Should farmers enter carbon markets?

Thursday, 14 September 2023

One of the questions I am frequently asked when I talk to farmers about carbon markets is whether they should enter a carbon credit scheme. It is a question that I find challenging to answer for several reasons.

Firstly, carbon markets are a relatively new entity, with a huge number of unregulated schemes available to farmers. The companies buying carbon and trading carbon credits know a great deal more about the value of carbon in the open market than farmers do. In economics, this is known as ‘asymmetry of information’. This concerns me. In any market, if the buyer knows more than the seller, or vice versa, the market is likely to be distorted and the price may well favour the party with the knowledge.

That said, there are many reasons why farmers are increasingly finding carbon markets attractive. The removal of direct payments is leaving a gap in farm finances. Farmers need to mitigate this loss and many will be investigating carbon markets as one potential option.

Carbon schemes can appear attractive, offering cash generating schemes over a period of time, for regenerative farming techniques that help capture and store carbon in the soil. If farmers are already transitioning to regenerative practices, this seems a fairly straightforward option.

Speaking with farmers, many will tell you that one of the key financial benefits of regen is the lowering on input costs, as well as the reduction in labour and machinery costs with fewer passes for fertiliser and pesticide. The income generated from selling carbon is described as ‘the cherry on the top’. Not going to make you rich, but they will contribute to the loss of income from direct payments. For these farmers, their view is ‘well I am doing it anyway so I may as well get paid for it’.

Others, who may be considering a transition to regen specifically to sell their carbon, may have a different perspective. Farmers will need to weigh up potential loss of yield against the reduced cost of inputs – an equation made harder with price volatility in both input and output prices. Then, the carbon schemes themselves. What is the cost of participation? What buffer will the company hold back? What is the time lag between signing up and being paid and most importantly, what will farmers be paid per tonne of carbon? Schemes vary hugely and the devil, as always, is in the detail.

Going back to the original question, should farmers enter carbon schemes? You can see why this is such a challenge to give a straight answer to. Carbon schemes won’t suit every farming business.; it is certainly not a silver bullet. However, for some, layered with other options such as SFI, CS, diversification, other private green finance schemes, such as BNG, and improvements in the core enterprises, it can contribute towards the gap in finances left by the removal of direct payments.

Once again, knowledge is key, and farmers need to upskill themselves on the pros and cons. For unbiased, evidence-based information, visit our carbon markets pages.

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Sarah Baker

Head of Economics - Analysis

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