Research Note March 2021 Opportunities at the Intersection of Carbon Markets and Agriculture

Increasing numbers of corporations and other organizations are making firm commitments to reduce their greenhouse gas emissions to help mitigate the pace of future climate change, some specifically targeting net-zero emissions over the next ten to twenty years. Reaching these targets will require reductions in both direct and indirect output of greenhouse gases related to their own operations as well as funding activities that will either reduce greenhouse emissions or directly capture and store carbon from the atmosphere through the purchase of carbon-credits or carbon-insets activities. The Science Based Targets initiative outlines the needed actions as primarily abatement (eliminating emissions in companies’ value chains), followed by neutralization (carbon removals within companies’ supply chains, referred to as carbon insets) and compensation (purchasing carbon offsets).1 The agricultural sector has significant potential to contribute to these neutralization and compensation climate- change mitigation efforts through operational practices that reduce the level of greenhouse gases per unit of production and/or boost the amount of carbon stored in farmland soils. Currently, market structures are quickly evolving to allow the creation, accounting, verification, marketing, sale, and transfer of Soils contain about 75% of the agricultural carbon credits. The development carbon stored on land, more of robust markets for farmland-based carbon than three times the amount credits will directly connect organizations contained in plants and animals. seeking natural climate solutions with climate change mitigating opportunities inherent in farming. Opening this new tier of climate-solution capital for farmland could help incentivize farmers to accelerate the shift to climate-positive operations and regenerative agricultural practices, and potentially create new revenue streams. The Intergovernmental Panel on Climate Change estimates that to hold warming to 1.5 Celsius above pre-industrial levels, the world will need to reach zero net emissions by 20502 and remove about 1,000 billion metric tons of carbon dioxide from the atmosphere between 2020 and 2100.3 With global soil carbon estimated to be three times that of atmospheric carbon,4 modifying agriculture practices to preserve and build soil carbon are increasingly recognized as an important tool in achieving this global goal.

1SBTi is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature (WWF), https://sciencebasedtargets.org/resources/legacy/2020/09/foundations-for-net-zero-executive- summary.pdf, accessed 03/10/2021 2IPCC 2018, https://www.ipcc.ch/sr15/chapter/chapter-2/ 3IPCC, “Global Warming of 1.5°C: An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways” https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/ SR15_Full_Report_High_Res.pdf 4Vermeulen, S., et al., “A global agenda for collective action on soil carbon,” Nature Sustainability 2, 2019, https://www.nature.com/ articles/s41893-018-0212-z 5Ecological Society of America, https://www.esa.org/esa/wp-content/uploads/2012/12/carbonsequestrationinsoils.pdf, accessed 2/22/2021 6Griscom, B., et al., “Natural climate solutions,” PNAS 114(44), 2017, https://www.pnas.org/content/pnas/114/44/11645.full.pdf, accessed 2/24/2021 7U.S. Environmental Protection Agency, https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions, accessed 1/19/2021 HNRG Agriculture Research Note, March 2021 1

Soils contain about 75% of the carbon stored on land, more than The rate of adoption of climate-positive regenerative agricultural three times the amount contained in plants and animals.5 practices in the U.S. is expected to gain momentum with support Studies estimate that globally, croplands have the potential to from both the public and private sector. sequester 1-2 billion tons of carbon dioxide annually.6 In The USDA Natural Resources Conservation Service has addition to the carbon storage potential of U.S. farmlands, U.S. programs that provide financial incentives to leave farmland agricultural operations contribute 10% of total annual fallow to protect sensitive lands, such as those with steep slopes greenhouse gas emissions,7 providing significant opportunities or prone to flooding, and the Biden Administration is expected to for the creation of carbon credits based on emission reductions. direct some of those payments towards producers practicing Here, we explore the current rapidly changing landscape of farming methods that retain and sequester carbon.15 agricultural carbon solutions and their markets. Concurrently, corporations and other private organizations could Agricultural Practices and Carbon Sequestration participate in developing voluntary agricultural carbon markets Opportunities as a viable option to move towards achieving their carbon- reduction goals. Regenerative agriculture practices that can reduce greenhouse gas emissions and increase the amount of carbon sequestration Current Voluntary Carbon Markets in farmland soil include conservation tillage, cover cropping, Legislated mandated programs to reduce GHG emissions, such changes in crop diversity and rotation8 and modifying fertilizer as those in the European Union, California, and New Zealand sources and application methods.9 These farming methods are were key in establishing the parameters and structures of global increasingly referred to as climate-smart agriculture and have carbon offset markets, but recent momentum is increasingly been recognized by the UN Food and Agriculture Organization being driven by voluntary initiatives taking place in the private as furthering the UN Sustainable Development Goals.10 sector. With growing public awareness and sensitivity to climate Soil carbon sequestration is the process of carbon dioxide being change, numerous major corporations, organizations, and removed from the atmosphere by plants and stored as soil nonprofit entities in the United States and globally have organic matter, and the two most widely deployed regenerative announced voluntary commitments and plans to reduce their agriculture practices, conservation tillage and cover cropping, carbon footprints. can boost the rate of carbon sequestration compared to Major firms that have communicated bold ambitions to achieve traditional agricultural practices.11 Conservation tillage and cover de-carbonization include Disney, Google parent Alphabet, cropping are already utilized on millions of acres of farmland Microsoft, and Shell.16 These corporate initiatives are closely across the U.S. and can have other more direct benefits for aligned with the Paris Climate Agreement reached in 2015 and farmers outside of their carbon impacts. Depending on the include the use of offset credits to meet targeted reductions in location, conservation tillage has the potential to reduce soil GHG emissions to accompany the key step of direct reductions erosion and runoff and can help retain soil moisture. Cover in their emissions. Consequently, the funding of carbon offset crops have the potential to prevent erosion, improve soil’s projects and the purchase of carbon credits are recognized as physical and biological resilience, supply nutrients, suppress viable avenues to achieve voluntary carbon goals. weeds and enhance soil water availability to primary crops, and this can boost crop yields while moderating input costs.12 The Since 2008, over 130 million voluntary offset credits have been Nature Conservancy estimates that each one percent of annual issued and about 40 million have been retired.17 Retired carbon cropland in the U.S. that adopts reduced tillage, cover cropping credits are those taken off the market and not traded again. The and crop rotation, translates into $226 million in societal value Climate Action Reserve provides protocols, guidelines, and tools annually, realized in increased water holding capacity, reduced to support the voluntary offset market, currently with 19 erosion and nutrient loss to the environment, and reduced GHG protocols adopted for use in the U.S., and over 400 offset emissions.13 projects registered. Climate Action Reserve’s Soil Enrichment Protocol adopted in September 2020 provides guidance on how to quantify, monitor, verify and report farming practices that In the U.S., conservation tillage is practiced on enhance soil carbon levels.18 202 million acres, 2/3 of total cropland. Participants in voluntary carbon markets are not bound to comply with the legislative requirements of California or the EU In the U.S., conservation tillage is practiced on 202 million carbon emission compliance programs, but most organizations acres, 2/3 of total cropland, while cover crops are used on just want their carbon offset projects to meet accepted standards 5% of cropland (15 million acres).14 While potentially applicable and protocols. By adhering to the program requirements in the to a wide range of both row and permanent crops, neither compliance markets to certify and validate their carbon conservation tillage nor cover crops are appropriate for all reduction efforts, and to align their efforts with broader climate farms. The applicability of either of these regenerative change mitigation efforts, participants in the voluntary carbon agricultural practices is dependent on a combination of factors market will be more likely to trade their carbon credits and be including soils, climate, and local growing conditions. able to manage their carbon credit portfolios. 8COMET-Planner, http://comet-planner.nrel.colostate.edu/COMET-Planner_Report_Final.pdf, accessed 2/17/2021 9USDA NRCS, https://www.nrcs.usda.gov/wps/portal/nrcs/detailfull/national/air/quality/?cid=stelprdb1044982, accessed 2/17/2021 10UN FAO, http://www.fao.org/3/ca6043en/ca6043en.pdf, accessed 2/17/2021 11COMET-Planner, http://comet-planner.nrel.colostate.edu/COMET-Planner_Report_Final.pdf, accessed 2/17/2021 12USDA Natural Resources Conservation Service, accessed 1/22/2021, https://www.nrcs.usda.gov/wps/portal/nrcs/detail/national/climatechange/?cid=stelprdb1077238 13The Nature Conservancy, https://www.nature.org/content/dam/tnc/nature/en/documents/rethink-soil-executive-summary.pdf, accessed 2/17/2021 14USDA NASS 2017 Census of Agriculture, accessed 1/22/2021, https://www.nass.usda.gov/AgCensus/ 15The Wall Street Journal, https://www.wsj.com/articles/agriculture-industry-bets-on-a-new-cash-crop-carbon-11608719403, accessed 1/19/2021 16Reuters, October 2019 17Climate Action Reserve, climateactionreserve.org/how/projects, October 2019 18 Climate Action Reserve, https://www.climateactionreserve.org/how/protocols/soil-enrichment/, accessed 3/10/2021 HNRG Agriculture Research Note, March 2021 2

The operational infrastructure built to support California’s Participants legislated effort to reduce carbon emissions provided an Major retail consumer food companies were the most prominent institutional template to trade voluntary carbon credits, facilitating early entrants into the agricultural carbon space, being pro-active the growth of the voluntary carbon-offset market. to establish their environmental credentials with their broad public The growing private sector response to the potential negative exposure. Danone and PepsiCo established initiatives in 2017 impacts of climate change has contributed to increased demand and 2018, respectively (Table 1). Following in the footsteps of in the voluntary carbon credits markets, insets and projects, and the consumer food companies have been agricultural input and this increased activity has been reflected in the price of carbon. tech suppliers (Bayer, Indigo, Nutrien) and more recent carbon- The price per ton of emission allowances within compliance focused companies (Truterra, Nori, CIBO). markets in the EU, New Zealand, and California have all trended As shown on table 2, Danone North America has 82,000 acres higher, rising from less than $15 per ton in the mid-2010s to enrolled in the U.S. and Canada , including row crops and between $15 and $30 per ton by 2020. almonds. The current scale of agricultural carbon market Carbon Prices Have Moved Upward Since the participants varies widely, as some have existing customer bases 19 representing millions of acres. As the agricultural carbon offset Paris Climate Accord, USD per ton of Carbon markets mature, consolidation is likely to occur, resulting in a

European Union California New Zealand $40 smaller number of players. A combination of reliability of the methods and ease of transactions will be key drivers leading $35 landowners, farmers and carbon credit purchase to gravitate $30 toward future market leaders.

$25 Business Model(s) $20

US $ per Ton of Carbon of Ton per US $ Consumer food companies’ motivation to create their own carbon $15 sequestration programs has some clear drivers including, helping $10 meet their net-zero goals, as well as assuring the environmental $5 quality of the farmers in their supply chain and improving their

$0 public image. For suppliers to the industry such as Bayer or 2014 2015 2016 2017 2018 2019 2020 Nutrien, the promotion of carbon-positive operations also helps In a scenario analysis commissioned by UN Principles for improve their public-facing corporate persona, but also provides a Responsible Investment (PRI) performed by a collaboration of service to the farmers who buy their goods and services, by PRI, Vivid Economics, and Energy Transition Advisors, carbon allowing them to more easily access potential benefits of pricing is projected to trend up to US$40 to $80/tCO2 by 2030, agricultural carbon credit markets. Peoples Company, a major opening additional opportunities to invest in nature-based climate rural land brokerage and management company, is targeting solutions such as farmland. To compensate for possible 20,000 acres to be enrolled in 2021 as a value-added service to 20 imprecision that could occur through non-compliance, updates to its clients. soil carbon science, or calculation errors, only a fraction of the According to a series of farmers interviewed by the Wall Street total credits procured by carbon credit companies are sold to Journal, agriculture carbon credit programs are currently paying buyers, moderating potential income to the farmland owner. 21 farmers about $7-$40/acre annually. The long-term economic Higher carbon prices in combination with increasing acceptance opportunity for carbon based on rising carbon prices is estimated 22 of agricultural carbon credits could provide added revenue to to be about $68-$90/acre annually. agriculture, offering greater optionality in the operation of Key considerations for agricultural carbon credits include farmland properties and potentially augmenting farmland values. rd verification, 3 party certification, additionality and leakage. These new carbon-based revenue streams could trigger a Verification of adherence to carbon credit practices and soil paradigm shift in farmland investments. The current emphasis on carbon levels can be expensive and imprecise. Certification of crop yield and financial crop return could broaden into new methods and results is conducted both internally and externally, strategies focused on achieving the most cost-efficient capture and carbon credit purchasers are currently sifting through and storage of carbon to meet investors’ environmental goals. multiple standards about how to evaluate the carbon impact of Evolving Markets for Agricultural Carbon specific agriculture practices in specific places. Another key hurdle in all carbon offset projects is additionality – whether the Several companies are pioneering market mechanisms to link change in carbon was truly a change from business as usual. If buyers of carbon credits to specific farmland properties that will more farmers are using cover crops to reduce soil erosion and reduce greenhouse gas emissions and/or increase the retention enhance water retention, it’s unclear if this change would have of carbon in their soils. These companies are identifying and occurred outside of carbon payments. Finally, guaranteeing the partnering with individual farm operations who agree to modify certainty of the longevity of the carbon capture is another area their practices in ways demonstrated to increase carbon capture, companies are addressing. If farming practices change, causing but the mechanics of payment, pricing and contractual structure carbon release, or the carbon credit company shuts down, the are still developing. impact may not meet the goals and expectations of the carbon market. 19International Carbon Action Partnership, https://icapcarbonaction.com/en/ets-prices, accessed 03/11/2021 20https://www.agriculture.com/news/business/cibo-peoples-company-partner-for-carbon-credits-on-farmland 21Wall Street Journal, https://www.wsj.com/articles/agriculture-industry-bets-on-a-new-cash-crop-carbon-11608719403, accessed 1/20/2021 22Mulligan, J., et al., “CarbonShot: federal policy options for carbon removal in the United States,” World Resources Institute, 2020, https://www.wri.org/publication/carbonshot-federal-policy-options- for-carbon-removal-in-the-united-states HNRG Agriculture Research Note, March 2021 3

For agriculture carbon opportunities, companies are working to solve measurement and implementation challenges needed to provide verification of carbon sequestration in soil and reduction of emissions and allow for third-party certification. Necessary elements include the need for multi-year legal commitments, and long-term monitoring systems to ensure practices meet commitments. Careful farm management records prior to and following carbon credit initiation are critical. In addition, representative soil samples must be tested to establish the baseline carbon levels and audit compliance with agreements. These processes will be complicated by the variability in the amount of organic matter (carbon) in soils between different fields and locations within a given property. As legal and testing costs are sticky on a per acre basis, higher carbon prices could possibly be necessary to offset the administration, transaction and monitoring costs that will be required to build market confidence. While these programs represent a potential opportunity for farmers to capture financial and environmental benefits, they do represent multi-year encumbrances by limiting the optionality of the farming operation and land, requiring farmland owners to give up a portion of their real estate rights. For the farmland owner, entering into carbon credit agreements has some of the tradeoffs on a smaller and shorter scale, associated with a conservation easement. The costs and benefits are especially important to consider if the agricultural land has potential for conversion to a higher-value farm such as a permanent planting or non-farm use. The agreements could impact the transferability and liquidity of the farmland if the owner or operator changes.

Figure 1: Carbon Credit Value Chain in Agriculture

Carbon Data Carbon Purchaser: Suppliers: Credit Certifiers, Companies, Farmers, Market Verifiers Institutions Landowners Company

Cash

Flow

For illustrative purposes only. The quality of the carbon credits are typically certified by greenhouse gas registration nonprofit organizations such as Gold Standard,23 Climate Action Reserve24 and Verra,25 and soil science organizations such as the nonprofit Soil Health Institute.26 The independent status of these organizations allows carbon market companies to quantify and certify the expected carbon impact of agricultural practices, measure baseline carbon levels, and monitor carbon levels and farm records to assure compliance. Citing the barriers that administrative costs and delays represent to smaller ag carbon providers, certain companies, such as Nori, have elected to operate with their own proprietary methodologies. The soil carbon market is still emerging area in terms of its science and market structure and building confidence in soil carbon removal estimates will depend on rigorous measurement approaches. Baseline sampling is critical for the estimation of sequestered carbon and the avoided GHG emissions. Table 1: Timeline of Carbon and Agriculture Market Expansion

Selected Carbon Programs Starting

2017 Danone27

2018 Pepsico28

2019 Indigo29, 30 Nori31

2020 Bayer32 CIBO33 Gradable34

2021 Nutrien35 Truterra36

23Gold Standard, https://www.goldstandard.org/impact-quantification/environmental-markets, accessed 03/02/2021 24Climate Action Reserve, https://www.climateactionreserve.org/, accessed 2/17/2021 25Verra, https://verra.org/, accessed 2/17/2021 26Soil Health Institute, https://soilhealthinstitute.org/, accessed 2/17/2021 27Danone, https://www.prnewswire.com/news-releases/danone-north-america-expands-the-most-comprehensive-regenerative-agriculture-program-in-the-dairy-industry-301196286.html, accessed 03/11/2021 28Pepsico, https://www.pepsico.com/sustainability/overview, accessed 03/02/2021 29Indigo Ag, https://www.indigoag.com/for-growers/indigo-carbon, accessed 1/19/2021 30https://www.wsj.com/articles/how-to-get-rid-of-carbon-emissions-pay-farmers-to-bury-them-11568211869?mod=article_inline 31Nori LLC, https://nori.com/resources/faq, accessed 1/22/2021 32Bayer, https://media.bayer.com/baynews/baynews.nsf/id/Bayer-takes-steps-to-make-carbon-sequestration-a-farmers-newest-crop-opportunity, accessed 1/19/2021 33CIBO Technologies, https://www.cibotechnologies.com/faqs/, accessed 2/24/2021 34Gradable Carbon, https://www.gradable.com/carbon, accessed 2/23/2021 35Nutrien, https://www.nutrienagsolutions.com/sustainable-ag, accessed 03/02/2021 36Truterra, https://www.truterraag.com/Articles/Land-O%E2%80%99Lakes-Sustainability-Business-Truterra -Laun, accessed 03/02/2021 HNRG Agriculture Research Note, March 2021 4

Table 2: Selection of Companies in the Carbon and Agriculture Market as of March 2021

Scale Potential Rates Features

1,200 Farmers Bayer37 Market carbon rates Working with Embrapa in Brazil U.S., Brazil 30,000 acres CIBO38 Up to $20 per acre Calculation, verification and market U.S. Since 2017, the program has sequestered more 82,000 acres Danone39 Cost-sharing funds than 20,000 tons of carbon through regenerative U.S., Canada soil health practices U.S., Canada, Gradable40 Up to $0.15/bushel Part of Farmers Business Network Australia Up to 2 credits/acre and $15/acre 2 million acres vesting over 5 years. Farmers Typical growers estimated to receive about 0.3-1 Indigo41, 42 Global enrolling in 2021 and 2022 are credits per acre. guaranteed at least $10 per credit. Start-up carbon removal marketplace focused first Nori43 U.S. Up to $15/acre on agricultural projects. Developing their own verification protocol. Nutrien44 U.S. To be announced Nutrien is the world’s largest crop input company. Working with Precision Conservation Management. Pepsico45 U.S. Cost-sharing funds More than 8,155 ton carbon emissions reduction 2018-2020. A Land O’ Lakes company, Truterra launched Truterra46 U.S. Up to $15/acre TruCarbon in January 2021, and the first company purchasing carbon credits was Microsoft.

For illustrative purposes only.

Looking forward As countries and companies plan for a reduced-carbon future, reducing emissions of 1,000 billion tons by 2100, carbon offsets will become a valuable tool. Agriculture, a natural resource solution, is likely to play a role in sequestering carbon relative to today’s baseline of business as usual, with the potential to sequester 1-2 billion tons of carbon annually. Given the small scale of today’s carbon programs, only a few million acres, relative to the scale of agricultural lands, 320 million acres of cropland and 580 million acres of pasture in the U.S. alone, there’s room for significant growth.47 Much as the forestry sector has made carbon sequestration a meaningful driver of value creation, agricultural landowners and operators that change management practices to sequester carbon and reduce greenhouse emissions should find ample buyers seeking to limit the magnitude of future global climate change.

37Bayer, https://media.bayer.com/baynews/baynews.nsf/id/Bayer-takes-steps-to-make-carbon-sequestration-a-farmers-newest-crop-opportunity, accessed 1/19/2021 38CIBO Technologies, https://www.cibotechnologies.com/faqs/, accessed 2/24/2021 39https://www.prnewswire.com/news-releases/danone-north-america-expands-the-most-comprehensive-regenerative-agriculture-program-in-the-dairy-industry-301196286.html 40Gradable Carbon, https://www.gradable.com/carbon, accessed 2/23/2021 41Indigo Ag, https://www.indigoag.com/for-growers/indigo-carbon, accessed 1/19/2021 42Wall Street Journal, https://www.wsj.com/articles/how-to-get-rid-of-carbon-emissions-pay-farmers-to-bury-them-11568211869?mod=article_inline 43Nori LLC, https://nori.com/resources/faq, accessed 1/22/2021 44Nutrien, https://www.nutrienagsolutions.com/sustainable-ag, accessed 03/02/2021 45Pepsico, https://www.pepsico.com/sustainability/overview, accessed 03/02/2021 46Truterra, https://www.truterraag.com/Articles/Land-O%E2%80%99Lakes-Sustainability-Business-Truterra-Laun, accessed 03/02/2021 47USDA NASS, 2017 Census of Agriculture, https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/, accessed 1/26/2021

HNRG Agriculture Research Note, March 2021 5

HNRG Research Team

Keith Balter Daniel V. Serna Weiyi Zhang, Ph.D Managing Director, Associate Director, Senior Natural Resource Economic Research Senior Agricultural Economist Economist [email protected] [email protected] [email protected]

Mary Ellen Aronow Elizabeth Shestakova Director, Economic Research Analyst Forest Economics [email protected] [email protected]

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