It has been estimated that agriculture contributes around 20-25% of global GHG emissions. In developed markets like the US and Australia, carbon markets are being deployed to incentivize farmers to employ regenerative practices that rebuild soil organic matter, thereby storing more carbon from the atmosphere in their soils. Companies wanting to offset emissions can pay farmers to sequester carbon, but some of the challenges include the high cost of converting to regenerative practices and the difficulties in measuring and reporting the changing carbon content of their soils.
The promise of ‘carbon farming’ is potentially even more compelling for smallholder farmers in regions like Southeast Asia, which faces significant climate change risks. Smallholder farmers globally are on the frontlines of climate change and are less likely to have the resources to manage and adapt to it. Smallholder farmers also stand to benefit from the additional, more diversified income and increasing their crops’ productivity through better soil management etc
The challenge is: how can we provide access to carbon markets and other types of green finance for the benefit of smallholder farmers? What lessons can be learnt from developed markets and other regions? What tools for monitoring, platforms, or practices have to be developed or scaled to create a conducive enabling environment for smallholder adoption? Through this session, we aim to spark a discussion on the potential for including smallholder farmers in climate action through carbon markets and other platforms.
Rabobank will provide an overview of the dimensions of the opportunity and market, and showcase their Acorn initiative - an agroforestry-led carbon removal system for smallholder farmers. CarbonSpace will highlight their satellite-based platform for carbon footprint tracking and share more about how this tool facilitates greater access to carbon markets. MUFG will share about their recently launched initiative, GreenOn, which enables verifiable disclosures for deforestation mitigation projects.
Carbon Markets: A Primer
By Jelmer van de Mortel, Head of Acorn and Innovation Lead, Rabobank
Rabobank aims to combat climate change and land degradation, strengthen food security, and improve smallholder farmer livelihoods. To tackle these challenges, Rabobank has recently launched a new program: Acorn.
Acorn – Agroforestry CRUs for the Organic Restoration of Nature – unlocks the international voluntary carbon market for smallholder farmers in developing countries by enabling the sale of ex-post, nature-based carbon removal units (CRUs) to corporations. In this opaque but growing market, Acorn is a game changer. The proposition focuses solely on smallholder farmers (those with under 10 ha of land) in developing countries, and works with local partners (NGOs, cooperatives and finance & accounting corporations), which support those farmers with a variety of services, from technical assistance to access to finance and markets.
One of the main reasons for developing Acorn are the barriers faced by smallholder farmers in entering the voluntary carbon market. High costs for monitoring and certification and complex processes have made this market difficult for individual farmers and local project developers to navigate. By bringing together Plan Vivo’s experience with Rabobank’s network and capacity, Acorn works to overcome these barriers. Acorn also makes the process more straightforward by narrowing the scope of eligibility to agroforestry and smallholders. And by working with local partners, Acorn assures solutions that are tailored to the specific local circumstances. As the program grows over the coming years, scalability will be a key focus: from education, farmer payouts and data collection to the supply of seedlings and saplings.
Acorn also makes the carbon sequestration behind its CRUs transparent through (cost-)efficient remote sensing technology and scalable certification, following its Plan Vivo-certified Framework and Methodology. To estimate change in tree biomass between two points in time, Acorn’s model combines on-the-ground measurements with satellite imagery, safeguarding accuracy and ensuring conservative calculations.
Carbon markets are already in full development. There’s an important distinction between compliance markets and voluntary markets. While the compliance market focuses on allowance, the voluntary market adds avoidance, reduction and removal. The voluntary market is currently worth over EUR 1 bn, with 200m+ credits averaging a price of USD 3-4 per ton of carbon (tCO2), with higher prices for forestry and removal (Ecosystem Marketplace). In the compliance market, like the EU Emissions Trading System, prices are currently above EUR 70 tCO2 (November 2021). For removal, a distinction can be made between nature-based solutions like soil sequestration, biochar and afforestation, and technological solutions like direct air capture and bioenergy with carbon capture and storage.
Carbon prices are mainly driven by:
Cost of reducing carbon emissions in current operations
Cost of reference prices like emissions trading systems
Supply and demand of voluntary carbon credits
More than 20% of the world’s 2,000 largest public companies have a net-zero commitment, and over two-thirds of global gross domestic product (GDP) is covered by jurisdictions with net-zero targets. The motivations behind such commitments are: 1) reputational risk, consumer pressure and general societal activism, 2) investor/shareholder pressure, and 3) the wish to demonstrate industry leadership and market differentiation (IETA, GHG Market Sentiment Survey 2021). The first priority for corporations is to lower/reduce their greenhouse gas (GHG) emissions, and for unavoidable emissions to offset what they release.
With the voluntary carbon market growing rapidly, the quality of the carbon credits on offer differs widely. Corporations look for low-risk (ex-post) nature-based removal credits with evident SDG benefits. Given the steep increase in demand and the scarcity of supply, prices are expected to go up in the coming years. The corporate demand for removal over avoidance and reduction credits, results in higher prices for removals. Additionally, to incentivise avoidance and reduction activities, instruments like carbon taxes would also be a suitable alternative.
An inherent paradox exists with voluntary carbon credits: reduction is sometimes prioritized (WWF 2021), but net zero requires negative emissions – in other words, removal. So in a given timeframe, an equilibrium between emissions and removal is reached: somewhere in the world, a ton of carbon is emitted, and somewhere else it is sequestered. Additionally, we have to remove the anthropogenic emissions that we have emitted in the past.
An element that has not yet gained much traction in pricing is the durability of removal. Some interventions like soil sequestration will likely sequester the carbon for shorter periods of time than solutions like direct air capture. Going forward, pricing differences will likely be based on the expected durability of removal given the solution used.
Acorn secures a minimum price of EUR 20 per tCO2. This minimum ensures that price risks for the farmers are removed and is based on the potential to reimburse transition costs using CRUs. At this price, farmers will earn an additional 20% on their annual income. With the price of carbon credits expected to rise, these dynamics might result in unprecedented private capital flows from the Global North to the Global South.