Soil carbon sequestration by agricultural activities is a recognised approach to mitigate the effects of climate change, helping offset ongoing emissions and aiding in restoring and preserving carbon sinks. For carbon sequestration to be a cost-effective strategy, all costs associated with the implementation of these measures must be well accounted for. However, transaction costs are often neglected. These costs comprise market-related and additional costs borne by farmers due to the time spent on research, information acquisition, planning, contracting, certification, etc., as well as potential auxiliary services needed to receive governmental compensation for the cultivation of the crops.

In a recent scientific article published in the journal Carbon Management, MARVIC partner Katarina Elofsson (Aarhus University), together with co-authors Luiza Karpavicius, Gregor Levin and Arezoo Taghizadeh-Toosi, investigates how transaction costs affect the cost-effective supply of carbon sequestration from cover crops in Denmark. In most studies modelling carbon sequestration in the land use sector, transaction costs are assumed to be zero, while previous estimates suggest that they are actually between 20% and 80% of the total expenses. Therefore, accounting for transaction costs is crucial for comparing environmental policies and for understanding whether carbon sequestration can be a cost-effective climate mitigation strategy.

The article, which can be found here, presents a model of the optimal adoption of cover crops, accounting for farm spatial heterogeneity and potentially nonlinear transaction costs to adoption. The authors estimate the supply of carbon for a range of carbon prices between 0 and 500 €/tCO₂e in different scenario simulations, using a baseline price of 220 €/tCO₂e, equal to the tax level recommended by the Danish Climate Council, for comparative analysis.

The authors find that if transaction costs are assumed to be zero, the carbon sequestration can be estimated to be more than 13,000 tCO₂e. In contrast, cover crop cultivation would only offset a negligible amount of CO₂e at the baseline carbon price when transaction costs are considered. Transaction costs also change the optimal allocation of sequestration across space and farm type, highlighting the relevance of measuring and accounting for regional and farm type differences in administrative, monitoring, and compliance costs, as well as costs for adopting different practices. Moreover, the authors point out that practice adoption could be increased through governmental efforts to reduce farmer’s transaction costs, for example by disseminating information about cover crop benefits and management practices.