Carbon Insetting in agriculture supply chains: The carrot or the stick ?

How do farmers and food companies navigate the net-zero journey together, in a constructive way?

This started as a review of Carbon Shortcuts a really informative four part podcast series by Humans of Agriculture , featuring Richard Eckard .

After listening to the podcast series (I highly recommend it) I felt compelled to add to the conversation. So it turns out that this is a "sort-of" review. A mix of review and my own opinion. I hope it brings you some value. Please let me know if it doesn't!

Carbon Insetting is when a company reduces and removes (sequesters) carbon emissions within its own supply chain.

Some take-aways from Carbon Shortcuts.

Overall the podcast series talks more about "sticks" (e.g. market access demands and regulation) than "carrots" (e.g. potential for diversified revenue, balance sheet value of carbon credits or carbon-neutral price premiums). With four short interviews, it is a great bite size introduction to carbon neutrality in agriculture supply chains. It is really informative and there is no doubting Richards incredible level of knowledge. From Richards perspective:

• By 2030 farmers will need to show low emission intensity to maintain?market access.
• They may also need to show carbon neutrality, by sequestering carbon to offset any unavoidable emissions.
• This Carbon Insetting will be more important to a farm than the diversified revenue that can come from selling carbon credits.
• The ag industry will need all of the carbon credits it can generate to get itself to net-zero.
• Selling carbon credits outside the farming supply chain is risky (a farmer might need them one day).?
• A farm area has a capped potential for carbon?credits (there is only?so much land to plant to trees, or hectares available for a soil carbon project). So a farmer will have a finite number of carbon credits available.?It might not be wise to sell these for short-term gain. Think of the long-game.

The podcast emphasises livestock emissions, but there is also some good discussion of viticulture, horticulture and cropping (very briefly).?There is much discussion around the big picture of reaching net-zero as a nation and as an industry, which may or may not be of interest to a farmer audience.

It is very important to emphasise the risks and on-ground reality facing farmers (which is done very well). But we mustn't forget that carbon farming can also be an incredible opportunity. There are carrots at play here, not just sticks.

A slight clarification on Carbon Insetting:

There is one brief comment in episode two that implies that carbon insetting won't incur the administrative?costs or 25-year liability associated with carbon offsetting (creating carbon credits).?

This statement would sometimes be true in the instance of certain carbon credits based on emission reductions (e.g. reduced methane emissions through feed supplements).?

But when it comes to complying with most carbon neutral standards (such as Climate Active ) you cannot claim carbon?sequestration?(storing carbon in soil or trees) unless it has been formally accredited (ie. an actual carbon credit unit has been created and retired).?

Also, claiming carbon neutrality to a supply chain partner (e.g. an intermediary who on-sells a farmers produce to a manufacturer) will likely also require a formal carbon credit unit for any?sequestration?based insetting.

Supply chains need solid-proof of the integrity of any sequestration claims for their end buyers and this is best done through an independent third party carbon credit.?

So a landowner will still need to engage in a carbon credit program, and incur the costs and liability of creating a carbon credit (at least under the current dominant system).

Check some things for your own context:

There are a few generalised statements made in the podcast series that I'd encourage any farmers to double check for accuracy in their own context. I'm not challenging the validity of the studies quoted, just suggesting it might not be the case on your farm (or maybe check the parameters of the studies). These generalised statements don't stack up to my own experience with the farmers we support via The Carbon Farming Foundation .

• It suggests a very low (1%) of revenue on the average farm could come from carbon credits. I'd check this in your own context, we have a tool at www.carbonscout.online that can help.
• It suggests that if the average farm plants 20% of its area to trees, it would buy 5 years worth of carbon neutrality. Again, I'd check that one out for accuracy in your context.
• It mentions that banks are getting less interested in funding carbon sequestration projects, due to the risk of reversal. This is counter to my own personal experience which suggests that banks are eager to fund sequestration projects. Though there are definitely risks and the sector is trying to work out how they can manage these risks, in order to deploy the pools of capital available.?
• It does imply that you need to choose between farm productivity benefits OR carbon credits. That these things don't coexist. In episode two it is stated that building soil carbon in a livestock system will require a reduction in farm production (reduced livestock utilisation). It also mentions that shelter-belt tree plantings can have more of a financial gain from increased lambing survival rates than carbon credits (I agree). But why cant you have both?.There would be many who argue that you can have productivity AND carbon credits, you don't need to choose one or the other.

But don't take my word for it either (I'm human and subject to my own bias). It is worth doing your own homework and forming your own opinions.

My two cents - for farmers

Investing in?emission?reduction?is an investment in future market access. So it makes sense to get on the front foot.

Emission reductions can sometimes earn carbon credits (e.g. reduced livestock methane output through feed supplements). But ultimately you should (eventually) be paid some kind of price premium for being a low emission producer, so there isn't huge long-term incentive to incur the costs of generating carbon credit units from these emission reductions (maybe up until 2030 is ok). My prediction is that emission reduction based carbon credits will phase-out in 5-10 years time.??

But when it comes to sequestration activities (storing carbon in soil and trees), you will need to be part of a carbon credit program if you want to realise the value towards your own carbon neutrality.

It will take 3-5 years for you to start getting carbon credits issued, so don't wait until 2030 to get started.?

Carbon credits are an asset for your business, it makes sense to start building a bank of these for your future use.?There are risks, but they can be managed with good strategy and being very careful when choosing a carbon service provider.

If you maintain control of your carbon credits (keep 100% of them) then all the negotiating power (and therefore value) sits with you.?

• You can hold them as an asset on the balance sheet (though watch out for tax rules here),
• retire them to be carbon neutral (if there are sufficient carrots or sticks to justify this path),
• or sell some (if the time and price is right).?

Ultimately the future of farming is going to require that you engage wholeheartedly in both emission reduction and carbon sequestration.

Really farm masterplanning and productivity comes first. Getting more carbon flowing (flowing is the key word) in your farming system has a multitude of benefits for productivity, resilience, water retention etc. The carbon credit opportunity can be a nice addition. So it is worth at least running the numbers to see if carbon credit creation could work for you.

If you play your cards right. There can be major advantages to being an early mover.

My two cents - for downstream food and fibre companies

Planning needs to start straight away on how to incentivise emission reduction at a farm level.

You may need to index your purchase prices based on emissions intensity (e.g. tons CO2e per kilogram of grain). You will need to go even further if you expect to purchase certified carbon-neutral produce. A farmer will have the choice to:?

1. Sell the produce as carbon neutral and retire the associated carbon credits (to offset unavoidable emissions), or
2. Sell their produce for a normal market price (as non carbon neutral) and instead then sell the associated carbon credits to the highest bidder.

So you are going to either need to use a carrot (ensure option 1 is more lucrative or attractive than option 2) or a stick (refuse to purchase from farmers who are not carbon neutral).

Though who ever prefers the stick? Carrots are surely the preference. Of course you could also sit back and hope that regulation forces farmers into option 2.

To get on the front foot. You could estimate supply chain emissions and create an internal "phantom" carbon price. Then you can do the maths on how much cash you have available (per unit purchased) to invest in incentivising emission reduction or purchasing carbon credits.

Purchasing carbon credits (to offset unavoidable emissions) could be really powerful if they are coming from within your own supply chain (rather than buying cheap carbon credits for the lowest price on the international market).?

This Carbon Insetting approach is a chance to forge a long-term partnership with farmers, while credibly delivering on your ESG goals.

For example, could you co-invest in the cost of a biodiverse tree planting (like Wide Open Agriculture has done here)? There is a really exciting opportunity here, which could be much better than buying carbon credits on the open market (which has huge price risk).

Really for food companies, the starting point must be understanding the context for farmers. Why would they hand over their hard earned carbon credits without getting some share of the value? How can you make it a win-win for both parties?

How can you deploy some carrots? Rather than relying on the sticks.

All in all. It is well worth listening to the podcast if you are a farmer or work downstream within agricultural supply chains. There is much to learn and much to discuss. So big thanks to Humans of Agriculture and Richard Eckard for this thought provoking series.

Just noting that the views in this article are my own personal opinion. They don't reflect the position of The Carbon Farming Foundation or any other organisations I'm involved with.