Carbon markets for farmers: explaining compliance and voluntary markets

Farmers and land managers are uniquely positioned to drive sustainable land stewardship with large scale removal of carbon in the atmosphere and storing it in the soil through carbon farming.

With science backing it up, adopting sustainable practices on the farm are only a part of the bigger picture for carbon farming. The business aspect of agriculture is also expanding because of it.

What’s captivated farmers and other industries alike are the burgeoning markets that facilitate incentives and demand for soil carbon storage. Organisations plough payments into carbon trading markets to reach their emission reduction goals. In exchange, farmers receive earnings for switching to practices with a documented increase in carbon storage.

Carbon markets for farmers are poised to mature over the decade as private companies and agriculture face mounting pressures to adapt to climate change effects.

It is, therefore, crucial to get a grasp of the basics of agricultural carbon markets to dispel uncertainties before participation. Get a general overview of carbon markets, common types, and what lies ahead of them.

What are carbon markets?

We can think of carbon markets as the economic arm of carbon farming. Generally, a carbon market is a framework that facilitates trading between buyers and sellers of carbon reductions, avoidance, or sequestration represented in the form of certificates or credits.

In agriculture, generating carbon credits is a process that begins with measuring the baseline capacities of farms for carbon sequestration. Once calculated, suitable farming practices must be adopted to safeguard soil carbon accrual over time.

Verified carbon credits are then awarded to farmers when sequestration is proven to happen over a period of time. Organisations buy up credits in carbon markets to account for the sequestered carbon against their own emissions and goals.

Carbon markets are created by governments or private organisations to support environmental, sustainability, and climate change targets that include CO2 or other greenhouse gas (methane, nitrous oxide) emissions reduction and removal.

Switching to practices that sequester carbon more effectively in the farm also means building healthy soils. On top of the income directly coming from selling credits in carbon markets for farmers, there are many benefits to carbon farming that can impact farm prosperity over the years. Some known benefits to carbon farming include:

• Improved water quality

• Biodiversity

• Decreased reliance on chemical inputs

• Resilience to extreme weather events

2 types of carbon markets

Carbon markets generally fall into two broad categories:

• compliance markets

• voluntary markets

Both types generally perform related functions with distinct differences that are worth knowing.

Compliance markets

Compliance markets, also referred to as mandatory or regulatory markets, are structured around national, regional, or international requirements for greenhouse gas emission limitations.

To tackle emissions, a governing body enforces some form of restrictions on emissions by either imposing taxes on emissions or setting a limit on how much carbon dioxide can be emitted by organisations who are legally compelled to abide.

Some regulatory carbon markets include a trading mechanism where organisations can buy and sell emission allowances among other parties to balance out emission margins at a price. Each emissions credit has value because it grants the holder a clearance to emit at a limited capacity.

Some examples of regulatory compliance markets are:

• EU Trading System (ETS)

• California Cap-and-Trade Program

• Clean Development Mechanism (CDM)

• Regional Greenhouse Gas Initiative (RGGI)

Voluntary markets

As more businesses strive to keep their emissions as low as possible, both supply and demand for credits continue to grow. Voluntary carbon markets have become very important in scaling the low-carbon economy including carbon farming.

In the absence of legally binding requirements, many private organisations seeking to offset their emissions outside of a regulatory regime can purchase offset credits in voluntary carbon credit markets. This type of carbon offset market is usually established by private entities. Therefore, unlike compliance markets where guidelines are set, standards, procedures, and measurements vary from one carbon program to another.

Take for instance carbon farming. Soil carbon sequestration in farms generates verified credits with each credit is equivalent to one metric tonne of carbon stored effectively. These credits are purchased by organisations to offset emissions produced from their operations. It is worth noting that businesses must work to minimise emissions as close to zero as possible and only purchase credits for emissions that are unavoidable.

Carbon programmes for farming

Carbon programmes support carbon markets for farmers in various ways including engaging both buyers and sellers of carbon credits. Carbon programs differ and it is wise to connect with providers that:

• Track science-based results and measurements

• With clear permanence and additionality guidelines

• Issues high-quality offset credits for units of emission reductions or removal that have been verified and certified.

For farmers, carbon programs work best when there is expert guidance that can be provided by the programme. This ensures that measures are done properly from the beginning and the right carbon farming practices (like minimising tillage or agroforestry) are recommended on a per-farm basis. Pre-purchasing of credits are also made available by providers to help with initial overheads.

What lies ahead of carbon markets for farmers

In 2021, it was reported that the value of global carbon markets surged to a record $851 billion and is expected to grow even more in the decade. Similarly, the EU is close to proposing a carbon farming framework in the region to standardise processes and strengthen genuine climate outcomes.

Technological innovations such as blockchain are also seen to play important roles in the wider adoption of systems that support the low-carbon economy.

More farmers are seeking to engage in carbon farming for its income and environmental benefits and more businesses look to land-based projects to collaborate on their emission reduction targets. An agricultural carbon program connects both market players to meet their needs and requirements for the best possible outcome in carbon markets for farmers and more.

Sources

• Carbon Market Watch. (2020). Carbon Markets 101 The Ultimate Guide To Market-Based Climate Mechanisms. https://carbonmarketwatch.org/wp/wp-content/uploads/2019/06/CMW-CARBON-MARKETS-101-THE-ULTIMATE-GUIDE-TO-MARKET-BASED-CLIMATE-MECHANISMS-WEB-FINAL-SINGLE.pdf

• Congressional Research Service. (2021). Agriculture and Forestry Offsets in Carbon Markets: Background and Selected Issues. https://crsreports.congress.gov/product/pdf/R/R46956

• Havens, Drew. (2021). Agricultural Carbon Markets: How Might They Work?. Presentations, Working Papers, and Gray Literature: Agricultural Economics. 51. https://digitalcommons.unl.edu/cgi/viewcontent.cgi?article=1055&context=ageconworkpap

• Tang, K. Kragt, M. Hailu, A. Ma, C. (2016). Carbon farming economics: What have we learned?, Journal of Environmental Management, Volume 172, 2016, pp 49-57, ISSN 0301-4797, https://doi.org/10.1016/j.jenvman.2016.02.008