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Overcoming Barriers to the Development of an Agricultural Carbon Market

• April 25, 2022
• 7 min read

By Dr. Alejandro Plastina

Carbon credits are intangible assets traded in carbon markets. Each carbon credit represents a claim that one metric ton of carbon dioxide emissions, or an amount of another greenhouse gas (GHG) emissions with similar global warming potential as a ton of carbon dioxide, has been removed from the atmosphere or avoided. Buyers of carbon credits use them to offset their own emissions or those of their supply chain and reduce their carbon footprint. However, since the quality of a carbon credit cannot be ascertained by the end buyer even after consumption (what economists refer to as being a “credence good”), a well-functioning carbon market needs a robust measuring, reporting, and verification (MRV) system.

In the agricultural sector, robust MRV systems are key to convincing buyers that the implemented changes in agricultural practices actually removed carbon from the atmosphere or avoided carbon emissions, and that carbon credits are additional (only generated by new changes in practices), permanent, real, and steps have been taken to prevent increases in GHG emissions outside of the project area in response to decreases in production within the project area (leakage avoidance).

Current Challenges

Lack of uniform guidelines. One of the current challenges to the development of an agricultural carbon market is the lack of consistent and uniform guidelines across MRV systems that can result in high “search costs” for credit buyers. The standardization of guidelines across MRV systems would address this challenge.

Independent verification. Another challenge is that a low degree of independence between verifiers and carbon programs could undermine buyers’ trust in the MRV system. However, independent verification is costly and might be cost-prohibitive for small scale projects. Aggregation of carbon projects before submission for verification and increased competition among independent verifiers can address this challenge.

Demand uncertainty. Typically, pledges of carbon neutrality by large corporations place their target date a decade or more into the future, but details about short- and medium-term plans to purchase carbon credits are kept under wraps. For example, Microsoft and Smithfield Foods pledged to become carbon negative by 2030, while Kraft Heinz, Ford, and Exxon pledged to become carbon neutral by 2050. The uncertainty about potential demand for carbon credits in the short and medium term increases perceived risks for farmers, who are typically required to sign multi-year contracts to enroll in programs to generate carbon credits. Corporations could help mitigate this uncertainty by providing more detailed information on their plans to purchase carbon credits and sticking to them.

Carbon credit pricing. Since changing farming practices is costly to farmers, fair compensation will be needed to induce widespread participation in agricultural carbon programs. Not only prices for carbon credits received by farmers would have to cover all extra costs, but also provide sufficient buffer to deal with multiple risks, described below.

Identifying relevant program. Carbon programs estimate the number of carbon credits generated by a particular project using different models (See table below). Currently, it is impossible to easily and transparently assess the amount of carbon credits that one change in practices in one farm can generate across carbon programs. Consequently, farmers struggle to identify the most relevant carbon program for their own situation.

Uncertainty in credit volume. Even after choosing a particular carbon program, farmers face high uncertainty in the projected volume of carbon credits that can be produced in their farms due to the coarseness of the estimates from existing models, which were developed to analyze regional rather than farm-level changes in carbon emissions. Since contracts are signed based on the projected volume of carbon credits, but paid on the actual volume of credits generated, uncertainty in projected volumes translates directly into uncertainty in revenues for farmers. The agricultural carbon industry needs research-based guidelines on how to compare the potential to generate carbon credits across programs to reduce uncertainty for credit buyers and farmers.

Uncertainty in quantification. Additional uncertainty stems from the quantification of actual or realized carbon removal or emission avoidance, which can entail costly processes. On the one hand, soil tests can produce more accurate measurements than remote sensing, but they are cost-prohibitive at large scale. On the other hand, remote sensing technologies could be less expensive but produce very uncertain estimates of actual changes in GHG emissions at the farm-level scale. A lack of scientific consensus on the linkages between soil dynamics, agricultural practices, and GHG dynamics at the farm level makes the coordination of multiple technologies to measure the actual production of carbon credits very challenging and can undermine the viability of an agricultural carbon market.  More research is needed to develop a consensus on the appropriate mix of technologies to measure actual carbon removal or avoidance at farm, project, and regional scales.

Disadoption of practices. The disadoption of conservation practices such as no-till and cover crops is not uncommon. Temporary or permanent disadoption of carbon farming practices can generate carbon reversals, or events in which sequestered carbon goes back into the atmosphere. Different carbon programs impose different penalties to disadopting farmers and have varying protocols to mitigate carbon reversals through carbon credits reserves or buffers. Increased transparency on how carbon programs plan to address carbon reversals is needed to foster an agricultural carbon market.

Competing credit sources. Finally, agriculture is one of many potential sources of carbon credits. Buyers will consider the quality, price, and availability of carbon credits from competing sources such as forestry, industrial carbon sequestration, and international agriculture when making purchase decisions. Strategic consideration of competition and market structure in the supply side of the market is necessary to foster an agricultural carbon market.

Potential Solutions

In summary, the development of an agricultural carbon market faces multiple challenges, that can be addressed by:

1. Focusing on the science gaps to reduce the uncertainty in the production of ag carbon credits, increase the transparency of the system, and improve the credibility of agricultural carbon credits against other carbon credits.
2. Developing and enforcing minimum standards for carbon credits, and letting the market define premiums and discounts with respect to the standard. The evolution of organic markets before and after the certification process developed by the USDA could serve as a blueprint for agricultural carbon credits.
3. Developing a suite of tools to manage production, price, and legal risks for participating farmers, including:
   • Templates with suggested language to add to contractual agreements to protect the balance of powers between carbon programs, farmers, and credit buyers
   • Insurance policies for agricultural carbon production
   • Hybrid compensation systems with a minimum payment to enhance program participation plus performance-based premiums
   • Protocols for stacking payments from carbon programs (focused on GHGs), and environmental services beyond carbon (water quality and quantity, biodiversity, etc.)
   • Protocols for non-additional practices, since eventually all practices considered additional today will become the norm and therefore non-additional at the end of carbon farming contracts.

Dr. Alejandro Plastina is the current Farm Foundation Agricultural Economics Fellow. He is an associate professor/extension economist in the Department of Economics at Iowa State University.

For an in-depth look into the topic of agricultural carbon markets, watch the recent Farm Foundation Forum, “Solving the Barriers to Agricultural Carbon Markets.” Dr. Plastina was one of the presenters. You can also read this Issue Report by Dr. Plastina where he expands on the concepts touched on in this blog.