Carbon Credit Farming: A Savior for Farmers and the Planet

What is Carbon Credit?

A carbon credit is a tradable permit or certificate which provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas. It essentially acts as an offset for producers of harmful greenhouse gases. It is also known as, “carbon offset”.

The purpose of creating carbon credits is to reduce the emissions of carbon dioxide and other greenhouse gases from industrial activities. The carbon credit is half of a so-called "cap-and-trade" program. Corporations get a strict quota for their carbon emissions from the regulating body, ergo the “Cap or the limit”. That limit is decreased periodically. Meanwhile, the companies which reduce their emissions below the required limit are eligible for credits and can sell those credits in the market, ergo the “Trade”.

Private companies are thus doubly incentivized to reduce greenhouse emissions. First, they must spend money on extra credits if their emissions exceed the cap. Second, they can make money by reducing their emissions and selling their excess allowances. The "cap-and-trade" model was used to reduce sulfur pollution in the 1990s.

Cap-and-trade programs remain controversial in the U.S. However, 11 states have adopted such market-based approaches to the reduction of greenhouse gases, according to the Center for Climate and Energy Solutions. Of these, 10 are Northeast states that banded together to jointly attack the problem through a program known as the Regional Greenhouse Gas Initiative (RGGI).

A carbon credit can be sold multiple times until it is retired by the end-user that wants to claim that offsets impact. Carbon credits are most often created through agricultural or forestry practices, although credit can be made by nearly any project that reduces, avoids, destroys, or captures emissions. Individuals or companies looking to offset their own greenhouse gas emissions can buy those credits through a middleman or those directly capturing the carbon. There are several private companies that offer carbon offsets to companies or individuals seeking to reduce their net carbon footprint.

What are Carbon Markets?

The carbon market refers to the market in which carbon credits are obtained and sold within defined standards for the prevention or reduction of GHGs. Carbon markets turn emission reductions and removals into tradeable assets.

There are two types of carbon markets within the carbon industry:

1. Voluntary Carbon Markets

The voluntary carbon marketplace encompasses all transactions of carbon offsets that are not purchased with the intention to surrender into an active regulated carbon market. It does include offsets that are purchased with the intent to re-sell or retire to meet carbon-neutral or other environmental claims. Voluntary carbon markets are relatively flexible and far less regulated than compliance markets because voluntary markets operate in the private sector. Because voluntary markets are developed by several different private companies, each market can differ from one other. Specifically, each market operator sets its own verification standards, credit registries, participation requirements, and project criteria for its carbon market. While voluntary markets differ, most markets are structured the same, and each implements similar operational practices.

The value of the global voluntary carbon market has topped $1 billion in 2021, according to the information and analysis group Ecosystem Marketplace. The future demand for carbon credits is projected to jump 15-fold by 2030.

2. Compliance Carbon Markets

Compliance carbon markets are marketplaces through which regulated entities obtain and surrender emissions permits (allowances) or offsets in order to meet predetermined regulatory targets. The market size of the compliance carbon market is $851 billion. In the compliance market or involuntary market, governments set a cap on how many tons of emissions certain sectors — oil, transportation, energy, or waste management — can release.

Article 6 of the 2015 Paris Agreement tasks national leaders with figuring this out on a global scale. So far, about 64 carbon compliance markets are now in operation around the world, the World Bank reported in May. The largest carbon compliance markets are in the European Union, China, Australia, and Canada.

Compliance Carbon Market in action

Trading Carbon Credits

Carbon credits can be traded on both private and public markets. Current rules of trading allow the international transfer of credits. The prices of credits are primarily driven by the levels of supply and demand in the markets. Due to the differences in the supply and demand in different countries, the prices of the credits fluctuate.

Although carbon credits are beneficial to society, it is not easy for an average investor to start using them as investment vehicles. The certified emissions reductions (CERs) are the only product that can be used as investments in the credits. However, CERs are sold by special carbon funds established by large financial institutions. The carbon funds provide small investors with the opportunity to enter the market.

There are special exchanges that specialize in the trading of the credits, including the European Climate Exchange, the NASDAQ OMX Commodities Europe exchange, and the European Energy Exchange.

Carbon Footprint of the largest industry in the world

Agriculture is the world's largest industry. It employs more than one billion people and generates over $1.3 trillion dollars worth of food annually. Pasture and cropland occupy around 50 percent of the Earth's habitable land and provide habitat and food for a multitude of species. When agricultural operations are sustainably managed, they can preserve and restore critical habitats, help protect watersheds, and improve soil health and water quality. But unsustainable practices have serious impacts on people and the environment.

The dominant sources of agricultural greenhouse gases (GHGs) include carbon dioxide (CO2) from tropical deforestation, methane (CH4) from livestock and rice production, and nitrous oxide (N2O) from fertilizing or burning croplands. Agriculture is responsible for about half of global methane emissions and 80% of global deforestation, which is also the leading cause of habitat destruction. The global food system is responsible for ~21–37% of annual emissions as commonly reported using the 100-year Global Warming Potential. Industrial agriculture also wreaks havoc on biodiversity within the soil. These stats bring us to the conclusion that agriculture has a massive carbon footprint and if we transform agriculture into a carbon-negative industry, it would lead to a substantial decrease in global warming.

Carbon Credits & Agriculture

The carbon farming initiative is a voluntary carbon offsets scheme that provides economic rewards to farmers and landholders who take steps to reduce greenhouse gas emissions. Farmers and landholders can choose whether or not to be involved. Carbon farming activities that reduce greenhouse gas emissions are referred to as abatement activities. They reduce emissions by storing carbon in soil or plants (sequestration projects) or reducing emissions of carbon and other harmful greenhouse gases (emission reduction or avoidance projects). Under the carbon farming initiatives scheme, they may be able to earn carbon credits from activities such as:

• Reducing livestock emissions

• Increasing the efficiency of fertilizer use

• Enhancing carbon in agricultural soil

• Storing carbon through re-vegetation and reforestation

• Planting an extra crop in the offseason

Farmers can also claim carbon credits for a host of regenerative agricultural practices such as not burning paddy straw, conservation agriculture such as not plowing land, and laser leveling of land.

How does carbon farming work?

The Hurdles: An Overview of Microsoft agriculture credits deal

Microsoft bought nearly 200,000 of the farm-based credits at an undisclosed price - among the largest-ever purchases of agricultural credits - as part of a larger deal to buy 1.3 million credits. But the tech giant rejected far more of the more than 5 million credits offered by agriculture projects because of systemic problems with measuring their climate benefit.

Typically, farm carbon programs establish a field's soil carbon with soil sampling and laboratory testing. Programs then estimate how much carbon is captured and stored by analyzing everything from weather and seed type to farming practices. They use data gathered by humans, satellites, and sensors on farm machines. Third-party verifiers validate the data and generate credits, which are issued to program managers or to farmers.

The high costs of measuring and verifying soil carbon credits have prevented more farmers from participating in such programs.

The Microsoft purchase showed buyers are willing to pay for high-quality credits, but farmers say they need help covering costs to ensure their efforts are worthwhile. Verifying carbon-capture claims accounts for about 75% of the cost of generating credits, said Debbie Reed, executive director for the Ecosystem Services Market Consortium (ESMC). Hence, companies and nonprofits have launched pilot projects to cover soil-sampling costs and help farmers find credit buyers.

Carbon Credit Farming: The way forward

The development of voluntary carbon markets has the potential to benefit agricultural producers greatly. Producers enrolling to participate in a voluntary market implement carbon-smart farming practices, and these practices have the ability to enhance soil health, crop yields, and sustainability. Additionally, these carbon markets also provide producers with a new source of revenue by selling credits in a carbon marketplace.

From the perspective of global climate change, soils are a major compartment within the planetary carbon cycle, the second-largest pool after the oceans, holding more carbon than the atmosphere and all vegetation combined. Soils aren’t necessarily climate neutral, depending on how they are managed: they can release additional carbon into the atmosphere through practices like overgrazing and excessive plowing, or soak up atmospheric carbon through practices like agroforestry and conservation agriculture. But when run properly, farms can be powerful tools in the fight against climate change. Estimates of the “technical potential” of agricultural soils to absorb carbon range from 3 to 8 gigatons (billion metric tons) of CO2 equivalent a year for 20 to 30 years, enough to close the gap between what is achievable with emissions reductions and what is necessary to stabilize the climate.