AEDE Carbon Market Outlook 2022
by Brent Sohngen (sohngen.1@osu.edu)
As we enter into Outlook season here in the Department of Agricultural, Environmental, and Development Economics, it’s useful to provide a quick update on carbon markets. I recently wrote an outlook piece for the Ohio Soybean News, which hopefully provides some useful information to landowners and others looking at this emerging market (you can find the article in the November-December, 2021 version here: https://www.soyohio.org/association/ohio-soybean-news/ ).
The recent COP meeting in Glasgow got a lot of news and press. While it didn’t provide significant additional commitments by countries that would spur substantial new demand for carbon offsets, it didn’t take the collective foot off the gas pedal either. Even though there weren’t firm new commitments, enough happened to suggest that the offset market will continue to build. Here are some outcomes of note:
First, the US and China agreed to cooperate more closely on climate. I honestly haven’t been able to find the real significance of the joint statement by the countries, but it is useful that the world’s two largest CO2 emitters are talking about cooperating. It suggests that there may be more to come that may be more substantive. But of course we’ll see.
Second, the declaration on forests and land use follows many years of similar declarations, but the way I read it, is that it did seem to put a bit more emphasis on implementing and redesigning agricultural policies to incentivize sustainable agriculture, promote food security, and benefit the environment. The recent Dasgupta Review on the Economics of Biodiversity, a 600 page report for the UK Treasury (you can find it here: https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review ), highlighted estimates that there are nearly $700 billion per year in farm subsidies, and a very small percentage of those are used for “sustainable” agriculture or conservation.
Meanwhile a recent report I wrote with some others in Nature Communications (https://www.nature.com/articles/s41467-020-19578-z ) suggests that it will take more than $200 billion per year immediately, rising to over $400 million per year in the near future, to meet the world’s robust net zero by 2050 commitment. Lots of people are starting to ask “if we can’t get new investments of $200-$400 billion per year in sustainable agriculture and forestry, can we re-engineer how we user the existing $700 billion”.
I don’t see how this isn’t an important conversation in the next US Farm Bill discussion.
Third, there was a renewed discussion of global carbon trading, that is, development of a new mechanism run by the UN to facilitate CO2 trades from country to country. It’s great to see this on the docket for additional discussion because global trading of CO2 will raise the value of land-based carbon sequestration in agricultural soils and forests. If the market for carbon sequestered by US farmers is global, like soybeans and corn, the price farmers get will be higher.
It is true that current markets are somewhat saturated with lower value land-based carbon credits from developing countries, but in the long-run the likely best outcome for Ohio farmers will occur if there is a legitimate global market for carbon sequestration.
Finally, the basic math of the global goal to keep global temperature change below 1.5-2.0°C has not changed. There is only so much additional carbon that we can emit from fossil fuels if the world is going to achieve this goal. The amount of fossil fuel combustion we can do is dramatically lower if don’t have a heavy dose of land based offsets from farms and forests around the world.
The same is true for companies, who cannot achieve robust net zero commitments without a heavy dose of offsets supplies by farms and forests. The overall outcome of Glasgow is that the pressure is still on businesses and countries to achieve net zero quickly. If anything, this pressure has grown in the last month or so, which means that the carbon offset market farmers isn’t going away anytime soon.
