Towards climate targets with cropland afforestation – effect of subsidies on profitability

Abstract

Afforesting unutilized or low-productivity agricultural land is important for achieving ambitious climate targets, and subsidy schemes may incentivize this land-use change. To determine how subsidies affect the relative performance of afforestation, we analyze both carbon-flux-based and lump sum afforestation subsidies. Utilizing detailed empirically estimated ecological models based on Finnish conditions, combined with economic descriptions of agriculture and forestry, enables us to study this complex multidisciplinary question with minimal simplifications. We calculate the economic performance of both agriculture and forestry using different interest rates, afforestation costs, and subsidies to determine how each economic parameter affects the relative economic profitability of each land-use alternative. We show that afforestation can be more profitable than low-income (€70/ha) agriculture, even without subsidies. On high-income (€200/ha) cereal farms, forestry is more profitable than agriculture if carbon is subsidized at a medium level (€100/tC), and afforestation costs are less than €2000/ha. If afforestation costs are high (€2000 +/ha), additional afforestation subsidies are needed for the forestry to be competitive with agriculture. If agricultural income per hectare is very high (€600/ha), forestry remains less profitable unless carbon subsidies (€600/tC) or additional afforestation subsidies are very high.