Carbon Markets and Credits 201
Carbon Markets and Credits 201 builds on foundational concepts covered in the Carbon Markets and Credits 101 handout, offering a deeper dive into the mechanics and opportunities within carbon markets. This resource explains how carbon markets operate, focusing on agricultural carbon offset markets that allow producers to earn credits based on their greenhouse gas (GHG) impact. It also explores key projects like anaerobic digesters, enteric feed additives, and conservation practices in cropland, as well as new opportunities in low carbon fuels programs and insetting arrangements. Readers will gain insight into the roles of key players, payment models, regulatory trends, and current market data, equipping them to understand and engage in carbon market opportunities effectively.
Learning Hub ▶ CARBON Markets
CONTENT CURRENTLY UNDER DEVELOPMENT
Digital Resources
Summary Presentation
SPEAKER: Claire Pluard
Downloadable Resources
Summary of Key Points from the Presentation
Carbon Markets and Credits 201 Handout - COMING SOON!
Review of Carbon Markets and Credits 101
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Carbon markets are mechanisms for buying and selling carbon credits; there are compliance markets and voluntary markets.
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Emissions can be classified as either Scope 1, 2, or 3.
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Carbon insets refer to GHG reductions within a company's value chain; carbon offsets compensate for a company's unavoidable emissions.
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Farmers should understand measurement, monitoring, reporting, and verification (MMRV) in carbon markets and key quality factors such as additionality, permanence, and how to avoid double counting.
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There are specific opportunities for dairy farmers in carbon markets, including low-carbon fuel standards, carbon sequestration, and feed additives.
Key Players in Agricultural Carbon Markets
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Producers: Farmers are the foundation of these markets because changes begin in your operations. A producer can elect to make small incremental practice changes or vast changes that reduce the GHG footprint of their operation or sequester soil carbon. As the origin of the supply chain, a producer is responsible for documenting their new interventions and reporting that information to participate in the program. This is usually done through management data. There are a few venues for a producer to pursue a project, whether offsets or insets and with a variety of levels of involvement from the producer.
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Registries: These are independent groups, often non-profits, that develop standards. They certify carbon offset projects only and issue tradable carbon credits to ensure integrity in the voluntary carbon market. These are typically used by carbon programs or grouped projects and are not paid directly by producers.
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Carbon programs: These are third-party companies that facilitate transactions by defining eligibility criteria, negotiating contracts, determining the value of the credit, implementing monitoring and verification processes, and setting prices between buyers and sellers. These opportunities are established to simplify these markets for producers and often take a percentage of the offset payment to pay for their services. This percentage varies and is commonly between 15 and 40%.
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Intermediaries: Intermediaries are companies that connect producers and carbon market opportunities. They offer information, measurement, reporting, and support through many carbon programs. They can also be considered carbon programs that come from within the supply chain, like co-ops or other intermediate supply chain infrastructure. There is more variety within these versions of carbon programs. They are essential players that connect producers with economies of scale and grouped projects. Frequently, the corporation benefiting from the insetting will pay for these services directly to enable producer participation.
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Verifiers: Verifiers are independent auditors of carbon projects that check documentation, calculations, and eligibility information to ensure a project has met the rules of the carbon project methodology and has properly quantified impacts that will be credited. They are responsible for the “V” in the acronym “MMRV”. In some cases, inset credits do not need to be verified by a verifier though offsets always need to undergo the process.
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Buyers: Buyers are corporations that face mandatory regulations or have made voluntary commitments to lower their greenhouse gas emissions. Corporations can buy either offsets or insets depending on their regulation and goals. Corporations with producers in their supply chain frequently pursue insetting opportunities that benefit from the more direct relationships and thus slightly lower costs.
Carbon Project Life Cycle
Initial Process
The process is relatively similar if a producer decides to participate in a carbon market, whether an offset or an inset opportunity.
STEP 1: SELECTION AND ENROLLMENT
After electing to adopt a new practice, a producer can join an aligned program or market opportunity. Occasionally, producers will be recruited to these programs before adopting the practice and can leverage technical assistance and other support from the program they have enrolled in to ease the implementation of new practices.
STEP 2: ON-FARM PRACTICE IMPLEMENTATION
This includes any steps the producer must take to implement the practice or technology on their far including but not limited to purchasing equipment or seeds, developing site plans, working with on-farm advisors, or introducing other new practices. Ideally, these practices would be started just before joining a carbon program or after starting the engagement.
STEP 3: MEASUREMENT/MODELING AND REPORTING
The producers participate in the measurement or modeling and reporting process. Modeling is the most common method and utilizes scientific data systems and norms to estimate on farm impacts. This requires producers to share farm management information, occasionally allowing sampling on the farm, answering questions or surveys, and collecting evidence like receipts for seeds or equipment, photos of new processes, and frequently legal paperwork on land ownership. Programs also can use satellite imagery to demonstrate the changes made in the fields. This is likely the second most intensive time requirement from a producer but has been simplifying over time.
STEP 4: VERIFICATION
Next, a program or intermediary would move a producer, likely with many other producers, into a grouped verification process where the verifiers will assess the scientific modeling, on-farm management, and evidence to ensure that it aligns with the program’s methodology or goals and has created the intended impact. Verification can vary widely in time, from a few weeks to a few months depending on project size and general workflow.
STEP 5: ISSUANCE AND PURCHASE
From there, the producer should be paid for the number of credits issued by the program, though payment windows also vary depending on the program and can be dependent on the offset being sold.
STEP 6: ONGOING COMMITMENT
After initial enrollment and the carbon program steps highlighted above, a producer is responsible for maintaining compliance with the program, likely intending to continue the conservation practices and to provide regular evidence for ongoing monitoring for the life of the project which can vary from one to 20 or more years, depending on the practice implemented.
Learn More
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Offsets versus Insets
Carbon markets offer the opportunity for producers to be paid for climate-smart practices that measurably reduce GHG emissions. These market opportunities have taken different forms, from formal markets to informal supply chain collaborations. The differences between compliance markets and voluntary programs are discussed in more detail in Carbon Markets and Credits 101. Here we further break down voluntary carbon markets into offsets and insets. While voluntary markets can have offsets and insets, compliance markets only trade credits referred to as offsets.
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Carbon offset: A carbon offset or credit is a transferable asset certified by governments or independent certification bodies to represent a reduction or storage of one metric tonne of carbon dioxide or an equivalent of another GHG. These credits can be traded outside the agricultural supply chain to companies looking to meet emissions targets.
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Carbon inset: A carbon inset represents a strategic approach where companies invest in greenhouse gas reduction projects within their supply chains. Through similar practice changes, these insets result in food and agriculture products with a lower carbon footprint.
Program Goal
EQIP addresses specific problems or “resource concerns” such as erosion, nutrient run-off, etc.
Practices Funded
New plans (including engineering), infrastructure, energy upgrades, in-field practices, edge of field practices, and more.
Funding Rates
Payments are based on flat rate payment rates determined by NRCS based upon typical costs associated with the implementation of practices; rates differ by state.
Funding Rates
See link for a full list of eligible practices and payment rates in each state. Find your state and click on the link for either EQIP or CSP
Duration
1-10 years
Funding Distribution
Max $450,000/ person or entity / Farm Bill EQIP distributes payments for specific conservation practice after they are complete and verified.
Definition
A company buys the rights to GHG reductions, “credits” made by a project that is not related to their business.
Definition
A company works within its supply chain to reduce GHG emissions, helping them meet the target GHG footprint of their supply chain.
Source
Directly avoided, reduced, or sequestered emissions by adopting new practices or technologies.
Source
Directly avoided, reduced, or sequestered emissions by adopting new practices or technologies.
Accounting
Offsets “count” against a company’s direct emissions (Scope 1).
Accounting
Insets do not result in tradable credits; they typically reduce a company’s indirect emissions (Scope 3).
Financials
The price of a credit is primarily based on additionality and permanence.
Financials
Payment comes through a variety of payment mechanisms.
Who Benefits
Only the credit buyer can account for the reduction.
Who Benefits
Multiple players within the supply chain may benefit from the GHG reduction.
Structure
Programs are standardized and rigorously tracked to ensure each reduction is only counted once.
Structure
Insets need to be built through partnerships within the supply chain, whether with the end purchaser of the ingredient or the co-op or processor.
CARBON OFFSETS
CARBON Insets
It is essential to understand the difference between these commonly discussed phrases and program structures. Both offsets and insets represent up-and-coming opportunities for producers to incorporate new income streams. Producers can leverage the best fit for their operation while adopting climate-friendly practices.
Pricing and Payment Mechanisms
Pricing in offset markets is generally determined per carbon credit, where one credit represents one tonne of carbon dioxide equivalent. While there are some markets where prices are more transparent, most offset transactions happen through private brokered agreements, making it difficult to accurately determine pricing. An Ecosystem Marketplace survey of voluntary carbon projects determined that the average carbon price for agricultural projects globally was $6.51 per tonne in 2023, but there have also been public announcements of carbon credit pricing upwards of $80 per tonne for agricultural projects. See the Carbon Quality section in Future Trends for information on factors driving prices.
Pay-for-Outcomes Model
measurement, reporting, and verification process. Outcomes are essentially equivalent to the tons of GHG emissions reduced, avoided, or stored (i.e., calculated carbon credit number). Because most producers think more about revenue per acre or per head of cattle, it can be difficult to translate carbon credit pricing into profit expectations. Generally, impacts for cropland practices range from 0.2 to 0.75 tonnes per acre, whereas livestock practices, such as enteric feed additives, generate roughly 0.21 to 1.12 tonnes per head. These GHG impact estimates depend heavily on local conditions, the specific practices and technologies selected, and a facility’s performance before starting a project. A challenge of pay-for-outcomes programs is that there may be a gap between what a producer expects to generate from a project and the benefits generated under real-world condition
Pay-for-Practice Model
Quantifying GHG benefits involves technical modeling and measurement that can be difficult to assess before the start of a project. Some carbon programs help manage producer risks by paying for practices rather than paying for quantified outcomes. This approach has been implemented by Bayer, Corteva, and Cargill in cropland systems where they offer a simple fee schedule for practices like no-till, cover cropping, or nitrogen reductions. This model provides clarity to producers and might compensate for pre-existing practices, though this approach does not necessarily allow a producer to capitalize on increasing credit pricing or synergies between practices. Pay-for-practice programs also don’t allow carbon buyers to directly incentivize the quality of practice implementation or use more reliable quantification approaches to evaluate impact.
Co-Investment and Credit Stacking
Some producers de-risk project development by accessing multiple forms of cost support and incentive payments. Many forms of federal support for conservation practices like EQIP, CSP, RCPP, and Climate Smart Agriculture programs do not prevent producers from simultaneously accessing carbon markets and being compensated for their resulting outcomes. Brand insetting programs may also connect producers to discounted capital to purchase equipment and infrastructure to support project implementation, in addition to providing separate payments for outcomes. In some regions, additional compensation or tax incentives may be available for projects that implement conservation easements, conservation banking, or water quality improvements, though these programs are only available in specific areas. There are some cases where participating in multiple programs could create the risk of double counting. It is best to confirm program rules before entering parallel programs, as programs like CRP and the Sustainable Aviation Fuels program, may not be stacked with other carbon credit programs.
Producer Participation
How to Prepare to Join Carbon Markets
All offset programs have rules to guide whether producers qualify for payments for reducing emissions. The rules are typically explained in a “methodology” for each project type. It is important to document past and present management practices to establish a baseline to compare against potential project activities. Tracking cropland management practices including crop varieties, planting and harvest dates, tillage equipment and events, grazing history, and fertilizer usage are critical inputs for evaluating project eligibility and potential value capture. Digitized records of equipment purchases, animal sales and herd management, feed receipts and records, and manure management practices, can also help document project activities and facilitate more efficient verification audits.
Grouped Projects Are Essential
Many carbon projects benefit from economies of scale to help spread the costs of monitoring, verification, and project development. In some cases, aggregated projects that make up larger land holdings or many producers can take advantage of approaches that allow for lower soil sampling density to reduce cost but maintain quality. Aggregated projects can also spread the costs of marketing credits and allow for verification audit expenses to spread over multiple project participants.
Current Common Projects in offset market opportunities
Barbara K. Haya, Aline Abayo, Ivy S. So, Micah Elias. (2024, May). Voluntary Registry Offsets Database v11, Berkeley Carbon Trading Project, University of California, Berkeley. Retrieved from: https://gspp.berkeley.edu/faculty-and-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database
Future Trends
While there isn’t a looking glass to provide complete clarity on the future of carbon opportunities, years of development and trends have emerged that give us likely insight into what might come next.
Standards and Regulation
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Emerging markets: While carbon markets like California’s cap-and-trade program are governed by state regulations, most voluntary programs exist without formal regulation. There are several emerging standards such as the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Carbon Credit Quality Initiative, that help standardize the requirements for offset methodologies, ensuring projects, for example, go beyond business as usual and have safeguards against emissions reversals.
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Standards and certifications: In August 2024, USDA also published their intent to establish a program where offset protocols, technical assistance providers, and verifiers will be certified, based on their ability to produce and review projects that are sufficiently reliable, efficient, effective, transparent, and consistent. Standards and certifications can help provide more confidence in carbon markets and protect credit buyers and producers.
Offsets and Insetting Evolution
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GHG reporting initiatives: There are several corporate GHG initiatives, such as Science-Based Targets Initiative (SBTi), Greenhouse Gas Protocol, and Carbon Disclosure Project, designed to accelerate reductions across supply chains. Most GHG reporting initiatives have explicitly excluded carbon offsets as a tool to help companies reach goals, or at least forced companies to use them as a last result after managing activities they more directly control. Insets (or “Scope 3” reductions) generally have counted towards company goals, though the rules around traceability can be confusing and limiting, particularly in fragmented supply chains like agriculture.
Offset Quality
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High-quality offsets: Recent announcements by SBTi suggest high-quality offsets (such as those approved by ICVCM) generated from sectors related to a company’s supply chain (even if products are not directly traceable to that company), may begin to count towards GHG targets, though this concept has not yet been written into formal rules.
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Offset interchangeability: There is some debate over whether offsets can act as an interchangeable commodity, or whether offsets from particular types of projects may be more valuable than others. In regulated markets like California’s, offsets are completely interchangeable, whether they come from a forestry project or a digester.In voluntary markets, some prominent buyers, such as Microsoft and Stripe, have prioritized carbon removal over avoided emissions, and have expressed interest in technologies with low reversal risk, or “long-duration” carbon storage.
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Permanence of offsets: Projects that credit reductions from high-permanence solutions like biochar production or enhanced weathering may create benefits for hundreds or even thousands of years, and often generate higher credit prices than projects that are not considered sufficiently “permanent.”