Decarbonize Farming through Carbon Markets

The global average atmospheric carbon dioxide in 2020 is estimated to be 412.5 ± 0.1 parts per million (ppm). This is an increase of 2.7 ± 0.1 ppm from 409.8 ± 0.1 ppm recorded in 2019. Carbon dioxide levels today are higher than at any point in the past 800,000 years. The increase in atmospheric carbon dioxide to today’s levels is virtually instantaneous. 

Atmospheric carbon dioxide concentrations in ppm for the past 800,000 years. On the geologic time scale. Graph by NOAA Climate.gov

Carbon dioxide is the most important and abundant greenhouse gas. It absorbs less heat per molecule than the other greenhouse gases methane, nitrous oxide, chlorofluorocarbons 11, and chlorofluorocarbons 12, but it stays in the atmosphere much longer. Increases in atmospheric carbon dioxide are responsible for about two-thirds of the total energy imbalance while the remaining one-third is because of increases in atmospheric methane, nitrous oxide, chlorofluorocarbons 11, chlorofluorocarbons 12, and a group of 15 other minor contributors. The energy imbalance is what is causing Earth's temperature to rise.

In the last three decades of the 20th century, the average global greenhouse gas emission increase of 1.3% per year was mainly driven by the 1.6% average annual growth in carbon dioxide emissions since 1970. Thus, apart from short interruptions in years of global recessions, global greenhouse gas emissions have been increasing steadily in the decades since, e.g. from 24.6 gigatonnes in carbon dioxide equivalent (GtCO2 eq) in 1970, to 33.0 GtCO2 eq in 1990 to 37.1 GtCO2 eq in 2002. Subsequently, in the next decade, global emissions accelerated annual growth of 2.9% on average leading to 47.9 GtCO2 eq in 2011, after which emissions increased at a much slower rate of 1.1% on average to 52.5 GtCO2 eq in 2019. 

The last time atmospheric carbon dioxide equivalent was this high was more than 3 million years ago when the temperature was 2°–3°C higher than during the pre-industrial era, and the sea level was 15–25 meters higher than today. So if we don't act fast the writing is on the wall.

Agriculture - The Victim or the Culprit?

Actually, agriculture is both a victim of and a culprit responsible for climate change. Surely global warming is already having a profound impact on the sustainability of agricultural production systems as it is responsible for a fall in yields of up to 8 percent in various regions.

However, agricultural and land use/land change activities, including tilling, deforestation, and the use of chemical fertilizers, pesticides, and animal wastes contribute approximately 23 percent of total greenhouse gas emissions. If we do not change, this rate is bound to further increase due to an increase in the demand for food from a growing global population, the stronger demand for dairy and meat products, and the intensification of agricultural practices.

Greenhouse gas emissions (2007–2016) from Agriculture, Forestry and Other Land Use (AFOLU). Graph from IPCC Special Report on Climate Change and Land

Carbon Markets

To decarbonize agriculture it is important that we enable producers to change the way we produce, transport, and consume food. It is vital that we do not leave the weight of reducing the carbon footprint on the weakest link of the chain, the farmer.

To answer this simple question of that can carbon markets help decarbonize farming let's first understand a few basics.

What is a Carbon Market?

The idea behind a carbon market is to reduce greenhouse gas emissions by enabling the trading of emission units referred to as carbon credits.

A carbon credit is a permit/certificate/representation that allows the entity that holds it to emit a certain amount of carbon dioxide or other, marked to carbon dioxide equivalent, greenhouse gases. One carbon credit permits the emission of a mass equal to one ton of carbon dioxide. The carbon credit is key to a carbon market program as a basic emission unit. In nutshell, carbon credits were devised as a market-oriented mechanism to reduce greenhouse gas emissions.

Trading/transfer of carbon credits enables entities that can reduce emissions at a lower impact cost to be incentivized to do so by those with higher impact costs to reduce emissions or are heavy emitters due to the type of activities they perform. Further, by putting a price on carbon emissions, carbon market mechanisms raise awareness of the environmental costs of carbon pollution, hence encouraging entities to follow a lower-carbon path. This also allows investors, and consumers of these entities to understand the value of following a lower-carbon path.

There are two types of carbon markets: cap-and-trade or compliance carbon markets and voluntary carbon markets.

GLOBAL EMISSIONS COVERED BY A CARBON TAX OR EMISSIONS TRADING SYSTEM (%) - Source: World Bank Carbon Tracker, U.N. Intergovernmental Panel on Climate Change; data as of April 1, 2021, and August 9, 2021, respectively.

Cap-and-trade or compliance carbon markets set a mandatory limit on greenhouse gas emissions by an entity and entities that exceed these limits can buy excess allowances in form of carbon credits to fill the gap or face punitive legal actions. In this type of market arrangement, the regulator awards carbon credits to emitting entities that allow them to continue to emit carbon to a certain limit based on various parameters based on their activities, type of business, location of their operations, benchmark values based on top performers, historical activities and other parameters unique to a market/trading system. However, if the entity does not need these carbon credits because of more environmentally efficient practices compared with what is expected in similar entities, the entity may sell any of these unneeded credits to another entity that needs more carbon credits than what is allowed to them. The markets are created by national and international treaties such as the Kyoto Protocol. In the United States, 11 states have adopted cap-and-trade market-based approaches to reduce greenhouse gases. While most of the European Union and the UK are having EU Emissions Trading System (EU ETS).

Voluntary carbon markets as the name suggest are those where entities are not forced but enable the trading of carbon credits outside of the regulatory environment on a voluntary basis. The voluntary carbon market enables entities like governments, non-governmental organizations, and businesses to voluntarily purchase carbon credits to offset their emissions. The largest category of buyers in voluntary carbon markets comprises private firms that purchase carbon offsets for resale or investment or those driven by certain considerations such as safeguarding their reputation, ethics, and corporate social responsibility. The voluntary carbon markets direct private financing to climate-action projects that would not otherwise get funded and can have additional benefits such as biodiversity protection, pollution prevention, public-health improvements, and job creation. They also support investment in the innovation required to lower the cost of emerging climate technologies. Scaled-up voluntary carbon markets can further facilitate the investments in the Global South, where there is the highest potential for economical nature-based emissions-reduction projects

Irrespective of the type of carbon market, they are doubly incentivizing entities to reduce greenhouse emissions. First, entities will be at a disadvantage to their peers if they exceed the carbon emissions cap. Second, they can make money by saving and reselling some of their emissions allowances.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) estimates that demand for carbon credits will increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050.

The market for carbon credits could be worth upward of $50 billion in 2030.

Decarbonizing Agriculture

Many opportunities to reduce agricultural emissions exist, including improved soil management to increase the sequestration of carbon in agricultural soils, reducing fertilizer inputs, adjusting livestock feed to reduce emissions from digestive systems, and capturing methane emissions from manure.

Cultivation techniques that convert atmospheric carbon dioxide to carbon-based compounds in the soil can enhance carbon storage. These techniques can also provide additional benefits in form of reducing erosion and the need for fertilizers. These techniques include improving soil microbial diversity and abundance, increasing the mass and quality of plant and animal inputs to soils, avoiding deep tilling or ensuring no tilling, and maintaining living plant cover on soils year-round. Breeding and choosing plants with long roots or other characteristics favoring sequestration can also enhance agricultural sinks.

Greenhouse gas emissions can also be reduced through improved management of fertilizer use through precision agriculture for better tailoring the quantity and timing of applications, improving fertilizer formulations, and applying fertilizer directly to roots. Precision agriculture uses advanced technology such as sensors and data analysis to fine-tune the application of farm inputs to field conditions. Precision agriculture can also reduce fuel requirements by reducing the areas that receive agricultural inputs and the number of applications.

Enteric fermentation emissions from livestock can be reduced through feed management and by breeding livestock that emits less methane. More and more feed additives that could reduce enteric fermentation emissions need to be researched, developed, and tested for their effectiveness and long-term impacts on animal health. Investments need to be made in large-scale breeding of livestock, including potentially through genetic modification and replacing the existing ones with new breeds with lesser enteric fermentation emissions.

Anaerobic digesters can reduce emissions from manure management by capturing and converting methane to renewable energy. Improved manure collection systems could maximize biogas production and minimize emissions. Anaerobic digesters could mitigate emissions not only from methane abatement but also in part from reducing electricity emissions. However, these installation has been limited to large dairies in developed countries that can absorb the upfront cost and capitalize on electricity generation.

However, these activities will lead to an additional burden on the farmers due to inherent initial investments as well as a possible reduction in yields hence incomes for short period during the transition phase. Further, there is a cost of the creation and dissemination of the information related to sustainable agriculture practices on one hand and adoption and scaling of the same on the other.

A robust vibrant carbon market that incentivizes the adoption of these techniques at the grassroots level by providing an alternative revenue stream in form of carbon emission reduction monetization will surely enable the decarbonization of agriculture.

About Author

DEEPAK PAREEK, CEO, AgriWatch, Technology Pioneer & Expert – Digital Transformation, World Economic Forum  

Deepak is CEO of AgriWatch a consulting firm that provides market intelligence, research, and advisory services across the agribusiness value chain. AgriWatch is bridging the information and insight gap that exists in various sub-sectors of the agricultural economy in general and agricultural commodities trade in particular through access to lakhs of farmers and thousands of traders.

Deepak, before joining AgriWatch was Managing Partner at HnyB, a consulting company specializing in Social Domain, working to create an ecosystem to deploy cutting-edge technologies in Agriculture. He has 22 years of diverse experience working across 34 countries on various projects.

Deepak is a serial social entrepreneur who created some of the most respected AgriTech companies, DigiAgri, MyCrop, and AgriChain. These companies use cutting-edge technologies for improving the profitability and productivity of small and marginal farmers on one hand and providing valuable insights to agriculture ecosystem participants on the other.

Deepak was honored as Technology Pioneer 2018 by the World Economic Forum and a member of the Expert Panel of the World Economic Forum on Digital Transformation. He was awarded as top 10 Agropreneur by Future Agro Challenge and was also amongst the top 100 Social Entrepreneur listed by the National University of Singapore and DBS Foundation.

Deepak is a regular speaker across the globe and a well-published author. He has also moderated and Chaired many events related to Agriculture, Digital Transformation, and Global Business. He is also the host of the web series “Fire Side Chat with Champions” in which we interview global business leaders. He has been profiled by reputed publications/media including Forbes, Nikkei, Channel News Asia, YourStory, Nasscom Research, Inc42, and Business Insider to name a few.