Carbon market for climate smart agricultural practices
Why rigorous measurement, modeling, and scalability matter to farmers
Climate-smart agricultural practices that improve soil health and sequester carbon can provide financial benefits to farmers while concurrently improving environmental conditions by increasing biodiversity, reducing GHG emissions from
undisturbed land, minimizing the need for fertilizers and pesticides, and improving water quality and drought tolerance.1
Farmers currently lack financial incentives to implement climate-smart management practices. Through a carbon credit
program, farmers can increase their profitability and simultaneously implement farm management practices that
enhance soils, improve environmental conditions, and mitigate climate change.2 Generatinghigh-quality carbon credits requires meticulous and transparent standards for GHG mitigation (for example, realistic baseline, additional, and permanent, etc.). Therefore, policy initiatives must focus on high-quality carbon credits underpinned by robust monitoring, reporting, and verification to ensure the long-term viability of carbon crediting program. This provides financial resilience to farmers and ensures long term environmental benefits. The government can support these initiatives by providing market assurance via certification of acceptable soil carbon offset standards, and by providing technical assistance to encourage grower enrollment in the most robust programs. This document serves as a primer on the current state of the science that enables robust measurement, reporting, and verification.
Key Takeaways
- A combined monitoring approach encompassing direct measurement, modeling and remote sensing technologies promotes an accessible and scalable program to farmers, helping to reduce their GHG emissions while securing their long-term financial resilience. See Table 1, which describes ways to improve the quantification of carbon credits in the future.
- The key to managing a complex, multi-field approach is very detailed tracking of field level reporting and verification activities so that the carbon program can be assured that there is no reporting overlap at the field level.
- Harmonization between government reporting and farm data systems could take several forms: collaboration between the USDA and carbon markets standard-setting bodies on what data are needed and how those requests are worded; development of a system for carbon project developers, verifiers, and/or registries to digitally access farmer data directly from the USDA, with safeguards for data privacy and security; and development of platforms by carbon market participants whereby carbon project data collection can be leveraged to generate government reports directly.
- By continually assessing which data are hard to obtain as well as which parameters are most important to GHG outcomes, we can simplify the inputs required (by sourcing default values) without sacrificing the collection of program critical data. If we align modeling and reporting with the types of data the farmers are generating, it reduces friction at the field level. Alignment along the chain from field to model to GHG reporting will reduce confusion, complexity, and conversions, and make it easier to implement software to increase automation and reduce effort and potential sources of error.
- Research is needed to understand the drivers of carbon loss and the related indicators that can be monitored remotely.
- Software and digitization of farm data can reduce the complexity of a multi-field project, enable faster payments to growers, and lower the burden of data collection and increase the quality of data collected.
- It is critical that federal policies support and enhance farmers’ ability to generate high-quality (i.e., credible and verifiable) carbon credits and avoid policies and programs that place unintentional and unnecessary roadblocks to farmer participation in carbon markets.
1 Popkin, G. 2020. March 31. Can ‘Carbon Smart’ Farming Play a Key Role in the Climate Fight? Yale Environment360. https://e360.yale.edu/features/can-carbon-smart-farming-play-a-key-role-in-the-climate-fight
2 National Academies of Sciences, Engineering, and Medicine. 2019. Negative Emissions Technologies and Reliable Sequestration: A Research Agenda. Washington, DC. The National Academies Press. https://doi.org/10.17226/25259
Policy opportunities for climate smart agriculture
U.S. growers are struggling to remain profitable, production expenses1 have increased2, government payouts to farmers are breaking records, and the acceleration of per acre productivity seen over the past century is slowing3. Simultaneously, soil health has declined, and extreme weather events are proliferating, exacerbating the negative impacts of climate change. Our climate and the economic resiliency of our rural communities are compromised. Farmers need ways to increase their profitability and resilience if they are to continue farming, feeding our population, and fueling our economy for decades to come. Climate smart agriculture presents an opportunity to leverage proven agricultural management practices to improve rural livelihoods via enhanced grower profitability, and to enhance environmental and economic security through restored and more resilient lands.
Despite growing interest from the voluntary carbon market, and decades of effort by government agencies, advocacy groups, and grower initiatives, adoption of climate smart agricultural practices remains limited. The federal government can play a critical role in catalyzing practice adoption and carbon market participation by instituting policies that:
- decrease barriers to adoption of climate smart practices, and amplify awareness and assistance;
- offset cost risk for growers via incentives, including transition payments and tax credits; and
- endorse rigorous standards for the measurement, verification, and monetization of on-farm carbon
A variety of policy opportunities can be pursued, including endorsing quality criteria via the Growing Climate Solutions Act (GCSA), developing a carbon bank, supporting a price on carbon, expanding tax credits and low carbon fuel standards, modifying existing policies that currently impede widespread regenerative practice adoption, and supporting research and private-public sector work on soils, management practices, and carbon.
New policies that encourage climate smart activities on working lands can be implemented in a way that is compatible with existing programs that benefit farmers and ranchers. Conservation programs including CSP, EQIP, the grassland reserve program, the farmable wetlands program, and the conservation technical assistance program should continue to be funded. Working lands policies will complement established programs by allowing farmers to maintain productivity and profitability, while minimizing leakage.
The policies recommended here allow private markets and voluntary efforts to thrive, while avoiding the costs, consolidation, and burden associated with heavy-handed regulation. Regulation would inhibit the ability of individual producers and actors to make the decisions that are best suited for their unique circumstances, and would add costs via procedural requirements and administrative burden.
Given the array of policy opportunities and the importance of the US agricultural system for food, fuel, and its role as an economic engine in rural communities, agriculture presents an opportunity to advance meaningful policy instruments in a unified, bi-partisan manner.
1 https://downloads.usda.library.cornell.edu/usda-esmis/files/qz20ss48r/sj139q807/1v53kk18k/fpex0720.pdf
2 https://data.ers.usda.gov/reports.aspx?ID=17833
3 https://www.ncdc.noaa.gov/extremes/cei/introduction
On April 15, 2021, the US Senate Committee on the Budget heard from a panel of experts on The Cost of Inaction on Climate Change. Among those providing testimony was Dr. Robert Litterman, Chair of the Commodity Futures Trading Commission’s Climate-Related Market Risk Subcommittee and a member of Woodwell Climate’s Board of Directors. This is not Dr. Litterman’s first Congressional testimony on this topic. Last year, he testified before the House Special Committee on the Climate Crisis regarding the economic risks of climate change.
Below is his oral testimony to this week’s Senate Budget hearing:
Chairman Sanders, Ranking Member Graham, members of the committee. Thank you for inviting me to address the risks that climate change poses and my suggestions for how to deal with them. Climate change is real, and the risks that it imposes on our society are extraordinary. Though there are tremendous uncertainties about exactly how climate change will play out over time, that risk demands an immediate, ambitious, response.
My name is Bob Litterman. I am an economist by training and have spent my career managing financial risk. I chair the Commodity Futures Trading Commission Climate-Related Market Risk Subcommittee which published its report on Managing Climate Risk in the U.S. Financial System last fall. I worked at Goldman Sachs for 26 years, where I finished as a partner in 2009. I led the Firmwide Risk Management Department, and later managed the Quantitative Strategies Group in our Asset Management Division.
Financial risk management has several simple principles that apply to managing climate risk.
Most important, risk management requires imagining “worst case” scenarios. A risk manager’s job is not to just maximize returns, but to prevent extremely bad, but very plausible, scenarios. Identifying those scenarios is especially hard for climate risk because we are performing this experiment for the first time, it is irreversible, and the impacts will be felt for many decades to come. David Wallace Wells has done a commendable job illustrating the scientific research on worst-case scenarios.
Another principle of financial risk management, which is perhaps not as obvious, is that our objective is not to minimize risk, but to price risk appropriately. For example, at Goldman Sachs we placed a risk-based charge on traders to force them to take risks only where the firm would be more than compensated by the expected returns on their trades.
A third principle of risk management is that time is a scarce resource. If we have enough time, we can solve almost any problem. It is when time runs out that a risk breeds catastrophe. The risk from climate change is increasing as we fill the atmosphere with greenhouse gases. We do not know how much time we have before we cross a tipping point, after which the increased extent of such disasters becomes irreversible. This is an extremely urgent matter.
More colloquially, we are barreling toward a hazard of our own making, now we need to brake hard.
We must act decisively today so that, even in a worst-case climate scenario, the costs to society are manageable. These costs include: more extreme weather, sea level rise, wildfires, threats to national security from failed states and climate-induced mass emigration, and biodiversity loss. But addressing these effects will not reduce risk at the systemic level, when everything goes wrong.
For that we must reduce emissions and move rapidly to a net-zero emissions economy. The scale and urgency of that transformation require that financial markets immediately and dramatically increase the flow of capital toward investments that will reduce emissions. Then, we will almost surely need to follow that by removing significant quantities of greenhouse gases out of the atmosphere. Making those investments profitable and fostering the innovation necessary requires putting a price on carbon. Whether it is the National Academies of Sciences, the Business Roundtable, the American Petroleum Institute, or Nobel-winning economists like Professor Stiglitz—to cite some recent examples—experts and interested parties agree.
Congress needs to become the risk manager here. The most straightforward manner to price carbon is placing a tax on fossil fuel production. The risk management component of the carbon tax is the incentive it creates to reduce emissions; any revenues are available for other purposes.
The Climate Leadership Council, which I co-chair with Kathryn Murdoch, has developed the Baker-Schultz carbon dividend plan. There the revenues of a tax on fossil fuel producers would be returned directly to households. Several members of this committee have introduced carbon pricing legislation in the past or actively support it now. The exact policy construction varies between proposals, but there are other experts who can help Congress understand those policy questions and any resulting tradeoffs. I recognize that there are a variety of opinions about carbon pricing and their design, but leadership and compromise can help build strong coalitions of support.
To manage climate risks, the key would be to create a price immediately, set it high enough to reflect the risks imposed by greenhouse gas emissions, and apply it to emissions across the entire economy.
I and my colleagues stand ready to help you deliberate between these policies and do what is best for Americans and the future. Thank you.