Should farmers participate in the EU ETS? Permit price, measurement and technology

Summary

Farmers in the EU do not trade greenhouse gases under the Kyoto agreement. This is an empirical puzzle. Should farmers participate in the EU Emission Trading System (ETS) for greenhouse gases (GHG)? Our overall answer is yes. First, farmers may harvest private net gains because of i) relatively low marginal reduction costs, especially within organic farming; ii) the avoidance of future losses in productivity as a victim of climate change; and iii) the possibility of receiving a favourable allocation system, such as grandfathering or a list of projects that release free allowances. Second, market consequences in terms of the effect on permit price and technology are overall positive, yielding a promising future for the inclusion of agriculture in the EU ETS. Finally, we propose a scheme for including the farming practices in the EU ETS that reduces the uncertainty from measuring emission reduction in this sector.