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What’s in Store for Voluntary Agricultural Carbon Markets?

Alejandro Plastina, Oranuch Wongpiyabovorn, and John M. Crespi

Consumers and investors are putting increased pressure on corporations, governments, and other entities to reduce their environmental footprint. A recent article in Applied Economics Perspectives and Policy by Wongpiyabovorn, Plastina, and Crespi (2022) examines this issue. An increasing number of companies and governments are pledging to become carbon neutral or carbon negative over the next few decades. Until the technologies to achieve those goals become available at reasonable costs, a pathway to reducing overall greenhouse gas (GHG) emissions in the production, transportation, consumption, and disposal of goods and services is to purchase carbon credits in the voluntary market and use them to offset emissions.

For the buyer, carbon credits are tradeable certificates that represent the right to emit one metric ton of carbon dioxide-equivalent (CO2e). All GHG emissions can be converted into CO2e units, according to their global warming potential over a certain period. For example, nitrous oxide has a global warming potential equivalent to 265–298 times the global warming potential of carbon dioxide over 100 years (USEPA 2021).

For the producer, it represents a claim that they have “permanently” removed one metric ton of CO2e from the atmosphere, or they have avoided the same amount of CO2e emissions. The concept of permanence varies across credit suppliers (Plastina and Wongpiyabovorn 2021). Forestry has been the leading industry in generating carbon credits worldwide, followed by renewable energy (World Bank 2020). Agriculture supplies less than one percent of all carbon credits issued around the world (FTEM 2021). However, agricultural carbon credits have received plenty of attention recently, as they are considered a supplemental tool to increase the adoption of conservation practices.

A voluntary market for agricultural carbon credits is in its formative stage in the United States, characterized by a growing number of carbon initiatives testing multiple pilot programs pushing their own standards, and living off venture capital and angel investors. A report by the National Academy of Sciences, Engineering, and Medicine (2019) concludes that agriculture has a larger potential than forestry in the United States to generate carbon credits, but only if carbon prices in the voluntary market reach $100 per credit (figure 1).

Figure 1
Figure 1. Estimated cost in $USD per ton of CO2e (left) and potential rate of CO2e removal in the United States (gigatons/year) if prices cover costs (right).

Price discovery in voluntary carbon markets is not transparent, mostly because a clear definition of the standard characteristics attached to a carbon credit is not available. However, some futures contracts (currently traded with very low open interest) exist to hedge prices of very narrow definitions of carbon credits (Wongpiyabovorn, Plastina, and Lence 2021).

Two important variables that are likely to shape the development of the nascent agricultural carbon market are transaction costs and demand source for carbon credits. Transaction costs, such as transaction fees charged by carbon programs to issue and market carbon credits, or the extra time and effort that farmers will need to devote to reporting activities under the carbon program, will reduce the net value received by the farmer from a given market price. The fewer and more streamlined reporting requirements are, and the more efficient the issuance and marketing of carbon credits are, the larger is the expected share of the market price received by farmers.

The source of demand for agricultural carbon credits is not usually discussed among the challenges faced by this incipient market. However, as highlighted by Wongpiyabovorn, Plastina, and Crespi (2022), if a large portion of the demand for agricultural carbon credits originates in the public sector (as a means for administrations to achieve carbon neutrality or simply as a support policy for the agricultural sector), the viability of the system will depend on the political environment.

Based on the level of corporate demand for agricultural carbon credits and the value received by farmers, we envision four possible scenarios for voluntary agricultural carbon markets in the United States (Wongpiyabovorn, Plastina, and Crespi 2022).

Scenario 1: The next cash crop

If corporate demand for agricultural carbon credits is high and sustained, and farmers receive high net prices for their credits, then the carbon market will generate a valuable and stable source of revenue for participating farmers (figure 2).

Figure 2
Figure 2. Four possible scenarios for ag carbon markets.

A standardized definition of a carbon credit along with a credible measuring, reporting, and verification (MRV) system for agricultural carbon are necessary to achieve this scenario, as well as limited competition from other sources of carbon credits (via limited quantities issued at similar prices, or via a segmented market for carbon credits with different prices).

This scenario assumes large-scale adoption of multi-year conservation practices according to production protocols that generate high-quality credits.

A sustained demand for agricultural carbon credits and widespread farmer participation would result in liquid markets with moderate price volatility, supported by robust financing and adequate risk-management services for farmers and purchasers of credits.

The development of complementary value chains for low-carbon commodities that trade at a premium over conventional commodities, as well as articulated protocols that would allow producers to migrate across carbon programs, would reinforce this scenario.

Scenario 2: Low hanging fruits only

If corporate demand for carbon credits is high but buyers perceive the quality of agricultural carbon credits as low, then agricultural carbon markets will likely be small and underdeveloped.

A necessary condition for this scenario is that competition from other sources of low-value carbon credits is limited. Scenario 2 is likely to occur in the absence of a credible MRV system for agricultural carbon credits, resulting in participants implementing only the least-cost practices to generate carbon credits or practices that would be implemented even in the absence of carbon payments.

Market liquidity would be low, with high volatility around low average prices, and limited financing and risk-management services for farmers and purchasers of credits.

Scenario 3: Taxpayers pay the bills

If corporate demand for carbon credits is low but participation in voluntary carbon programs is highly subsidized (directly through cost-share programs to implement certain practices, or indirectly through crop insurance premium deductions or tax credits), to the extent that market prices for carbon credits become of secondary importance to farmers, then an inefficient market for agricultural carbon would develop, funded by present and future taxpayers. The focus of participating farmers would turn to complying with regulations to receive government payments or subsidies (rent-seeking behavior), and the sponsoring government agencies would largely absorb the cost of administering carbon programs.

A low corporate demand for carbon credits could stem from a weak MRV system or high competition from other sources of carbon credits. Market liquidity would be low, with high volatility around low average prices, and limited private financing and risk-management services for farmers and purchasers of credits. Scenario 3 would be unsustainable in the long run.

Scenario 4: Missed opportunity

If corporate demand for carbon credits is low and the perceived quality of agricultural carbon credits is low, resulting in low credit prices and possibly, but not necessarily, including adverse selection or moral hazard in the marketplace, then agricultural carbon markets will likely collapse.

A low corporate demand for carbon credits could stem from a weak MRV system or high competition from other sources of carbon credits.

A limited adoption of conservation practices will likely generate high volatility around low average agricultural credit prices and steer farmers away from carbon markets. There would be limited private financing and risk-management services for farmers and purchasers of credits. Scenario 4 would be unsustainable in the short run.

Final remarks

The current state of affairs around voluntary carbon markets seems to support a strong corporate demand for agricultural carbon credits based on the number of large corporations making pledges to become or remain carbon neutral (e.g., Microsoft, JP Morgan, Delta Airlines, Google). Most carbon programs are paying farmers who participate in their pilot programs between $10 and $30 per acre per year. However, market-based carbon prices will determine payments per output to farmers after the pilot period, and there are no clear signals that prices in voluntary carbon markets will increase in the near future (despite the increase observed in the price for carbon offsets in the mandatory cap-and-trade system for power plants in California). The prices of CBL Nature-Based Global Emission Offset (N-GEO) futures, which is based on carbon offsets generated by activities in agriculture, forestry, and other land use, were $12.49, $15.35, and $18.64 per ton of CO2e for the contracts expiring in December 2022, in December 2023, and in December 2025, respectively, as of March 2, 2022 (CME Group 2022). As a reference, the Nori Carbon Removal Marketplace (http://nori.com) has been selling carbon credits for $15 per ton plus 15% fees in 2021 and 2022.

The lack of standards and proliferation of intrinsically different carbon programs (in terms of how carbon is measured, how claims are verified, how credits are sold, etc.) seems to indicate that large transaction costs can be expected, potentially resulting in low net values for farmers. Based on these premises, the most likely scenario in the status quo is the second one, “low hanging fruits only.”

This analysis does not account for the increased interest in carbon capture and sequestration (“industrial carbon sequestration”) in the corn-based ethanol industry or the carbon calculation in renewable diesel production to qualify for the incentives offered by California’s low-carbon fuel standards, which could present further opportunities for farmers to monetize the implementation of conservation practices.

References

CME Group. 2022. “CBL Nature-Based Global Emission Offset.” Last accessed 03/02/2022.

Forest Trends’ Ecosystem Marketplace (FTEM). 2021. “‘Market in Motion’ State of Voluntary Carbon Markets 2021, Installment 1.” Washington DC: Forest Trends Association.

National Academies of Sciences, Engineering, and Medicine. 2019. “Negative Emissions Technologies and Reliable Sequestration: A Research Agenda.” Washington, DC: The National Academies Press.

Plastina, A., and O. Wongpiyabovorn. 2021. “How to Grow and Sell Carbon Credits in US Agriculture.” Ag Decision Maker File A1-76. Iowa State University.

Wongpiyabovorn, O., A. Plastina, and J.M. Crespi. 2022. “Challenges to Voluntary Ag Carbon Markets.” Applied Economic Perspectives and Policy, forthcoming. Accepted Feb 18.

Wongpiyabovorn, O., A. Plastina, and S.H. Lence. 2021. “Futures Market for Ag Carbon Offsets under Mandatory and Voluntary Emission Targets.” Agricultural Policy Review, Fall 2021. Center for Agricultural and Rural Development, Iowa State University.

US Environmental Protection Agency (USEPA). 2021. “Understanding Global Warming Potentials.”

World Bank. 2020. “State and Trends of Carbon Pricing 2020” (May). Washington, DC. Doi: 10.1596/978-1-4648-1586-7.

Acknowledgments

This APR article is based on a longer forthcoming article. Interested readers are referred to:

Wongpiyabovorn, O., A. Plastina, and J.M. Crespi. 2022. “Challenges to Voluntary Ag Carbon Markets.” Applied Economic Perspectives and Policy, forthcoming. Accepted Feb. 18.

The authors are thankful to the editors of AEPP for allowing us to disseminate this APR article.

Suggested citation:

Plastina, A., O. Wongpiyabovorn, and J. Crespi. 2022. "What’s in Store for Voluntary Agricultural Carbon Markets?" Agricultural Policy Review, Winter 2022. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=136.