As governments and companies look for ways to reduce greenhouse gas emissions, agricultural sequestration offers one promising method to combat climate change. However, for an agricultural carbon market to thrive, it must overcome several obstacles, including transparency, measurement, and standardization. The recently signed Consolidated Appropriations Act of 2023 is a promising place to start, write Oranuch Wongpiyabovorn, Alejandro Plastina, and John Crespi.
According to the World Bank, there are 70 carbon-pricing initiatives around the world, comprising 36 carbon taxes and 34 emissions trading systems (ETSs). These initiatives encompass nearly a quarter of the globe’s total greenhouse gas (GHG) emissions or 11.9 gigatons of GHG’s carbon dioxide equivalent (CO2e), which converts greenhouse gasses into carbon dioxide based on their global-warming potential.
As governments seek to devise new systems to reduce emissions, they should look to the potential of agriculture. Up to now, conversations about agriculture’s role in climate change have focused on its role as a contributor of GHGs. Indeed, agriculture contributes some 11% of all industrial CO2e emissions in the United States. Yet, as demand for carbon sequestration grows in both the public and private sectors, facilitated via carbon credits to trade negative CO2e emissions, agriculture is rightly being scrutinized for its potential role as a verifiable carbon credit source. No stranger to commodity trading or commodity certification, agriculture promises ready adoption of carbon-trading regimes and has the potential to be a carbon sink that mitigates not merely its own emissions, but to sequester emissions from carbon for other industries as well.
Nascent marketplaces already exist in the US where agricultural credits might make inroads. The largest agricultural state, California, has an ETS, as does a consortium of 11 states in the Northeast. Massachusetts and Washington state each have their own as well. Currently, these programs mainly regulate the emissions from the energy, industrial, and transportation sectors. Unregulated sectors, like agriculture, can reduce or capture emissions and create carbon offsets, though at present these are limited. Regulated facilities mostly meet their emission caps using emissions allowances, and only occasionally supplement allowances with offsets. For instance, California’s cap-and-trade program only allows agricultural offsets generated by capturing methane from livestock and rice production, accounting for 6.4 million MT of CO2e, or 4.5% of California’s total carbon offsets retired so far.
Agricultural lands have the potential to capture and store carbon in soil and plants through conservation practices such as no-till, reduced till, cover crop adoption, and crop rotation. In addition, some farm practices such as nutrient management and combustion improvements can reduce GHG emissions. These conservation practices turn carbon into another cash crop that could enhance revenues for agricultural producers. However, most carbon credits generated from these activities are not eligible to offset GHG emissions in the mandatory markets used by the government and companies legally required to offset emissions, making them most suitable for voluntary carbon markets – a decentralized market for private sellers and buyers of carbon credits.
Voluntary carbon credit markets are quickly evolving, with much uncertainty regarding the information that emerges. In the US, more than a dozen private-sector, carbon-farming programs exist. Challenges for voluntary carbon markets in agriculture arise on both the supply and demand sides of agricultural carbon credits.
First, carbon credits from agriculture and forestry suffer from concerns about permanence. Carbon captured and stored in plants and soil can be released back into the atmosphere through fire, erosion, and farming practices.
Another important concern about carbon credits is additionality. To be valuable, carbon credits must be generated from conservation practices that would not have been adopted without payment. Most private carbon programs require additionality as part of the new adoption of conservation practices. However, many farmers have already adopted such conservation practices long before there was any discussion of carbon sequestering. Any policies or sequestration programs would not want to create an incentive for these farmers to un-do these practices and start them over just to reap the benefits of future carbon credits. While a few initiatives offer a one-time payment for past eligible practices, this still means there are no additional climate benefits on these payments. The issues of permanence and additionality create uncertainty that might make a credit buyer uneasy about the quality of agricultural carbon credits.
Furthermore, current private carbon initiatives have a variety of methods to quantify, verify, and certify the amount of carbon being removed or sequestered. At least six different carbon quantification models and two primary guidelines of measurement, reporting, and verification (MRV) systems are used across US programs. Current MRV involves either soil testing, remote sensing, or both to determine conservation impacts on GHG emissions. While soil testing provides more accurate readings of soil organic matter, it is pricier than remote sensing technology, which has been adopted more widely. The differences in methods affect how much farmers get paid. At the same time, the disparity in outcomes reflects the imprecision of these methods to measure the amount of carbon sequestered, and emissions avoidance is extremely difficult to gauge.
Unlike other agricultural commodity markets, current agricultural carbon markets are also hampered by a lack of standardization and transparency. The current carbon programs offer various options to farmers. Most programs award carbon credits to producers, while some programs offer fixed payments per practice, and some have both output- and practice-based payments. Participants decide whether to join and in which program to participate using the estimates of carbon sequestered, which differ across methods. Relatedly, the actual payments vary based not only on the outcomes and carbon prices but the particular market program. Although all carbon models are very well documented in the scientific literature, at present there is insufficient information in the public domain to assess the main variables driving the resulting carbon sequestration estimates. The diversity of the carbon programs and uncertain outcomes make it difficult for agricultural producers to make their best choice.
To summarize, the problems on the supply side of agricultural carbon credits are the variety of carbon programs with different protocols, quantification, MRV, and standards for quality. Meanwhile, on the demand side, the major issue is the credit buyer’s trust in high-quality agricultural carbon credits due to issues of permanence, additionality, leakage, and avoidance of double counting. The problems on both sides lie in the lack of a unifying definition of the market, protocols, quantification methods, and MRV standards.
New legislation in the Consolidation Appropriations Act of 2023 may alleviate some of these problems. The Consolidated Appropriations Act of 2023, signed into law on December 29, 2022, is the latest effort to shape the voluntary agricultural and forestry carbon markets. It authorizes the US Department of Agriculture (USDA) to establish a Greenhouse Gas Technical Assistance Provider and Third-Party Verifier (GHG TAP & TPV) Program (originally featured in the Senate-passed Growing Climate Solutions Bill of 2021). The USDA will determine whether to create the program by October 2023. Hypothetically, the GHG TAP & TPV Program will facilitate farmers, ranchers, and forest landowners participating in carbon markets by providing technical assistance and information on existing voluntary carbon credit markets. The program will certify technical assistance providers and third-party verifiers and ensure a fair share of revenues to participants.
The legislation allows the secretary of agriculture to create an advisory council to review and recommend changes to the list of protocols, qualifications, and best practices included. Additionally, the council would advise on methods used by voluntary credit markets, means to reduce barriers to entry, means to reduce compliance and verification costs for farmers, and issues relating to land and asset ownership. The secretary will not have the authority to establish or operate a national carbon market but will have the authority to essentially be a certifier of the certifiers, creating a playing field with rules that all participants would understand to reduce uncertainty in the voluntary marketplace. This is not unlike the authority the secretary has in other agricultural markets where USDA sets the rules and market participants compete accordingly.
The establishment of the GHG TAP & TPV Program could reduce information asymmetry. In addition, a credit certification system can be a solution to gaining credit buyers’ willingness to pay a premium for carbon offsets when they are more certain of the quality of the credits. Crespi and Tidgren have described the similarity between the organics industry and the voluntary agricultural carbon credit market in this regard. As both products are credence goods, consumers’ trust is one of the most crucial components. A “lemons problem” (adverse selection) arises if low quality credits crowd out high quality ones under quality uncertainty. This situation describes exactly the organics market prior to the Organic Food Production Act of 1990. The OFPA made the US secretary of agriculture the certifier of certifiers and instructed USDA to set the definitions and guidelines for organic foods but not to run the market. As a result, annual organic sales rose from a negligible amount prior to the certification to about $11 billion today, according to the Organic Survey.
Taken altogether, carbon credits and ETSs are already a multibillion-dollar market. If buyers of agricultural credits feel more confident about measurement, verification, and accountability, the market could be enormous. Scientists have determined that the potential for carbon sequestration in agriculture is immense, and a joint report by Shell and Boston Consulting Group (BCG) found global demand for voluntary carbon credits will exceed supply by 2024.
New methods of reducing GHG emissions are needed. Many businesses have pledged to move toward carbon neutrality and the Securities and Exchange Commission has signaled it wants something real behind the “green” claims in corporate reporting. It may be difficult to create carbon-neutral jet fuel, steel, or concrete, but offsetting carbon emissions with carbon sequestered on farmland is a feasible pathway to the green economy. Prior to organic certification, it was not entirely clear if the demand was truly there (it was), but in the case of carbon, the demand is certain.
While an agricultural carbon market is in its infancy in the US, there are reasons to believe that with sustained demand from net-zero pledgers, advancements in measurement, overcoming concerns of additionality and permanence, and increased transparency and standardization to be spearheaded by an advisory council to the secretary of agriculture, such a market can rapidly develop into a mature and liquid market over the next decade.
The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.