Agriculture has yet to reach its full potential in the fight against climate change, but the conversation surrounding decarbonization is becoming increasingly focused on farmers. That’s mainly because climate-smart farming practices — like cover crops and reduced tillage — can limit the release of carbon into the atmosphere by “sequestering” it in the soil.
But policies and markets that will give necessary price signals to farmers to adopt these practices are still in the process of evolving. The idea of a market for carbon sequestration services is admittedly abstract, and the varying degrees of state, national and international policies on carbon have created a challenging landscape for the development of a unified carbon market. So, let’s take a moment to distill the key factors that we at FBN believe will shape the future of carbon markets and farming.
For a market to function properly, it generally requires three key actors: consumers (or buyers) who have a need or desire for a product/service, producers (or sellers) who can effectively create and deliver the product/service and institutions to provide rules for fair trade, legal enforcement and verification.
In this context, the consumers are companies that emit carbon as part of their operations, and the producers are farmers, who can serve as a key source for carbon sequestration. Put simply, these companies would work with farmers by offering to pay for a set of practices that yield a certain quantity of carbon removal defined by legal entities. And behold, a market is born.
There are a few options for what these markets could look like. For example, the carbon intensity (CI) of individual commodities like corn could become the attribute that is valued. Another option is for companies to purchase carbon sequestration services and, as such, the total amount of carbon sequestered by a farm becomes the traded metric.
These two potential paths for how carbon could be traded are not necessarily restrictive in terms of companies or farmers choosing one or the other, but they could involve subtle differences worth considering. Regardless of which pathway is selected, the cornerstone of either scenario will be data. This will start with machine-readable data like what is currently generated from modern planters, applicators and harvester equipment.
We believe this climate-smart future is imminent. Companies are beginning to set clear goals to reduce emissions and offer transparency about their progress. This is especially true for publicly traded companies. In fact, NASDAQ’s Environmental Standards Group reported that over 40% of the corporate annual reports sampled had clear targets for greenhouse gas emissions.
Our view on the future of carbon markets and their relationships with farmers for value creation is bullish. Carbon-based agricultural markets are yet to be fully formed, and there is still much to be done regarding the policies, institutions and systems that will support the transmission of carbon value back to the farm. However, the world is looking for solutions to the climate question, and we believe the necessary building blocks will be assembled in the coming years — starting on the farm.
For more information on carbon markets, please watch the FBN Roundtable discussion from January 20, 2021.