Harvesting benefits: Exploring the effects of second‐best policies on enhancing soil organic carbon stocks in agriculture

Abstract Agricultural subsidies can be an effective policy tool to enhance soil organic carbon sequestration. This paper assesses the effectiveness of a second‐best hypothetical policy which subsidizes additional canola hectares optimally for each soil zone in Saskatchewan in an effort to increase soil organic carbon. I develop a simulation model that includes on‐farm acreage responses and employs a novel field‐level dataset from the Saskatchewan Crop Insurance Corporation to measure changes in soil organic carbon stocks attributable to changes in cropping choices. I find that a policy offering optimal subsidies specific to each soil zone for additional hectares of canola, implemented in 2019 and continuing indefinitely for all insured fields in Saskatchewan, generates an external social benefit worth 14.7 billion Canadian dollars when the subsidy is set to maximize the net external social benefit, and 29.4 billion Canadian dollars when it is set to maximize the change in total welfare. This paper highlights the potential environmental and social benefits of second‐best policies as a cost‐effective alternative to traditional first‐best policies. It also shows how economic and biophysical models can be combined to estimate soil characteristics, thereby avoiding the high cost of direct measurement.