Emission trading in agriculture: a study of design options using an agent-based approach

The Scottish Government has proposed reducing Scotland's greenhouse gas (GHG) emissions by at least 80% by 2050, compared to the 1990 baseline level. It is not yet clear how these reductions will be achieved, but it is likely that all sectors will be expected to make some contribution. Depending on their farm activities, farmers have different sets of abatement alternatives—the challenge facing them, however, is in finding strategies that help to meet reduction targets while maintaining their income. In this paper, we use an agent-based modelling approach to study the implications of carbon trading design options aimed at reducing GHG emissions in the agricultural sector, such as auctions, fixed carbon prices, or carbon credit banking. The feasibility of carbon trading scheme options is assessed regarding their ability to ensure that farmers obtain carbon credits at an affordable and adequate price, since low prices would reward farmers not adopting on-farm abatement options and high prices would encourage non-compliance to targets, thus increasing enforcement costs. Assuming a closed market within the agricultural sector, this study shows that farmers may face up to 50% loss of income to achieve a 30% reduction target if this requires a cut in production. However, market design options such as credits banking may allow farmers to progressively adapt to the scheme constraints. At an individual level, the rate of on-farm compliance and the mandated emission reduction target will determine which farmer strategy is the most efficient to cope with a trading scheme.