This paper examines how a counterfactual carbon payment policy could incentivize Dutch farmers to adopt more sustainable land management practices. The Netherlands faces the dual challenge of achieving net-zero emissions while addressing nitrogen pollution in its nature reserves. Biochar amendments offer a potential solution to both issues. We develop a dynamic optimization model to analyze farmers’ optimal investment in biochar under location and farmer-level heterogeneity. The model admits a unique, saddle-path-stable steady-state solution. To account for heterogeneity, we calibrate the model using a Monte Carlo simulation across the five most common types of agricultural soil. Our results indicate that implementing a carbon payment policy would increase soil organic carbon sequestration by 61% to 80% and result in higher cumulative discounted profits within 8-10 years. Additionally, the policy is projected to increase crop productivity by 12% to 14%, depending on the soil type. By 2050, steady-state investment in biochar amendments reduces ammonia volatilization by 559–673 mol/ha/year, demonstrating strong co-benefits for both carbon and nitrogen management. 

Additionality is a structural constraint that only recognizes land-based carbon sequestration if it would not have occurred without carbon payments. This discourages large-scale investment because it removes a significant portion of the potential carbon storage asset. Here we examine the effects of replacing the additionality requirement with a carbon asset class on soil organic carbon (SOC) sequestration on cropland. We construct and calibrate an economic model focused on crop and carbon farming in Texas. Our results indicate that eliminating the additionality constraint and monetizing the SOC pool can significantly increase investment in land management practices. Rather than regulating SOC sequestration through additionality, we propose the creation of a carbon asset class that rewards carbon accumulation resulting from all land management practices. We assume that conventional land management sequesters 12.67 Mg of carbon per hectare. Under a carbon offset price of $150 per Mg of CO₂ with the additionality constraint in place, crop farmers do not sequester any additional carbon by 2050. However, when additionality is replaced with a carbon asset class and farmers receive annuity payments based on their existing carbon stocks, they sequester an additional 41.48 Mg of carbon per hectare by 2050 – a 327.4% increase relative to the original carbon pool. The historically accumulated carbon becomes a source of revenue that incentivizes new investment. 

We develop a methodology to incorporate natural capital into an analytical macro growth framework by deriving an easy-to-implement expression for the Pigouvian subsidy (tax) associated with various types of land conversion. This captures the marginal expected discounted future benefits (losses) resulting from the addition (reduction) in the flow of ecosystem services from, for example, a small addition (reduction) in forested land. To illustrate our analysis, we calibrate our model using data from Uganda and compute a lower bound for the magnitude of the ecosystem subsidy (tax). Introducing such policy tools can lead to more efficient land use, by internalizing the contribution of natural capital that is not captured by market value.