Thursday, 24 November 2022
Carbon may be hard to visualise, but the benefits of building carbon stocks (which form part of natural capital) and reducing greenhouse gas (GHG) emissions are tangible. These benefits include gains from improved soil health and input cost reduction. Benefits are also monetary as carbon stocks have a market value, as they contribute towards meeting net zero goals.
To ensure market value, credits need to have these four key requirements:
Within the established compliance market, carbon values are understood to be higher than in the voluntary sector currently. This is because the compliance sector has a set demand base, and the cost to de-carbonise these industries (for example airlines and energy) are high. It is also because the compliance market is regulated by government, and the quality of the carbon credits is audited, giving assurance of that quality to potential buyers.
But value in the voluntary sector too is set to increase This is especially if the market does become regulated in the coming years, and as companies and industries look to become net-zero. At present the voluntary market is sometimes referred to as the ‘wild west’ due to its unregulated nature and the variability of price and quality of carbon credits generated, as well as the asymmetry of information for those wishing to sell their carbon assets. This market has seen significant developments over recent years, and demand in the voluntary market is set to rise.
Looking at carbon pricing, credits sit around the £30/t mark, depending on those 4 key areas flagged above (credibility, additionality, permanence and verifiability). The value of carbon in the agricultural sector is expected to reach £125/t by 2050. This projection is based on the cost of technology to reduce carbon emissions (LSE, Grantham Institute).
But we have seen the increase in carbon value in recent years exceed the predicted price. Could values reach higher than this per tonne? Possibly, but it is too early to tell.
We may also see a difference in how quickly values rise of carbon across different sectors, which in turn will impact prices for offsetting vs insetting in the supply chain, within the voluntary market. It might be that carbon prices per tonne for offsetting (e.g., selling to a company in a different sector to counterbalance GHG emissions) may rise at a faster pace, as demand rises.
But it is well known that farms will likely need their carbon going forward for their own business to meet net-zero, to meet supply chain requirements. Selling carbon within your own supply chain, or ‘insetting’ allows a return on that carbon, without ruling out the possibility that it can be used towards calculations for whole supply chain emissions (in its Scope 3 emissions). This is an area we will explore in more detail and something to think about when understanding current on-farm carbon stocks.
Schemes are there to get involved in now, should you wish to explore these options. If you are looking to enter a scheme, it is recommended that you seek legal advice. Especially considering rights of tenants.
What can I do now if I am still unsure? Well, the key action now is to baseline your own farm for carbon stocks. This is because you need to show additionality and improvement in carbon stocks, for market value. The bigger the baseline (number of years), the better (more robust). Choose a calculator that works best for you and stick with it.
Do you have a question regarding carbon markets? To get in touch with us, contact our email address: firstname.lastname@example.org.