Horizon blog: Are carbon markets a saving grace for farmers?

Thursday, 28 July 2022

As policy is moving towards recognising and rewarding farmers and land managers for environmental outputs it has got me thinking about the direction of travel of carbon markets and the importance of natural capital.

Through our work on the Sustainable Farming Incentive (SFI) project, it is evident that this scheme alone is not going to bridge the gap left as Basic Payment Scheme (BPS) payments are reduced in England. Instead, the majority of the agriculture budget will be split across three agri-environmental schemes: SFI, Landscape Recovery (LR), Local Nature Recovery (LNR). The latter two will be open not just to farmers, but to all types of landowners. With this in mind, farmers are going to have to adjust their businesses, whether that be diversification or adapting to be less reliant on these payments. This leads to the question of whether carbon markets and environmental outputs can play a role in filling the gap?

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Jess Corsair

Senior Economist

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As we move forward and policy is more focused on environmental outputs and regenerative farming practices, I think that many farming businesses will not only need to consider their traditional outputs, such as crops, milk, and meat, but also the natural capital they maintain. Those delivering landscapes that support biodiversity and capture carbon, have the potential to produce an alternative stream of income. With increasing numbers of companies setting targets for achieving net zero and some even pledging to be carbon positive, this creates a market for them to buy carbon from farmers and landowners.

Natural capital is the stock of natural resources such as soil, carbon, air, water, biodiversity, trees, for example. Building natural capital, especially in carbon stocks, can help farmers accumulate carbon on their farm which could eventually be used as carbon credits to sell into the voluntary carbon markets. These voluntary carbon markets look set to grow exponentially over the next decade, both in size and value. Once the regulations on reductions and accountability are in place, it would be expected that prices for carbon will see massive increases.

For this reason, the general advice on entering voluntary carbon markets would be to hold fire. There needs to be informed decision-making before selling carbon or tying up land in long term offsetting schemes, because once you’ve sold your carbon it has gone! There are also some concerns about duplicating the carbon stocks - if you sell carbon credits from your farm, you cannot then use that carbon to support your business achieving net zero targets.

It's obvious there are many questions and points that need clarifying in the carbon market. The key action now would be to start measuring your carbon footprint. There are a lot of carbon calculators on offer, but you should choose the best one for your business. Some are focused on particular sectors or required by retailers or other parts of your supply chain, and some which measure carbon sequestration. There is no perfect option, so in the first instance you should pick one calculator and then stick with the same one to get consistent measurements year on year, which allow you to benchmark any changes in the future.

With climate change and net zero commitments key and important topics it is inevitable that carbon markets are going to grow in popularity and importance over the next few years. Also, reducing carbon emissions and sequestering or capturing carbon are going to be key priorities in both policy and industry developments going forwards. This presents an opportunity for farmers to start considering carbon as a commodity alongside reducing emissions. Going forwards, AHDB will be providing more insight into the carbon markets and carbon more generally to provide levy payers with the information necessary to make informed decisions and plan for the future.