Carbon Sequestration and Agriculture: Incentives, Practices, and Policies
Agriculture is unique among most sectors in the economy, as agriculture's mitigation potential from both an enhancement of removals of greenhouse gases (GHG) and reduction of emissions through management of land is significant. Agriculture provides food for humans, fiber, livelihoods for billions of people worldwide and is a critical resource for sustainable development in many regions. However, agriculture also provides many ecosystem services and opportunities for climate change mitigation.
Thus, promoting "climate-smart" agricultural practices on U.S. farms and ranches is a high policy priority. However, farmers and ranchers have confronted market barriers that have prevented markets for these practices from attaining scale historically. C-FARE hosted a panel titled Carbon Sequestration and Agriculture: Incentives, Practices, and Policies on March 18th at 12 PM ET to discuss the challenges, solutions, and plausible paths forward.
The panel features three experts to discuss their work, which was preceded by William Hohenstein, the Director of USDA's Office of Energy and Environmental Policy (OEEP). The panelists are: Madhu Khanna (University of Illinois, Urbana-Champaign), Roderick “Rod” Rejesus (NC State University), and Maria Bowman (Economist and Conservation Liaison at USDA’s Economic Research Service)
This session was moderated by Gal Hochman, C-FARE's Board member and the professor at Rutgers University.
William Hoenstein opens the webinar with a presentation titled “Market Approaches to Greenhouse Gas Mitigation in the Agriculture Sector”. This presentation deep dives into what is seen in the carbon marketplace and a preview of an initiative being launched at USDA, with a slightly different approach to connecting the market value of commodities to the attributes containing their production. Although there are about 4 operating nationally and over 30 protocols for how to generate an agricultural offset credit, there is a vibrant voluntary offset marketplace, there are hundreds of millions of credits being generated, but roughly only 2% are coming from agriculture despite the hype. Agriculture is playing a modest role due to four main factors highlighted by the USDA: the scale of agricultural projects, transaction costs, confusion in the marketplace, limited demand, and overall Farmers’ inability to see any benefits of the market.
In response, the USDA recently announced a new approach to assisting with this issue called Partnerships for Climate-Smart Commodities. In this approach, the secretary is making up to $1 Billion in grant funding available for large-scale pilot projects to help farmers implement climate-smart production practices, measure, monitor, and verify the associated GHG benefits, and use that information to develop markets and resulting in climate-smart commodities. The USDA is focused on generating commodities that have a better climate outcome and lower carbon footprint. Hoenstein explains that the USDA’s approach is working to connect the commodity with greenhouse gas benefits to create a climate-smart good. What they are trying to do differently is generate new demand for the commodities and connect those benefits to the products used. The USDA is expecting to demonstrate that they can accomplish this at scale, and by doing it at scale they can lower MMRV transaction costs as well as costs overall. This will work toward standard methods and protocols and a central tracking system to record GHG benefits generated through climate-smart projects.
The next panelist, Madhu Khanna, followed up with her presentation, “Opportunities and Challenges for Soil Carbon Markets”. Her presentation focuses on how agriculture has significant potential to not only reduce its own carbon emissions but also help decarbonize the economy. Khanna explains that agriculture has the potential to be Net Zero by 2040 with the adoption of climate-smart agricultural practices on 100% of cropland acres, but is currently in a very limited role in the carbon offsets that are being generated within the United States and globally, with its participation in global carbon offset markets being less than 1%. This raises significant opportunity and interest in looking at how we can enhance the role of agriculture.
There are numerous ways in which agriculture can help not only in producing food, fiber, and fuel but also by being a carbon sink. Madhu Khanna explains that there are many different land management practices for sequestering soil carbon, also known as carbon farming. The main challenges with carbon farming include the costs of aggregation of credits from many small suppliers; potential for being viewed as greenwashing: Concerns about quality of carbon offsets; additionality and permanence. Limited farmer participation and supply of carbon credits: uncertainty about the true amount of carbon being sequestered and value of carbon, unwillingness to lock into long term contracts with fixed carbon payment prices, the potential for missing future opportunities with higher carbon prices in the future, unfamiliar markets, unwillingness to share farm management data, low price of carbon.
Despite many of the challenges, there is a major opportunity for those in agriculture. The motivation for the development of this market is being generated not by Federal regulations, but by corporate interests as corporations are looking for natural solutions to meet their Net Zero goals, making it a potentially huge opportunity for agriculture to participate. In order to really develop a market, we know there need to be mechanisms for discovering a uniform price for carbon-based on the social cost of carbon or the costs of carbon mitigation and sequestration are missing. Given that carbon is a global externality, it should have the same price. Additional conditions enabling the development of credible soil carbon markets would include low-cost options for measuring, verifying, and aggregating changes in soil carbon stocks as well as reducing the risks of investment by farmers in low carbon practices with standardized mechanisms for how additionality is defined and treated, upfront costs being covered by annual payments, specification of the duration of contracts and payments, and penalties for deviations from contractual obligations. Taking a holistic approach to pricing all carbon from fossils, renewables, and soil would in fact aid in a much more robust approach to how agriculture can participate in this effort to decarbonize the economy.
Next, panelist Rod Rejesus presents, “Soil Health Practices for Carbon Sequestration: Economic Dimensions and Implications”. Soil health is now viewed as a key element in enhancing agricultural productivity, environmental sustainability, and food system resilience. This is considered by many as a “Natural climate solution” due to its potential to increase the sequestration of carbon in the soil, leading to strong interest in promoting these practices such as cover crops and no-till practices. To promote more sustained adoption, these practices have to make “economic sense” to individual farmers. To do this, policymakers need to understand these economic dimensions to better design policies that will effectively encourage adoption. In one of his papers, Rejesus highlights with the use of a table the different dimensions that must be considered such as the farmer level versus the environmental aspects of the benefits in costs. In each quadrant, there are agronomic benefits and costs as well as environmental benefits or costs.
Given these economic dimensions, there are concerns that must be addressed such as uncertainty with respect to private and environmental benefits of soil health practices. There must be answers to lingering questions people have over the adoption of cover crops and their efficacy in reducing carbon emissions, what conditions they perform best as well as the true value of these environmental benefits. It is crucial that we understand not only the short-term vs long-term economic outcomes, but also how different incentive payment structures influence the uptake of soil and health practices. Although there are no clear-cut answers just yet, Rod Rejesus emphasizes that these are questions that need to be addressed when thinking of better policy design for carbon sequestration through incentivization of these practices.
Panelist Maria Bowman closed out the webinar with her presentation titled, “Learning as we go: Informing policies and programs for agricultural carbon sequestration with research”. Starting with the farm scale, farmers must be well versed in the market to participate, they must know which federal or state programs to participate in, which market to participate in, which crops to grow as well as who to send them to, and what data is needed in order to make decisions every step of the way. As policies and incentives change, farmers must continue to make decisions even if they are not fully informed on how to adapt and participate. In Bowman’s research, she and her colleagues researched the impact of working land programs that the USDA implements on practice adoption and outcomes. Currently, there is a major opportunity to learn from emerging initiatives such as the Partnerships for Climate-Smart Commodities and the USDA Risk Management Agency’s Pandemic Cover Crop Program. Data that are collected in these new initiatives will enhance our knowledge base about how practices are working in combination on different types of operations and in different regions. They will also provide information about the costs of implementing these practices and measuring their outcomes.
The scale and scope of these policy challenges require new and innovative approaches. The high transaction costs are related to measuring, monitoring, reporting, and verifying carbon sequestration, but markets still are not seen as credible. Strategies are needed to aggregate credits or reduce transaction costs. Permanence and additionality are challenging, creating the need for policies or markets that account for the nature of dynamic management practices without perverse incentives. To answer the hard questions, Maria Bowman explains that we must integrate diverse and complementary data sources such as; soils data, survey data, modeled data, precision ag data, program and administrative data, remotely sensed data, and sensor data. All of this information helps researchers answer questions about how changes in practices impact soil carbon or GHG outcomes or the impacts of cover crops on yield, yield risk cost, and profitability. All of this is not easy, it often requires substantial investments in data management and integration, as well as time to understand the strengths and limitations of different types of data to answer a research question.
This session also featured a short question and answer, below is a summary of what was discussed:
Under Climate-Smart Ag, can a farm double-dip? For example, if a farm installs a manure digester, can it take a carbon payment from a carbon market and get a price premium for climate-smart milk or pork?
The U.S. is not currently implementing the procedure. However, once we implement it, the process will need to be set up in ways that prevent double-dipping. These markets do not exist, and the existing carbon markets only reward farmers at the farm-gate.
Some examples that may prevent the possibility of double-dipping:
The payment is provided to the final good distributed by the market at the different supply chain stages.
We can define climate-smart activity/technology as a bundle of characteristics, one of which is the amount of carbon sequestered. The sequestered carbon will generate a tradeable credit used in the offset markets or banked for future uses.
How would a producer recover the upfront costs? Any opportunities to ensure climate-smart practices? Will grants such as Climate Smart Partnerships cover upfront costs?
We think this is an important point, and enabling policies that provide access to credit and the creation of these supplies chains should be part of the program.
The Partnership and other USDA programs (e.g., EQIP) could cover up-front costs.
We can design long-term contracts that pay farmers lumpsum upfront payment for adopting a climate-smart practice equivalent to the stream of expenses earned over the contract's life. In return, the farmer commits to implementing that practice over the contract's life. Although such payment programs do not currently exist, the challenges of such programs would be ensuring enforcement and penalties for breaking the agreement.
Madhu mentioned carbon produced anywhere should have the same price but discussed a national market. Do we need to look at international carbon offsets as perhaps more efficient?
CORSIA (for international aviation) is a feasible international scheme that could emerge for U.S. offsets from agriculture and forestry.
An international price would be most efficient, but even a regional price is preferable to a fee that varies with the payment provider, as is the case currently. Albeit an international offset market is more efficient, politically, it is substantially more challenging. One should not overlook the benefits of setting policy nationally or even regionally. The RGGI is one example, and the C.A. cap-and-trade agreement with Québec is another example.
William suggested bringing GHG benefits into the commodity characteristics. Do you simultaneously sell the carbon sequestration benefit, or does embedding carbon offsets into commodities mean that they cannot be sold as offsets?
See response to 1
Has there been any research on whether the additionality requirement is currently a disincentive for some farmers to adopt soil health practices?
Anecdotal evidence suggests that farmers may be waiting to adopt when the carbon price is high enough, and they will be giving up that option by adopting early.
In practice, U.S. farmers and ranchers are not participating in offset markets due to high transaction costs, which may contribute to "additionality" requirements.
However, some panelists believe some of the disincentives are the outcome of misinformation. Current research tries to show the economic benefits of sequestering soil organic carbon.
With all the uncertainty and transaction costs, why are private companies offering to pay for carbon credits from ag?
Private companies are willing to pay because agriculture carbon credits are likely a lower cost option to move towards their net-zero goals than other options.
Offsetting scope 3 (supply chain) emissions are one motivation.
Existing literature argues that voluntary policy might be a step in the right direction, but it is insufficient.
What is being done to standardize the measuring and verifying of climate benefits? Has there been any new development in this regard?
We agree that more work is needed in this area.
The Partnerships Program seeks to attain this as one of its top priorities.
Maria raised the point that technical assistance to farmers is not always available on emergent practices and how to participate in these emergent markets. How can we help, from our extension programs, farmers who would like to participate in these markets?
Depending on your level of familiarity with your region's opportunities and the available programs, you may need to gather some more information. Several organizations and extension professionals are developing resources to try and summarize and describe available opportunities, so seeking out resources that others have already prepared could be helpful. Learning from farmers engaging in private initiatives or finding information themselves and listening to their experiences may also help give you a sense of some of the incentives and barriers to participation in these programs in your region.
The current agricultural carbon sequestration seems to focus on soil carbon. Are there any plans to consider the carbon in aquatic environments, such as wetlands, streams, rivers, lakes, and reservoirs that are influenced by agricultural activities?
It is an excellent point, and existing work shows the potential of blue carbon. However, regulation is more complicated since, different from the soil used for agriculture, the department of agriculture does not regulate water bodies. This alternative regulatory framework leads to additional challenges.
This program is supported in part by the Agricultural and Applied Economics Association and the US Department of Agriculture’s Economic Research Service, and the National Agricultural Statistics Service.
Those who register but cannot attend our webinar can always view a recording of it later at the council’s YouTube channel.