Energy crops like miscanthus and switchgrass provide ecosystem benefits such as CO2 mitigation through fossil fuel displacement and soil carbon sequestration in addition to being a source of cellulosic biofuel. These crops provide relatively high biomass yields and have potential to grow on marginal land without displacing conventional crops. However, energy crops have high establishment costs, reach full yield after some years, and are subject to price uncertainty over the crop life-cycle. Such crops are less likely to be planted by farmers who are risk-averse, impatient, or credit constrained.
We look at the effect of providing payments for enhanced ecosystem services on the decision by risk averse farmers to allocate land to energy and conventional crops and the effectiveness of alternative contract designs for such payments. We develop a simulation model that links an economic model with a biogeochemical model, DayCent, to account for spatial and temporal heterogeneity in crop yields. We consider the 1,919 counties in the U.S. rainfed region, each as a representative farmer maximizing expected utility under various exogenously determined contract designs and payment levels for an exogenous degree of risk aversion, time preferences, and credit constraints and analyze land allocation choices over a 10-year period.
Results/Conclusions
The results show that for a given carbon price, payments for displacement of fossil fuels stimulate a higher production of energy crop and corn stover than payments for carbon sequestered in the soil. We also find that contracts that provide upfront payments for carbon displacement or sequestration result in a higher production of energy crops. High carbon prices are needed, particularly when the energy-based price of biomass is low and most of the production of biomass occurs in the southeastern region of the US with high yields and high carbon sequestration potential.