Carbon Markets, Ecosystem Services, and Incentive Design for Sustainable Agriculture in Nigeria: A Theoretical and Empirical Investigation

Carbon markets and ecosystem service payment schemes represent an emerging institutional mechanism for incentivising sustainable land management practices in Nigerian agriculture, with potential to deliver co-benefits for climate mitigation, biodiversity conservation, and farmer income. Despite growing international carbon market engagement with African agricultural systems, the theoretical design of incentive-compatible carbon payment schemes for Nigerian farming contexts and the empirical evidence on farmer response to ecological payment signals are both underdeveloped. This study conducts a theoretical and empirical investigation of incentive design for carbon and ecosystem service markets in Nigerian agriculture. The theoretical component develops a principal-agent model of ecosystem service contracting between a carbon aggregator and heterogeneous farmer agents, characterising the optimal payment structure under moral hazard, monitoring cost constraints, and adverse selection. The empirical component applies a choice experiment method to elicit farmer willingness to participate in hypothetical carbon payment schemes, administered to 400 farm households across agroforestry and crop production communities in Ogun, Kwara, and Benue States. Mixed logit models are estimated to reveal preference heterogeneity and quantify participation thresholds. Results indicate that farmers require a minimum payment of N32,000 per hectare per season to participate in agroforestry-based carbon schemes, with significant variation based on alternative income opportunity costs. Monitoring burden, payment timing, and land tenure security are the three design attributes with the highest participation impact. The study contributes novel theoretical and empirical insights to the design of carbon market mechanisms adapted for smallholder farming realities in Nigeria. Keywords: carbon markets, ecosystem services, incentive design, choice experiment, sustainable agriculture Nigeria