Agricultural carbon markets; opportunity or distraction
The 2015 Paris climate agreement was heralded as a breakthrough in the global fight against climate change. One of the key commitments in Paris was limiting global warming to 1.5 degrees above pre-industrial levels. But now, just eight years later, global leaders have given up on that target, moving it to 2 degrees instead. Hopefully, this target will not be revised again, but avoiding it will require global action. Carbon credits will be a critical component of the solution, but what are they, and how do they work? What are the opportunities and challenges? And how can the agricultural sector benefit from them?
What are Carbon credits?
A carbon credit is a government permit that gives a company the right to emit one ton of CO2 or CO2 equivalents, known as CO2e. Whilst there are differences between countries, carbon credits are generally sold as part of a “cap-a-trade” system. The number of credits issued each year is based on the government’s emissions targets or emissions cap, and this target/cap decreases over time, making it harder for businesses to stay within it. With carbon credits, revenue flows vertically from companies to regulators. However, companies with excess credits can sell them to other companies through government run carbon markets. Currently, “cap-a-trade” programs exist in California, Canada, the EU, the UK, China, New Zealand, Japan, and South Korea, with several countries and states considering implementation.
Carbon offsets are often confused with carbon credits. Companies generate a carbon offset when they remove one ton of CO2 or CO2 equivalents from the atmosphere as part of their business activity. These offsets can be sold on public markets to other companies that want to reduce their carbon footprint. The purchase of these offsets is voluntary, which is why carbon offsets form what’s known as the “voluntary carbon market”.
Globally the number of carbon markets has shown a steady increase following their establishment by the 1997 Kyoto Protocol. According to the World Bank, there were 64 active carbon pricing initiatives in 2021, up from 61 in 2020 and 50 in 2019. Carbon prices have also shown a steady increase. For example, European carbon credit prices rose from $31 in 2019 to more than $52 in 2021. Currently, these contracts are trading for $83, but there are considerable differences between market locations and market types. For example, the above prices represent the EU “cap-a-trade” compliance price, whilst similar contracts trade for $29 in California, $22 in Australia, $52 in New Zealand and $8 in China. Prices for carbon contracts on voluntary offset markets are substantially lower. Unlike carbon credit prices, offset prices are not location-specific but market-specific. For example, at the moment, the aviation industry-, nature-based- and tech-based offset futures contracts are trading on the Chicago Mercantile Exchange (CME) for $3.21, $5.58 and $1.48, respectively.
The price disparity between mandatory and voluntary markets is expected to narrow as more companies participate in offset markets. Establishing a universal carbon pricing system and a single international market is also being deliberated, but it is uncertain if and when it will materialise. Hence, for the time being, if a farm operates outside of a “cap-a-trade” country, at best, they can try to participate in the nature-based offset market.
Agricultural carbon emissions
It is estimated that 11% of global CO2 emissions can be attributed to agriculture, with the largest proportion of this attributed to the livestock sector. The FAO estimates that a single cow emits up to 100 kg of methane annually, a gas which is 25 times as potent as carbon dioxide at trapping heat in the atmosphere. Hence given the 3.5 billion farmed animals worldwide, the livestock sector contributes 6% of global emissions. To put this statistic into perspective, the global airline industry is only responsible for 2.5% of greenhouse gas emissions. However, unlike most businesses, farmers sequester carbon through sustainable soil, crop, livestock and agroforestry management practices.
Challenges to agricultural offset contracts
Currently, the challenge with trading agricultural carbon lies in not recognising the importance of agriculture as a carbon sequestrator but issuing independently verified contracts at scale. Solving this challenge requires both technological innovation and global policy alignment. Another challenge is research into maximising farm carbon sequestration. Whilst some farmers could earn carbon offset benefits from their existing cultivation practices, the environmental sequestration benefits could be optimised through revised soil cultivation and cover cropping practices. Several companies are moving into the farm carbon credit and offset space, specifically for monitoring and certifying carbon sequestration, as well as contracting carbon sellers and buyers.
Agricultural carbon innovators
Indigo is an American startup that sources agricultural carbon offset contracts for global companies such as JPMorgan Chase, Shopify and North Face. Indigo distinguishes itself from the competition through its ability to issue farmer contracts at scale; this is a significant challenge given the large number of individuals from which the company must source the carbon. Since Indigo’s contracts are backed by rigorous science and independently verified, the company sells them at a premium ($27) relative to nature-based offset futures traded on public markets. In 2021 the Climate Neutral Group (CNG), an environmental consultant, succeeded in listing a South African agricultural carbon offset contract under the Verra Carbon Standard. CNG determines the number of carbon credits generated on a farm by analysing soil data, which is then submitted to the carbon auditor and accredited through the Verra carbon standard.
The carbon economy is one of the critical components of curbing global emissions. Several companies are trailing agricultural carbon credit initiatives, but numerous practical and legislative hurdles must be cleared before agricultural offset contracts become commonplace. The greatest challenge is issuing independently verified contracts at scale.