysis shows that credit stacking increases farmers’ participation in carbon offset markets, and that such increased participation provides additionality in environmental service provision. It is further shown that ecosystem markets are interlinked so that credit price changes in one market will shift credit supply in another market, thus affecting equilibrium prices. Empirical application of the framework shows that provision of CO2-eq offsets through reductions of nitrogen application or through the establishment of green set-asides is not profitable without water quality credits. A conversion from conventional tillage and reduced tillage to no-till is profitable in some cases, although current low carbon offset prices and transaction costs have a significant negative impact on the number of participating parcels. When farmers are allowed to stack water quality credits the profitability of carbon sequestration practices increases. Reduced nitrogen application levels becomes a profitable option and 21% of field parcels - representing 4.6 million acres- participate in the market with water quality credit prices at base levels of USD 3/lb for N and USD 4/lb for P. The establishment of green set-aside and streamside buffer strips becomes profitable in the lower productivity and highly erodible lands with base prices of nutrient credits. If water quality trading markets are small then high participation rates among farmers may result in an oversupply of nutrient credits and as a consequence equilibrium credit prices and farmers’ credit revenue would decrease.

Keywords: additionality; carbon offset; interlinked environmental markets; nutrient credit; transaction costs (search for similar items in EconPapers)
JEL-codes: Q53 Q54 Q57 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-ene and nep-env
Date: 2015-02-06
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