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Crediting Farmers for Nutrient Stewardship: Using Carbon Markets to Create Positive Environmental Change

Published: September 1, 2016 by Editorial Team

Elizabeth Hardee, The Climate Trust
As published by The Solutions Journal, Vol 7, Issue 4, Pg 52-57 – July 2016

In Brief

Carbon crediting holds the potential to incentivize optimal nitrogen fertilizer usage on farms, avoiding negative environmental consequences like climate change while supplementing revenue to farmers. Realizing the potential of this solution will depend on key factors including the adoption of nutrient management crediting structures for compliance carbon markets, increased data collection and usage efficiencies, and economies of scale for project expenses such as credit verification. This paper explores the potential, key barriers, and solutions for nutrient management crediting at scale.

It is impossible to discuss future food security without discussing climate change, a global problem that threatens the foundations on which our modern agricultural systems are built—stable weather patterns, well-balanced soils, a favorable temperature range. According to the IPCC, “All aspects of food security are potentially affected by climate change, including food access, utilization, and price stability.” Likely impacts include heat stress, flooding, drought, and changes in precipitation and in the distribution of invasive weeds and pests.1 Changes in precipitation and temperature resulting from climate change are also likely to alter the microbiomes contained in soils, in turn altering patterns of soil productivity. Climate change will not impact every region uniformly, but studies provide clear evidence that further warming will increase the need for creative adaptation.2–4

Agriculture itself currently accounts for roughly 10 to 12 percent of annual global emissions.5 Most of these emissions come from gases with global warming potentials over a 20-year timeframe that are 86 and 265 times that of carbon dioxide, respectively: methane, primarily from livestock production, and nitrous oxide—the focus of this article—primarily from crop production.6 However, even as agriculture is threatened by climate change, it is capable of creative solutions that will not only contribute to global climate mitigation efforts but have benefits beyond this as well. This paper focuses on one such solution: the generation of environmental credits from increased fertilizer use efficiencies.

Nitrogen fertilizers have led to an unprecedented increase in agricultural productivity, but nitrogen applied to soils can be converted to other forms—including nitrous oxide and nitrate—that can have negative environmental outcomes when lost from fields. Nitrous oxide emissions from soils are currently the second largest source of agricultural emissions and continue to rise—gaining efficiency here could have a significant impact on agricultural emissions overall.4,7 Though a worldwide potential exists, this paper focuses primarily on U.S. agriculture, as the consolidation of farms creates potential for larger impact from fewer farms.

When nitrogen fertilizer is applied to soil, biological processes within the soil convert some portion of it to nitrous oxide and, as a global meta-analysis study concluded, “N2O emissions tend to grow in response to N fertilizer additions at a rate significantly greater than linear.”8 The loss of excessive nitrous oxide from farms into the atmosphere is preventable and depends on matching the application of fertilizers more effectively with the needs of crops. Collectively referred to as nutrient management, there are several practices that do this—applying smaller quantities, applying different fertilizer products, use of nitrogen inhibitors, injecting fertilizers into soils rather than broadcasting applications, and/or optimizing the timing of fertilizer application for the plant’s nutrient uptake.9

Nutrient management practices are quickly catching the attention of farmers looking to save money on inputs, companies wishing to reduce the GHG emissions footprint of their supply chains, and the carbon markets—systems with potential to provide revenue to farmers on the basis of increased fertilizer use efficiencies.

In a carbon market, a farmer generates a credit for each unit of nitrous oxide emissions avoided by a change in nutrient application practices, and this credit can be sold to a company or other entity that wishes to offset its own emissions. The value each credit produces is distributed through that credit’s value chain; a portion of it goes to pay for the development of the carbon project, a portion to verify that the intended outcomes of the project are met, and a portion becomes an alternate stream of revenue for the farmer—important, as crop farmers are typically subject to the volatility of commodity crop prices in predicting their revenue stream.

This means that the generation of credit from nutrient management changes is beneficial from multiple angles: millions of tons of greenhouse gas emissions are avoided, farmers are compensated, and jobs are created to handle the carbon accounting. Even water quality may improve, as the optimization of fertilizer applications also limits the creation and distribution of nitrate—an anion salt that has been implicated in adverse water quality conditions in several areas worldwide.10

One reason to be optimistic that carbon markets can create value for conservation practices in crop agriculture is that they have been deployed to aid conservation efforts for other agricultural practices. In the US, California’s cap-and-trade system allows the creation of offset credits for the management of livestock manure through the installation of anaerobic digester systems. Since its inception in 2013, the program has created over two million credits from over 70 distinct livestock digester projects throughout the US.11 With these credits able to be sold to entities with compliance obligations under the program at prices in the range of USD$8 to $11 per credit, the total value created for those in the crediting value chain can be estimated at between USD$16 million and $22 million to date.

With so much monetary value involved it becomes even more critical for emission offsetting programs to be designed effectively. In the past, offsetting programs lacked accountability and offsets were sometimes created for emission reductions that had occurred in the course of business as usual, or had not occurred at all. The UN’s Joint Implementation Mechanism is one such example; under this system, Russia and the Ukraine were able to register credits for projects that would have happened in the absence of carbon revenue (in the language of carbon markets, such projects are referred to as non-additional).12 In response to questions about the quality of credits, markets have instituted standards that prioritize the environmental integrity of offset credits.

Environmental integrity, in the context of offset credit quality standards, means that the emission reduction represented by the credit is real (accurately calculated), measureable (able to be compared with a baseline condition), verifiable (able to be confirmed by an independent third party), permanent (unable to be reversed), additional (above and beyond business as usual, the most common practices in a region, or existing law structures), and enforceable (able to be withdrawn, should it be discovered credits were created fraudulently).13 Carbon accounting systems all over the world have accepted these principles as the best way to ensure the environmental integrity of credits.

However, environmental integrity is only one piece of the triple bottom line for carbon projects. An ever-greater emphasis has been placed on the social outcomes of carbon projects. Responsible sellers and buyers consider local community impacts when considering transactions, and standards have emerged to certify these variables as well, such as the Climate, Community, and Biodiversity framework, which considers variables such as property rights, stakeholder input, and continuous monitoring, particularly for areas of the world where these variables have been of concern historically.14

The benefits of offset projects that are managed with integrity cannot be overstated or overlooked. For agriculture, crediting could be a boon—a way to generate revenue that does not rely on crop prices. However, significant barriers remain to making carbon crediting a viable solution for agricultural emissions; breaking these will require continued cooperation between agricultural and carbon market stakeholders and a focus on prioritizing the proper balance between environmental integrity and ease of use. The most pressing barriers yet to be broken are related to data collection and storage, credit calculation protocols, and the price of carbon—each discussed in further detail here.

Data Collection and Storage

In order to prove reductions, carbon calculation methodologies require that certain parameters be tracked and that records are kept long term. Carbon projects typically last about 10 years; however, protocols also advise that data used to generate credit be kept a decade or more after credits are issued. The California Air Resources Board requires data be stored for 15 years after initial credit issuance.15 In addition, calibration of credit calculation models typically requires at least three to five years of historical data on a farm’s use of fertilizer to establish a baseline. As most agricultural data is currently very fragmented, farmers receive advisement on their fertilizer applications from a variety of sources and data may be kept by multiple parties in a variety of formats, complicating data collection substantially.

Agriculture is beginning to use the power of big data to drive efficiencies; however, it could benefit from increased standardization. U.S. health care, another industry to have recently implemented this type of transition, may contain lessons that could be applied to agriculture. Like health data, much of the data collected by farmers needs to remain confidential. The standards applied by the Healthcare Insurance Portability and Accountability Act (HIPAA) have helped the health care industry to reform its data processes for greater accuracy and better data security. HIPAA uses a staged phase-in approach, ties usage to incentives, and is working to standardize the format of collected and stored data.

If agriculture were to do the same, the privacy needs of producers could be satisfied—farmers would own the data (in the same way patients do in health care) and would be able to provide permission for access to limited datasets by stakeholders like buyers, agronomists, and carbon offset project developers. Agricultural data storage would ideally be handled through independent third parties with expertise in data security.

Carbon Price

In addition to adding greater clarity to data requirements, the scalability of carbon offset crediting for nutrient management practices relies on the price of carbon being high enough to provide a margin to farmers once project costs are accounted for. National and subnational carbon pricing is on the rise worldwide but is by no means universal, so nutrient management projects that generate credit are currently largely left to sell their credits to voluntary buyers—usually companies or municipalities with an emission reduction target.16 Prices can vary greatly in these markets, creating uncertainty as to whether project costs can be recovered. Ecosystem Marketplace, which tracks voluntary carbon markets worldwide, notes that the worldwide average carbon price across all sectors in the voluntary markets has fallen to a low of USD$3.80, and that a substantial portion of credits offered on voluntary markets go unsold,17 offering limited incentive for the development of these types of projects.

The ability of farmers to sell credits into systems created by regulation—known as compliance markets—such as the EU Emissions Trading System or California cap-and-trade market would be an ideal solution to the issue of pricing, as both systems clearly articulate the price of each ton abated, and provide more certainty in credit demand than voluntary markets.

Protocols

High carbon prices would do much to bolster enrollment in crediting programs, but are not enough on their own to solve this important challenge. Many barriers to enrollment still exist within the credit calculation protocols themselves. Current protocols only mark the first generation of mechanisms to calculate the emissions reduction potential of nutrient management and have much room to improve. Designed primarily for environmental integrity, rather than to flexibly account for the complex dynamics of soils, these methodologies are highly prescriptive, with high implied upfront costs to farmers for the generation and verification of credits.

Additionally, even if a farmer does commit to the costs associated with a carbon project, there is no guarantee that they will receive credit for their efforts. Failure to provide historical data, an ineligible soil type, and unexpected decreases in crop yield are all grounds for the withholding of credit. Though the ability of farmers to sell their credits into compliance markets would at least provide higher certainty around the carbon price, and therefore the ability to recoup project expenses, developers of carbon projects still need to ensure project costs remain low to minimize financial risks to farmers.

Nutrient management offset markets are nascent, and each of these issues will be resolved in time; however, efforts by carbon market project developers, protocol writers, credit verifiers, government agencies, and many others are underway to ensure barriers are removed sooner rather than later.

One final consideration: because nutrient management projects have both an atmospheric benefit and a water quality benefit, it may be possible to sell environmental credits for each benefit from the same plot of land—a process known as credit stacking.18 Stacking has long been discussed as a way to maximize revenue benefits to landowners, but its success depends on being able to verify that no one environmental benefit is attributed to more than one credit type. Pilot water quality credit trading programs have emerged throughout the U.S., but to date no transactions of carbon credits have been completed from the same lands. Because they typically address different practice changes, carbon offset payments also usually do not preclude farmers from receiving other types of conservation payments, such as Environmental Quality Inventive Payments from the U.S. Department of Agriculture or direct “Greening” payments from the European Commission Agriculture and Rural Development division.19,20

The carbon mitigation potential of optimized nutrient management practices is vast. In the U.S. Corn Belt alone, potential from practice changes on continuous corn or corn–soy rotational fields is estimated to be between 0.77 to 2.7 million offset credits per year (each credit represents one metric ton of emissions avoided).21 Add in the rest of the world’s regions and crops, and the sector becomes not only a major carbon mitigation player, but potentially very lucrative for farmers, particularly if carbon prices continue to rise—which is likely to happen with increased international focus on emissions.

Some may argue that we need whole new systems to address climate change, and they would be correct—but we need to improve our existing ones as well. The scale of this problem is simply too wide to leave anything to chance, and improving existing systems is equally as valid as creating new ones in pursuit of its resolution. If we reimagine revenue models for farming, we could end up creating a sustainable food system and staving off the worst impacts of climate change at the same time—a true win–win for humanity.

References

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