Carbon Markets and Credits 101
Although carbon markets have existed for many years, they are now more important than ever, as they are key tool in the toolbox to facilitate investment in decarbonization. Organizations, businesses, and individuals looking to participate should ensure they understand where they might participate in markets and stay informed about evolving market trends. Carbon markets have opportunities for farmers to contribute quality carbon credits, reducing carbon emissions inside and outside of their value chain.
Learning Hub ▶CARBON MarketS
CONTENT CURRENTLY UNDER DEVELOPMENT
Digital Resources
Summary Presentation
SPEAKER : Eric Hassel, Dairy Management Inc.
Downloadable Resources
Types of Carbon Markets
Carbon markets generally refer to the buying and selling of carbon credits that represent one tonne of greenhouse gas (GHG) emission reductions, measured in carbon dioxide equivalent. As countries around the world urgently seek to address climate change, carbon markets provide an option to accelerate the pace of decarbonization while offsetting the costs of reducing GHG emissions. These markets offer a key tool for countries and companies to mobilize the necessary resources to achieve climate goals by providing a flexible and economically viable pathway to reducing emissions.
A carbon market facilitates the buying and selling of carbon offset credits between entities. By converting emission reduction projects into tradable assets, buyers can pursue cost-effective ways to reduce emissions or meet a climate target. Carbon markets suffer from a lack of clarity because there is no unifying international market or established governance structure that guides carbon markets to ensure they function as intended. Carbon markets can be created by regional, state, or national governments or environmental non-governmental organizations (NGOs).
Carbon markets exist in two forms — compliance markets and voluntary markets.
Compliance
Compliance (regulatory) markets occur in which the demand for carbon offsets is driven by regulation. In these markets, a regulating group or agency sets a cap limit for carbon emissions and issues permits. The industry that is regulated must figure out how to scale back emissions so that the number of pollution units released is less than or equal to the number of permits. Regulated polluters can meet their emissions cap in one of three ways:
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Decrease pollution to match their permit stock.
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Purchase permits from other entities that do not need theirs.
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Buy offsets from an unregulated source outside of the market: an example of this would be a company paying a farm to adopt regenerative farm practices.
Regulatory carbon markets exist around the world. In the U.S., examples include the Regional Greenhouse Gas Initiative in the Northeast and mid-Atlantic states and California’s Cap-and-Trade Program.
Voluntary
Voluntary (non-regulatory) markets are driven by a company’s environmental goals. In these markets, non-regulated organizations such as retailers or food companies are seeking to offset emissions voluntarily, often to help achieve their own ambitious sustainability goals. These businesses could partner with a farm, for example, and pay them to plant cover crops. A third party would verify the carbon offset, and the company would have proof that it is working toward its sustainability targets. Often, buyers want credits that have a connection to their business or industries. For example, a company that sells yogurt or ice cream may prefer buying credits produced by dairies in their region.
Types of Carbon Credits
A carbon credit is the unit that is certified by a carbon credit program or standard for trade in carbon markets, representing one metric tonne of carbon dioxide equivalent. A carbon offset describes the process of using carbon credits generated outside of a company’s supply chain to compensate for that company’s emissions. A carbon inset refers to the process of using carbon credits generated inside the company supply chain to compensate for that company’s emissions by avoiding, reducing or sequestering emissions either upstream or downstream within its own value chain.
Inset Credit
Carbon Insets refer to emissions reductions within a company’s value chain. This is a more integrated approach, improving the system to which they belong.
An example of a carbon inset might be a food company investing in a project to reduce enteric methane emissions on a farm in their supply chain, and buying the associated carbon credit.
Offset Credit
Carbon Offsets compensate for a company’s unavoidable emissions by funding equivalent GHG reductions or removals elsewhere.
An example of this might be a shipping company purchasing carbon credits generated through a methane digester on a dairy farm in order to offset its scope 1 emissions.
Other Key Terms
Measurement, Monitoring, Reporting, and Verification
Measurement, monitoring, reporting, and verification (MMRV) is essential for carbon programs and markets.
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Measurement and monitoring are completed directly through methods like soil testing, or gas collection, and indirectly through technology like modeling, benchmarking, and remote sensing.
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Reporting refers to compiling and sharing this information in standardized formats that are aligned with accepted and recognized standards and frameworks, making it accessible to stakeholders.
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Verification follows reporting, in which a reviewer (ideally a third-party reviewer) audits the reported measurements to make sure they’re accurate and proper procedures were employed.
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This process is important in ensuring credibility and transparency for carbon credits. Different carbon markets may have different requirements for how carbon credits are measured, reported, and verified.
Additionality
Additionality refers to the actions being taken to generate the credit being additive to what would have been happening already (i.e., the carbon reduction or removal would not have occurred without the project).
Permanence
Permanence refers to the lasting impact of the carbon credit. Some carbon programs will specify how long producers are required to maintain their carbon reduction/storage practices to prevent carbon from being released back into the environment (leakage). Agricultural/land-based removals typically sequester carbon for several decades, whereas geologic storage sequesters carbon for thousands of years. Therefore, it is particularly important to monitor for carbon leakage in land-based dairy GHG removal projects.
Double Counting
Avoiding double counting/issuance/claiming refers to the concept that one tonne of GHG emissions reduced or removed is not counted, issued and/or claimed more than once. When carbon credits are transacted through carbon markets, actions should be taken to ensure that the same credit is not issued to multiple parties, and the credit is only counted and claimed by the purchaser exclusively.
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Types of Emissions
Carbon accounting is the process by which organizations such as corporations quantify their GHG emissions to understand their climate impact and set goals to limit their emissions. An organization’s GHG emissions are divided into scopes 1, 2, and 3.
The three "scopes" categorize the various emissions generated by a company, both within its operations and throughout its broader value chain, including suppliers and customers. While the term "scopes" may seem unclear compared to words like "groups" or "types," it originates from the Greenhouse Gas Protocol, the most widely adopted GHG accounting standard globally. As the Greenhouse Gas Protocol explains: “Developing a full [GHG] emissions inventory — incorporating Scope 1, Scope 2, and Scope 3 emissions — enables companies to understand their full value chain emissions and focus on the greatest reduction opportunities.”
SCOPE
01
Direct emissions from owned or controlled sources.
Examples
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For a dairy farm that doesn’t grow its own feed, the emissions that result from producing the feed it purchases would be scope 3 for that farm.
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For a cheese manufacturer, emissions created within the processor’s plant (e.g., from the energy, refrigerants, etc.) would be within the processor’s scope 1 emissions.
SCOPE
02
Indirect emissions associated with the purchase of power, heat, steam or cooling. These are emissions that occur elsewhere, but for which the company has operational control.
Examples
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For a dairy farm, scope 2 emissions include electricity produced off-site — the farm may have operational control over whether the power is switched on or off, but the actual emissions are released elsewhere through the production and delivery of the electricity.
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For a cheese manufacturer, scope 2 include the electricity to make its products.
SCOPE
03
Indirect emissions that occur in their value chain, including both upstream and downstream emissions. Another way to think of this is other indirect emissions not covered in scope 2.
The emissions that were scope 1 for the dairy farm above would be scope 3 for the processor receiving that farm’s milk.
Examples
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For a dairy farm that doesn’t grow its own feed, the emissions that result from producing the feed it purchases would be scope 3 for that farm.
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For a cheese manufacturer, the company’s scope 3 upstream emissions include all GHG emissions used to create the milk the company purchased, including emissions that occurred before the company had operational control over the process or product. That same cheese manufacturer would also have to consider scope 3 downstream emissions that occur after the products leave the plant, such as those at the grocery store or when consumers dispose of the packaging.
Opportunities for Dairy Farmers in Carbon Markets
Historically, agriculture has not played a significant role in carbon markets. However, opportunities in this area are growing. As carbon markets expand, more agricultural climate-smart activities will be leveraged for carbon credits.
Dairy farmers pursue a number of sustainable practices, and some are available for carbon credits. Today, the most common service eligible for the carbon markets is renewable natural gas (RNG) produced on a dairy farm. However, the markets are expanding to include other ecosystem services including GHG reduction, water quality, water use, air quality, biodiversity, carbon sequestration and soil health.
Specific practices may range from simple workflow changes to system-wide investments, including:
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Low-Carbon Fuel Standard (LCFS) and Digester Markets: Today, dairy farms are eligible to sell RNG as a part of the California Low-Carbon Fuel Standard (LCFS) program, which is intended to reduce the carbon footprint of transportation fuels. California awards LCFS credits to producers of low-carbon fuels. RNG qualifies for credits as long as it is used to replace conventional transportation fuel in California. The RNG does not have to be produced in California or even land there physically.
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Carbon Sequestration Markets: These markets are still emerging but hold potential as an opportunity to support carbon sequestration through practices like rotational grazing or tree planting or in field practices.
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Feed Additives: There are emerging opportunities in reducing enteric methane emissions through feed additives. It should always be confirmed that an additive is authorized and registered to mitigate methane emissions before feeding it for that purpose.
Carbon markets are not a silver bullet, because they are complex to navigate and have inconsistent funding. Environmental groups can be critical of environmental benefits, although there is growing credibility.
Where Do We Go from Here?
There are several ongoing efforts to improve technological advancements related to carbon markets (e.g., improved modeling methods) and practices for carbon reduction and sequestration.
Policy developments and regulatory changes continue to impact carbon pricing and market participation as new compliance markets and standards come into effect, like the Voluntary Carbon Markets Joint Policy Statement and Principles and Integrity Council for Voluntary Carbon Market’s Core Carbon Principles.