How much do uncertainty and information asymmetry matter? The case of soil carbon storage practices in the agricultural sector

This paper explores the welfare implications of three alternative types of Monitoring, Reporting and Verification (MRV) requirements in the presence of information asymmetries. MRV requirements mandate how environmental benefits – here carbon storage – must be estimated and audited in order to monetize them, for example as carbon credits or public payments in an ecoscheme. Due to trade-offs between uncertainty and MRV costs, excessively flexible MRV requirements may compromise the carbon reduction goals, while highly stringent requirements may prevent some projects from being implemented. We build a simple adverse selection model to predict the behaviour of economic agents faced with different MRV requirements. We then calibrate this model and evaluate the welfare implication by using data on carbon storage for the four most promising carbon storage practices in the agricultural sector: agroforestry, hedges, temporary grasslands and cover crops. We identify the optimal set of MRV requirements in different information asymmetry settings and derive a decision tree to guide regulators in determining the best choice of MRV rules for payment for environmental services schemes.