Production of agricultural biofuels is expected to rise due to increasing climate change mitigation ambitions. Policy interventions promoting targeted bioenergy solutions can be motivated by the large environmental externalities present in agricultural systems and the local context of biomass production co-benefits. Introducing energy crops in crop rotations in arable land with depleted Soil Organic Carbon (SOC) levels offers the potential to increase SOC stocks and future crop yields as a step towards more sustainable agricultural systems. However, the environmental performance of a policy incentive for energy crops with SOC co-benefits is less evident when considering its land-use effects within and outside of the target agricultural system. We study the potential impacts of a change in agricultural policy on regional agricultural structure and production, and the environment with an Agent-Based Life Cycle Assessment approach. We simulate a policy payment that would achieve adoption of grass leys in crop rotations corresponding to 25 % of the highly productive land in an intensive farming region of southern Sweden. Although enhancing soil health in SOC-depleted farming regions is a desirable environmental objective, its significance is limited within the life-cycle performance of the payment. Instead, crop-displacement impacts and the grass potential as biofuel feedstock are the main drivers. The active utilisation of grasses for biofuel purposes is key in reaching a positive environmental evaluation of the policy instrument. Our environmental evaluation is likely generalisable to other regions with similar technological levels and farming intensity, while our analysis on structural shifts is specific to the policy instrument and agricultural production system under study. Overall, our work provides a method to contrast regional effects and global environmental impacts of policy instruments supporting agricultural biomass for biofuels prior to implementation. This contributes to the environmental assessment of land-based biofuels at a time when their sustainability is highly debated.