Corporate interest in reducing and offsetting greenhouse gas emissions has grown substantially in the past decade. With more than one-third of the world's largest publicly traded companies now committed to net-zero goals, according to the Net Zero Tracker, carbon credit offsets have been touted as a way for the private sector to reach its decarbonization targets.

One nature-based offset, soil carbon credit, has begun to gain traction particularly in the US and Australia, yet several challenges impede the take-off of such projects globally.

Opportunities

The intersection of voluntary carbon markets and agriculture has become increasingly important in the face of global climate change.

The agriculture industry contributes significantly to GHG emissions, yet there are numerous opportunities for the implementation of agricultural practices that reduce, avoid, or remove emissions from the sector.

Carbon is sequestered by plants during the process of photosynthesis. As plants photosynthesize, carbon dioxide is pulled out of the atmosphere and eventually stored below ground within soil organic matter. Soil organic matter is created through the decomposition of plants, the breakdown of animal waste, and through various processes involving soil microorganisms.

Land management practices greatly influence the amount of carbon sequestered in soil. Practices that increase the amount of soil carbon stored include reduced or no tillage, prevention of overgrazing, reduction or increased precision of fertilizer application, and the maintenance of ground cover through cover cropping.

According to Australia's Commonwealth Scientific and Industrial Research Organization, nature-based carbon sequestration projects, including soil carbon projects, represent the most cost-effective methods of storing carbon.

Apart from being a cost-effective tool for reducing emissions from the agriculture sector, soil carbon projects also represent a long-term investment and source of income for farmers. As most farmers live season to season and often work off-farm jobs to get by, so-called "carbon farming" presents an opportunity to reward farmers for switching to more regenerative agricultural practices. For example, farmers in the US can earn up to $30/acre/year from participating in soil carbon projects, according to US-based project developer Indigo Ag's website.

Public policy

Countries such as the US and Australia have begun incorporating soil carbon sequestration into climate mitigation plans and policies, creating an opportunity for soil carbon projects to grow in popularity.

In the US, President Joe Biden has pushed soil carbon sequestration as an important component of climate mitigation, suggesting in his first address before Congress in April 2021 that farmers should be getting paid for growing cover crops.

In June 2021, the Senate overwhelmingly voted to pass the Growing Climate Solutions Act, a bill that would make it easier for farmers to participate in voluntary carbon markets. The bill sat stagnant in the House of Representatives until recently when it was included in the omnibus spending bill passed on Dec. 23. The legislation is set to reduce barriers of entry for the voluntary carbon market by establishing a US Department of Agriculture certification program for third-party verifiers and providing technical assistance on generating and selling carbon credits. Agriculture Secretary Tom Vilsack has suggested that one long-term solution for promoting the development of carbon markets in the US is through the Commodity Credit Corporation, which could act as a carbon bank.

In Australia, the storage of carbon dioxide in soil is one of the major goals of the government's Technology Investment Roadmap, which represents an important part of the country's long-term emissions reduction plan. Under the country's Emissions Reduction Fund scheme, project developers can participate in the compliance-based market by following various established methodologies, such as for soil carbon sequestration, to generate Australian Carbon Credit Units, or ACCUs. There are 433 soil carbon projects registered under the ERF as of Feb. 13, according to a spokesperson from Australia's Clean Energy Regulator.

Challenges

"There's no getting around the complexity of agriculture mixed with the complexity of the carbon market," Max DuBuisson, head of sustainability policy and engagement at Indigo Ag, said in an interview with S&P Commodity Insights earlier this year.

The viability of carbon farming as a value-add for farmers is limited by several factors, such as the upfront costs of soil sampling and project registration, the opportunity cost of changing practices, potential near-term reduction in yields and the market price of nature-based carbon credits.

The complexity and differences between the various standards for soil carbon quantification presents another challenge for farmers due to the potential variability in the quality of credits produced and thus the marketability of those credits.

Permanence and additionality are also contentious issues when discussing soil carbon projects. The additionality of projects, or showing that the changes in carbon stocks wouldn't have occurred without the financial incentive of credit generation, limits participation in the carbon market to farmers that have not yet adopted sustainable practices. For example, farmers that already sow cover crops in their rotations would not be able to benefit from participating in the carbon market.

The permanence of storing carbon presents a challenge for the take-off of soil carbon projects as the length of carbon storage in soil varies based on the biological, chemical, and physical properties of soil. Additionally, as almost half of all farmlands in the US are rented according to the USDA, changes in land ownership or management could result in a reversal in carbon storage.

Furthermore, up to tens of thousands of acres are needed to enable feasible, cost-effective credit generation, DuBuisson said, adding that this imperative for scale to make the numbers work has likely held the market back. "You really need larger projects to make it work."

The aggregation of fields to generate credits is the most common way to address the issue of scale as this reduces the upfront financial burden of sampling each field. Project developers in the US and Australia have taken an aggregation approach by taking a subset of soil samples from different farms to determine baseline carbon stocks and then using models or remeasurement to determine changes in carbon stocks under the project scenario.

Pricing

Currently, carbon prices are too low for soil carbon projects to be profitable unless done on a massive scale or unless they attract a major premium for the credits generated. For reference, Platts, a part of S&P Global, assessed CRC current year, which reflects the most competitive price for nature-based and technology-based removal credits, at $12.30/mtCO2e on Feb. 21.

"Today a soil carbon project needs to be delivered at scale and requires a carbon price of $30+ to be viable," Louise Edmonds, CEO and founder of Carbon Sync, an Australia-based project developer, told S&P Global via email on Jan. 30.

Under the Carbon by Indigo program, Indigo Ag sold credits generated at $20/credit when the program first launched. It has since increased with a wave of contracts sold at $27 and $40/credit. With farmers receiving 75% of the revenue from credits sold, farmers participating in the Carbon by Indigo program may receive up to $30/credit generated.

"We tend to be selling out well ahead of the sort of market average prices," DuBuisson said. With the average acre generating around 0.2 credits/year, "we do you need that price to be even higher, to make this a really, really valuable sort of addition to the farmer's business," DuBuisson added.

For context, a 1,000-acre farm would generate around 200 credits/year on average, and if valued at $40/credit, the farmer would earn only about $6,000/year of additional income for conducting a soil carbon project.

With the return on investment fairly low and possible short-term decreases in yield from adopting regenerative practices, the price of soil carbon credits would have to rise substantially, or additional incentives would need to be implemented, for farmers to participate in the carbon market on a larger scale.