COP26 negotiators finally reached an agreement on international regulations for the carbon credits market. Along with renewable energy, reforestation projects and agriculture represent an interesting way of generating carbon credits in the future. But what are carbon credits and how could farmers benefit from this international compensation system?
What are carbon credits?
A carbon credit is a tradable certificate that represents one ton of carbon (or carbon equivalent) removed from the atmosphere. It can be created by a carbon offsetting project and bought by any company or country that wants to compensate for its own emissions. The mechanism of carbon credits emerged at the end of the 1990s with the Kyoto Protocol, which was the first international treaty committing the signatory states to limit their greenhouse gas emissions according to national specific quotas. In order to reach their individual targets, countries must reduce emissions on their own territory, but could also finance foreign carbon mitigation through carbon credits. The objective was to limit global warming by setting up a system to measure and control the carbon emissions while driving investments toward climate change mitigation projects and technologies.
Figure1: the carbon credit cycle, by UNEP
What is the regulatory framework?
In order to generate carbon credits, a project should demonstrate its ability to reduce, avoid, capture or remove a quantified amount of greenhouse gas emissions present in the atmosphere. A detailed audit of the project is therefore required, and can be conducted by certification organisms like Verra, Gold Standard, CCB etc. Once certified, the carbon credit can be traded on a regulated market. Despite the multiplication of international summits and treaties on climate change, many countries did not sign any environmental agreement. As a consequence, the regulatory framework is fragmented, and the market is mainly concentrated in the European Union, Canada and China. The prices of carbon credits being primarily driven by the levels of supply and demand in the markets, they fluctuate depending on the geography.
Yet, the COP26 agreement in Glasgow may considerably change the dynamic and volume of carbon transactions.
Figure 2: ICAP, ETS world map. See detailed version here.
What are the projects that can generate carbon credits?
Any project that reduces greenhouse gas emissions or increases carbon sequestration can claim carbon credits and sell them on ETS once they get certified. However, it must first demonstrate its additionality, that is to say prove that it would have not existed without the financial flow unlocked by the carbon credits mechanism. Typical activities include reforestation projects, solar and wind infrastructures, but also methane destruction projects or energy efficiency initiatives. Projects can range in scale from very small (one hundred tons of CO2e per year) to very large (millions of tons of CO2e reduced per year).
Figure3: AFN, Percentage share of carbon credits issued by area of scope of projects. Source: Berkeley Carbon Trading Project
In practice, a majority of carbon credits are issued from forestry and renewable energy projects. Despite having a large potential of carbon sequestration, agriculture only represents 1% of carbon offsetting projects.
Can farmers benefit from the carbon credits system?
Agriculture directly accounts for 15% of global greenhouse gas emissions mainly because of tractor use, manure and fertilizer applications. But the sector is also a promising part of the solution. Global croplands and grasslands can capture and store the equivalent of the US domestic emissions each year according to the Intergovernmental Panel on Climate Change. Farming practices that mitigate climate change can be eligible for carbon credits and include:
Adding cover crops (for the first time, extending the duration, or diversifying the mix)
Diversifying crop rotation
Reducing or eliminating tillage
Reducing fertilizer (reducing N or switching to injection)
To know more about these practices and their environmental footprint, check out our articles Tillage: farming practices in Thailand and environmental consequences and Chemical Fertilizer in Agriculture: A big source of Greenhouse Gas Emissions. So why is agriculture struggling to break into the carbon credits market? The natural diversity of agricultural conditions (weather, soil specificity, annual variations) makes the estimation and monitoring of the carbon sequestrated during a project very difficult. Thus, demonstrating the additionality and effectiveness of a carbon offsetting project requires costly interventions of intermediaries and third-parties to conduct soil and water testing. In addition, given the price of carbon credits (around 15$/ton), farmers need a sufficient surface to generate revenues. Several companies particularly in the US developed an expertise to support farmers in their journey to sustainability and carbon offsetting. Their role is the key to implementing successful roadmaps with farmers and unlocking the potential for more agriculture carbon credits.
Sources
Financial times, COP26 global carbon market rules pave way for emissions credits boom
Caring for climate series,Carbon market, the simple facts
Carbon offset guide, Carbon offset projects
Janzen AG, Creating carbon credits
AFN, Agriculture produces just 1% of carbon credits, data suggests
The potential of carbon markets for small farmers: A literature review, Alessandro De Pinto, Marilia Magalhaes, and Claudia Ringler, 2010
AG Funder, Dishing the dirt on ag carbon credits