Agriculture and climate change: The socially optimal production, land use, and GHG emissions

We use an integrated economic and ecological model to examine the socially optimal crop production, choice of cultivation technology and land allocation when climate impacts of greenhouse gas (GHG) emissions from agriculture are taken into account. We outline qualitative properties of the social optimum and use an empirical model based on Finnish data to assess GHG emissions in the private optimum in the absence of policy instruments, in the social optimum and under current Common Agricultural Policy (CAP). The representative cereal crop is spring barley (Hordeum vulgare L.), cultivated on three different soil types (clay, loam, and organic). Agricultural land can be allocated between crop production, green fallow and afforestation. We find that the shift from the free market optimum (current CAP policy regime) to the social optimum reduces GHG emissions by 4.2 (3.7) million tons from the initial 6 (5.5) million. The share of targeted fertilizer application in this reduction is minimal, slightly below 3%, whereas a change in the land allocation produces 97% resulting from radically reduced emissions from organic soils and carbon sequestration due to afforestation of loam and organic soils. Green fallow is never an optimal solution. Surprisingly, under green fallow organic soils remain sources CO2-equivalent emissions. Only loam soil provides larger sequestration but its social welfare estimate is low.