Making soil carbon a commodity: how technology can redesign carbon markets based on rewards and…

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Making soil carbon a commodity:

how technology can redesign carbon markets based on rewards and outcomes

The world is starting to wake up to agriculture’s role in turning carbon into a commodity. There’s talk about creating a carbon bank in the US, and Australia is turning to technology to address its relatively large carbon footprint.

But exactly how we create soil carbon commodity markets that function efficiently to draw down carbon and achieve environmental impact is still being determined. One thing is clear, though: technology will play a critical role in creating both more opportunities to incentivize and reward farm-level practice change, as well as more avenues for startups to provide compelling solutions to help scale markets.

What is the opportunity, and what’s at stake?

Developing more and better solutions to address the massive, global climate change risk we all face is an existential challenge and a huge opportunity. Unfortunately there is no one silver bullet for decarbonization. Instead, it will take many forms, including both the direct reduction of emissions as well as purchasing of emissions reduction credits.

While direct reduction is imperative, for some organizations, meeting ‘net-zero’ emissions targets won’t be possible in the near term by simply reducing their own emissions. Instead, they will need to find sources of ‘negative’ emissions to augment their reductions. By creating viable carbon offset markets, we can provide direct incentives for service providers to address this need.

Further, agriculture itself is under pressure to achieve net zero emissions, with robust debates about how exactly the industry should participate in the transition. The agriculture industry is in fact well placed to significantly contribute to a net-zero future: there are ample opportunities to achieve direct emissions reductions, and increasingly, the ability to participate in the supply-side market for offsets to help other sectors meet their targets.

Shouldn’t we leave carbon markets to the government?

There is a level of skepticism over whether the private market can deliver emissions trading systems. While there is certainly a role for regulations, the counter-point is that investors and the free market may be in the best position to come up with solutions to this complex problem. As the market grows (research suggests carbon credits could be worth upward of $50 billion by 2030), investors seeking opportunities for returns and impact are turning to soil carbon markets. This is a good thing, as we need more capital to fuel the development of technologies and business models that can ensure these markets are viable.

Also, from the consumer side, people are increasingly aware of the climate footprint of their choices and want to see their preferred brands act decisively to lower the resource intensity of their products and services. Brands like Cargill, Coca-Cola, and General Mills are already recognizing this opportunity, for example by getting involved in soil health and regenerative ag incentive programs. Given that agriculture is upstream of a large number of these global consumer brands, these initiatives will drive significant supply chain transformation and create opportunities for disruption and disintermediation — another opportunity that private sector investors and the startups they support are well placed to capitalize on- as well as impact.

Why are outcomes-based schemes so hard?

Despite the growing global opportunities for soil carbon (and ecosystem services more broadly) markets, take up of programs has been relatively low, including in places like the US and Australia. Why?

One reason is that we lack a viable measurement system to underpin these markets. If carbon is a commodity, then that commodity relies on the renewable and non renewable natural resources, such as plants, animals, water, soils, minerals, and the stocks of carbon embedded in those assets. For markets to effectively provide rewards, it is particularly important to know that these natural resources are being enhanced rather than degraded as a result of agricultural production. In other words, we need to be able to quantify the state of these assets and how they change over time.

We already have systems for quantifying the state of human capital, and these accounting systems are central to effective management: you can’t effectively run a business without a profit and loss statement and a balance sheet. We need to develop the same capabilities for our ‘natural capital’ to ensure we manage our resources in a long-term sustainable way and can effectively balance economic gains with environmental gains. However, doing so is incredibly complex, and we have thus far struggled to develop widely accepted, cost-effective, accurate measurement systems.

Another reason that success of soil carbon markets has remained limited is that we’re dealing with humans, and change is hard. For farmers especially, there’s a mental leap required from growing commodities, to using their soil to store carbon and trading it as a commodity. And yet, if practices don’t change, we won’t see impact in the form of lower carbon emissions and natural capital improvements.

To increase farmer participation and create more effective schemes, we must develop economic incentives that require and reward observed changes. Further, we must match the rewards with the costs of participating- we cannot afford disincentives such as requiring large, upfront investments by participants. Yet, to date, given the lack of available measurement, reporting & verification (MRV) technologies at low-cost and large scale, we’ve been stuck with incentive programs that are practice-based, rather than outcome-based.

Where are the solutions and how can technology help?

First and foremost, we need to understand why farmers will choose to get involved. It is easy to think that the promise of extra payments, or the benefits that accrue on-farm from the practices (e.g., improving soil health) will be enough, but that is too simple. Instead, as the volume and variety of programs on offer increases, farmers are contending with a dizzying array of choices — each with its own set of costs, benefits and service providers.

Right now, farmers have two choices for how they get involved in carbon markets: offsetting programs that formally quantify the carbon that farmers sequester, usually in vegetation or in soil, and supply in the form of tradable credits; and insetting programs where farmers participate in supply-chain initiatives led by downstream partners (e.g., food companies) who are working to reduce emissions along the entire supply chain.

Having even these two choices, whilst not mutually exclusive, adds significant levels of complexity for farmers who are making decisions about how and where to participate. We therefore need incentives that ensure the costs of participating are matched to the rewards. In addition to the opportunities for business model innovation that exist in incentive design, there are several other key areas for solutions.

Better products. First, products must be real and measurable, not simply projected or planned. There needs to be independent and accredited verification through recognized methodologies with conservative assumptions, and the carbon credits need to be unique and traceable (ie. to eliminate double-counting). There also needs to be permanence, such that once the soil carbon has been stored, ideally, the impact cannot be reversed. And in cases where there is a risk of reversal (e.g., tiling, fire, etc), then appropriate risk management needs to be in place.

Most of these challenges can be greatly addressed with technological innovation and there is an increasingly important feedback loop between acceptable methodologies that quantify increases and the technological innovations that make that new methodology both scientifically valid and cost effective at scale.

Scalable, low cost measurement to lower barriers to entry. When it comes to accuracy of credits, we must be pragmatic. In other words, we cannot focus on quantification and verification methods that favor absolute accuracy over the cost of implementation, as they can dramatically reduce the level of participation. Instead, we need highly scalable methods that combine remotely sensed data, statistical and biophysical models, and targeted calibration, as these approaches have the potential to provide economically acceptable accuracy at far lower costs.

Education and support. Ultimately, the thing that matters most is the adoption of new practices. These changes require education and support as well as incentives and tools. It will be critical to consider which parties are in the best position to help drive that change and provide the sort of support that will make a lasting impact. In many cases, these will be organizations that already have farmer’s trust.

Conclusion

Enabling the global transition to net zero is an urgent need, and agriculture can be a major provider of cost effective and impactful climate solutions. Though we have a long way to go in developing impactful, scalable solutions, there are significant opportunities for brands, retails, farmers, startups, and investors to both realize commercial returns as well as provide solutions for the massive climate change risk we all face. The time to act is now.

Matthew Pryor is a General Partner at Tenacious Ventures, Australia’s first and only dedicated agrifood tech venture capital firm, and a Partner at AgThentic, a global agtech strategy firm.

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Making soil carbon a commodity: how technology can redesign carbon markets based on rewards and… was originally published in AgThentic Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Making soil carbon a commodity: how technology can redesign carbon markets based on rewards and…