Environment: Sustainable Farming Incentive and Carbon Outlook

By Jon Foot

Climate change has made the leap from political rhetoric into policy reality. It’s an issue that will increasingly manifest itself in national and international policy decisions, as well as supply chain standards. At the same time, there is an industry commitment to a path towards Net Zero emissions. Farm businesses will have to balance environmental sustainability with the impact on production systems and financial viability. Farmers and growers will need to navigate a new and uncertain policy landscape, which may reward some practices (via future agricultural policy) and penalise others. This article aims to explain how farming carbon may become central to every farm business.

A significant driver of change will be climate change with the reduction of greenhouse gas emissions and the use of natural systems to lock up carbon to achieve net zero carbon emissions. It should be remembered that neither NFU Net Zero Goals or government targets expect all farms or even all sectors to achieve net zero. To mis-quote George Orwell’s Animal Farm “all farms are equal, but some are more equal than others” and this means farmers and growers may group together to optimise the ability for others to carry the load in some areas, whilst others may do less.

All the signs are that farmers and growers will have to measure their carbon stocks, emissions and demonstrate how the products they are producing can be done so with less carbon. 

So why should farmers and growers do this? Where is the money to be made?

These are good questions, so let’s start with the big picture and then bring it back to the farm level.

The majority of environmental and sustainability changes are likely to result from policy and regulation to mitigate climate change. The Agriculture Act 2020, Environmental Act, Streamlined Energy and Carbon Reporting (SECR) 2019 are key examples of this. In the supply chain, food processors and retailers are being driven by legislation to measure and report their emissions, including the carbon in the products and services they buy (also called Scope 3 emissions). The increasing demands of consumers of both product choice, shifting diets and climate change concerns will also drive this agenda and accelerate change.

The broader challenge for agriculture and society as a whole; is how do we produce low carbon/sustainable, safe, affordable and secure food supplies in a world where there will be greater demand for food, and in particular good quality protein, while at the same time increasingly deliver public goods and services? 

AHDB has a clear role in assisting the agricultural sector to understand and minimise its carbon emissions, particularly in the livestock sectors. Carbon management is good for business - lower carbon footprints are often associated with higher efficiency, above average yields and better margins.

We are supporting our levy payers on this journey with a three-step approach.

Compulsory trading schemes: to link or not to link?

The compulsory carbon trading schemes do not currently apply to UK agriculture, but we’ll explore in this section why they might be of interest to us in the future.

Businesses may be part of a ‘cap and trade’ scheme. The total amount of greenhouse gases that may be emitted each year is determined at a governmental level according to agreed national targets. This is the ‘cap’ and it reduces over time until a final annual emissions target is met, such as the UK’s net zero by 2050.

For example, the EU Emissions Trading Scheme (EU ETS) operates in all EU countries, limits emissions from around 10,000 direct and associated activities in the power sector and manufacturing industry, as well as airlines operating between these countries. Participation for these is compulsory, and the scheme covers around 40% of the EU's greenhouse gas emissions. A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021. The UK ETS will apply to energy intensive industries, the power generation sector and aviation.

Similar schemes exist elsewhere, including in parts of the US, New Zealand and China but they are not yet linked. The Paris Agreement, adopted by 197 countries serves as an example of how international emissions markets could be linked in the future.

In trading schemes such as this, businesses have their emissions measured, verified and audited. At the end of each compliance period, they must surrender carbon credits equivalent to their emissions in that period. If they don’t, they typically face a fine, as well as mandatory purchase of credits equal to the shortfall. Depending on the scheme, participants may be given some credits for free, or they may buy them in an official auction. They can also trade with other participants on the open market, buying or selling as necessary. Free allocations aim to prevent ‘carbon leakage’ where manufacturers move carbon-intensive industries overseas.

The advantages of an emission trading scheme are that the cap provides certainty for policy makers, and it provides a flexibility for compliance route for the industrial participants. However, creating a market in something with no intrinsic value is very difficult.

Carbon trading scheme such as the UK ETS are not suitable for agriculture, because the monitoring and reporting requirements would be a disproportionate burden for the industry, and the data required to underpin the scheme cannot be directly measured in a timely and transparent way. It is only where the mandatory scheme is linked to voluntary offsetting schemes that there may be some opportunities.

A glut of allowances or loss of confidence has led to a collapse in the price of carbon, and this can result in the scheme delivering no effective emissions reductions. In the early stages the voluntary offset allowances were traded, often at a discounted price, which also deflated carbon prices. In many emission trading schemes the ability to trade voluntary allowances has been significantly curtailed or stopped.

At the end of 2020, the cost of EU allowances was €33.43 (£28.84) per tonne. It has since risen to €56.35 (£48.61), following rising EU and national climate ambitions. The UK ETS allowances are trading at between £44-50 per tonne of CO₂ (May 2021), which closely mirrors the prices in the EU, and this linkage is likely to continue. However, the UK market has less liquidity because it is smaller; and so, prices are likely to be more volatile. There are currently no plans to link the mandatory and voluntary carbon schemes in the UK or within the EU.

Voluntary offsetting

Businesses not covered by schemes such as those described above may also wish to reduce the amount of greenhouse gasses they emit on a voluntary basis. They can do this themselves, or by buying credits from others.

Voluntary offsetting: how to take part

There are a lot of schemes promising farmers an income for growing carbon. However, all is not as certain as promised, and the returns come with risks, because there are few recognised standards or schemes here in the UK.

UK landowners are most likely to be familiar with this sort of carbon trading in the form of voluntary offsetting, either through the UK Woodland Carbon Code, or the Peatland Code. With both of these schemes, verified emissions savings can be sold to other businesses seeking to offset their carbon footprint. Project details are held for public view by IHS Markit in the UK Land Carbon Registry. At the moment, carbon savings generated under these schemes would not be saleable into an emissions trading scheme.

Some new schemes are trying to sell carbon credits linked to the idea that soils are a vast carbon sink that remove carbon dioxide from the atmosphere, helping reverse climate change with farmers being paid for the carbon they store by companies wanting to offset their emissions. However, there are some significant problems with these schemes in that they fail to meet the key principles of:

• The carbon offset must be quantifiable. This requires the organisation wishing to offset their carbon to be able to measure and quantify the amount they need to offset, and for the land manager to be able to demonstrate that the offsets are delivering the benefits contracted for.
• Additionality must be demonstrated and is hard to do (see box below)
• There must be no carbon leakage (see box below)
• The offsets must be permanent.

If the carbon offsets do not meet these requirements, then you should consider other options. Likewise, where the schemes lack an underpinning standard such as the Woodland or Peatland codes, it would be worth seeking further advice before making a commitment. When entering into these schemes, you also need to consider whether there is a long-term income to maintain the offset scheme, rather than a one-off injection of money into your business. Legal advice should be obtained to ensure the scheme is protected by covenants and there are legal protections and indemnities to protect you and your business should the project fail for reasons beyond your control (i.e. drought, vandalism etc.).

Whilst I have highlighted some of the negatives of offsetting, I am very optimistic about the future and the role of offsets for biodiversity and carbon. The AHDB will push for standards that support the development of the voluntary offset market and enable multiple benefits to be stacked for projects that are able to demonstrate that they are delivering across a range of environmental issues.  Standards and new guidance are being developed that will help to demystify this complex area. The recently published ‘Oxford Principles’ provide some good principles for how carbon offsetting can contribute towards net-zero.

The offset market will provide levy payers with new income streams and opportunities, for land that may be less suitable for food production. The offsets will be increasingly needed by all sectors of the economy. We should also be promoting the development of offset markets in the short to medium term to provide a quicker road to carbon neutrality, whist investment in technology catches up to drive more direct decarbonisation for sectors where decarbonisation is cost-effective. In the longer-term offsets are going to be required along with nature based solutions to achieve the government’s net zero targets by 2050.