Agriculture’s impact on climate change is unambiguous although its role is multifaceted as it is a source of greenhouse gases but also a sink. It’s feasibility to mitigate climate change has raised interest, but thorough studies about the net benefits of the mitigation practices are needed. The aim of this paper is to analyse the social net benefits of barley cultivation on three different soil types in Finland (clay, silt and organic) by using an integrated economic and ecological model. We ask whether it would be privately or socially profitable to allocate some of barley cultivation permanently for alternative land uses or cultivation systems, when production costs, GHG emissions and surface water quality impacts are taken into account. We compare the profitability of barley cultivation under conventional tillage (mouldboard ploughing) to conservation tillage (no-till), green and bare fallow and afforestation. We develop a theoretical framework for climate policies in agriculture. A comparison of the socially and privately optimal input use and land allocation choices allows us to derive optimal carbon tax and payments for climate and water quality friendly tillage practices. The empirical application of the model uses Finnish data to define the social welfare created by alternative soil type and tillage combinations and optimal policy instruments. GHG emissions are assessed on the basis of the whole life cycle of the production comprising also CO2 emission from soils. To assess the net social benefits related to alternative land use options monetary environmental valuation estimates are used in order to find the socially most profitable land allocation as regards soil type.