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### Abstract

Why do many smallholder farmers fail to adopt improved land-use practices which can improve yields and incomes? The reason is not always because these practices are uneconomical but sometimes it is because resource poverty prevents farmers from taking advantage of yield and income enhancing agricultural practices. In this study we examine the relative merits of using a carbon payment scheme compared to a subsidy policy to help reduce the cost of specific best management practices (BMPs) with productivity and ecosystem benefits. Using a 30-year crop simulation model, we examine the impacts of different soil fertility management treatments (SFTs) on yields and soil carbon and proceed to compute discounted incremental revenue streams over the same period. We find that the SFTs simulated are on average profitable given the conditions assumed in the DSSAT simulations and subsequent net present value analysis and revenue-cost comparisons. When carbon was priced at $8 or$12/t, the increase in incremental incomes generated from a carbon payment were higher than those imputed from a 50% fertilizer subsidy. When carbon was priced at \$4/t, the increase was almost always equal and sometimes higher than that from the imputed income transfer from a 50% subsidy. If these indications hold in further research, it could imply that using fertilizer subsidies as the sole mechanism for stimulating adoption of improved soil fertility management practices may unnecessarily forgo other complementary and possibly superior alternatives. Given the fiscal burden on public finances and unavoidable opportunity costs of any substantial subsidy program, it is possible that a carbon payment system is a reasonable alternative even at low carbon prices especially if accompanied by measures to ameliorate the costs of fertilizer to farmers.