By Brent Sohngen (sohngen.1@osu.edu)
For nearly 25 years, carbon offsets in agriculture and forestry have been the next big thing – a market with huge potential to increase revenue for farming with certain practices like conservation or no till, cover crops, the Conservation Reserve Program (CRP), or even growing trees. There is power in an idea that remains relevant for that long, but prices for carbon stored in American farms and forests remain too low to make it much of a “thing” at all. To most farmers, carbon offsets are just an annoyance – and a vivid reminder that the very people who tell us a “carbon crisis” is upon us are not serious at all about solving the problem.
The question I most often hear farmers ask is “why are carbon prices offered to farmers so low?” It’s a legitimate question. The news these days often contains reports of unexplained weather events, like heavy rainfall, that scientists claim have been caused by climate change. If there really is a crisis and farmers can help by doing something different, why is the price so low?
Some people are willing to pay a lot of course. Californians are willing to pay $30 per ton to stop emissions from factories. People in other parts of the world, like Europe or New Zealand, will pay more than twice that to stop emissions.
However, nature-based offsets – the ones farmers and foresters produce – garner only $1 per ton. If I were a farmer, I’d view this paltry amount as a slap in the face. Here I’ll try to explain why it’s not.
The most important reason why prices for nature-based offsets are so low is they exist nearly exclusively in a voluntary market. Needless to say, this is exactly how farmers and their farm organizations want these markets to be structured. They definitely do not want regulated carbon markets to enter farms directly. Even in California – the most regulated state in the U.S. – most farmers only see the effects of the California cap and trade system indirectly, that is, through their input prices. California farmers face high carbon prices when they buy things like gasoline, diesel, and other chemicals that are manufactured under the California cap and trade system, but they do not pay directly for carbon emissions from their farms. Further, like other farmers in the U.S., they receive a pittance for most carbon they store in their farm fields or forests.
Elsewhere in the U.S., farmers do not face much indirect regulation of their carbon, so they just see the low price offered for nature-based storage. It is too bad the price is low, but it is low precisely because the system we have in the US is the voluntary carbon market that farmers have demanded since people first started talking about carbon markets 25 some years ago.
To see what we’re missing here in the U.S., consider the case of New Zealand. There, farms and forests can be opted into the regulated carbon market and thus receive the much higher regulated carbon price for their nature-based carbon storage. Once opted in, however, farmers must pay for any emissions they create. So if they plant trees and get rewarded as those trees grow, they will face a stiff penalty if they harvest the trees. Despite this “tax,” which only hits if the trees are harvested, the economics tilts heavily in favor of planting trees in New Zealand.
It is no surprise, then, that when nature-based carbon storage is worth the same amount as carbon emissions – as it is in New Zealand – landowners are planting lots of trees on their farmed land (primarily their grazing lands).
In the rest of the world, including the U.S., study after study shows that if farms were to face a regulated carbon price, the economics would tilt in favor of growing trees rather than traditional farming. Growing trees is a lot easier, and with European, California, or New Zealand level prices (>$30 per ton CO2), growing trees would be more valuable than farming in many places where it currently is not.
In the U.S., a voluntary market benefits farmers and farm organizations by keeping land from converting to conservation and carbon storage. A higher regulated carbon price would benefit a slice of farmland owners because it would raise the value of their land asset. However, farm renters and farm organizations would suffer because more land would be devoted to trees and less to farming. It turns out that low carbon prices are pretty much exactly what the doctor ordered for much of the farming community.
Additionality matters, too
Other factors, like additionality, also contribute to low carbon prices for nature-based carbon. Additionality is the concept that carbon sequestration in forests or agriculture should only count if the carbon was placed there because someone paid for the carbon and not something else. It is hard to tell, however, if carbon prices are low because lots of nature-based carbon already in the market is non-additional, or if non-additional carbon results from low carbon prices. This is a real conundrum.
Consider this, the Norwegians ran around for 10 to 15 years paying rather paltry amounts (<$5/ton) for avoided deforestation in low-income countries. As a result, some people tried to pass off non-additional carbon to get the low sum of money Norway was offering. Go figure, eh? One has to ask if that’s evidence of actual cheating or straightforward rational economic behavior? After all, if you are paying me nothing why would I give you something?
Causality, however, also runs the other way. Farmers who have long done conservation tillage provide free carbon storage to society because they privately benefit for other reasons. Forest owners whose trees contribute to the nearly 800 million tons of forest-based sequestration in the United States every year, provide an even bigger service for free – worth nearly $100 billion per year at EPA’s current estimate of the damage of each ton causes. Yet neither type of landowner could ever be compensated on private markets because their efforts would not be considered additional.
Following UN Framework Convention on Climate Change (UNFCCC – a treaty the US signed and ratified in the early 1990s) guidelines, the U.S. government treats the 800 million tons in the forest carbon sink as additional and adjusts its expectations of other industries accordingly. That’s right, automobile fuel efficiency standards, regulations on power plants, subsidies through the Inflation Reduction Act, and all other federal rules on carbons emissions are set assuming foresters and farmers keep doing their part. This means that all these other rules are less stringent than otherwise because farmers and foresters (mostly foresters) are so good at storing carbon on the landscape for free.
This non-additional carbon actually is worth billions to companies that are regulated, yet the farmers and foresters get no credit, and see no benefit.
Worries about additionality have created some credence problems for offset markets too. Newspapers love to write about failures in the private offset market, making failure seem like the norm rather than the outlier it is. Worries born of this reporting for sure reduce demand for nature-based offsets.
For example, the Science Based Targets Initiative (SBTi) has encouraged private companies to make pledges to reduce their carbon emissions by 50% within 10 years. Until recently, however, they were susceptible to the news-driven hype about the non-additionality of most forest-based carbon offsets, so they would not allow companies to use offsets when meeting their “science-based” targets. This, of course, was an odd stance because the science of carbon removal by offsets is clear. SBTi recently seems to have shifted their approach to allow companies some flexibility in meeting their targets with offsets.
Over time, SBTi’s change could increase demand and raise offset prices, especially if it signals a broader embrace of offsets within the voluntary carbon market.
In conclusion, there are three primary reasons why nature-based carbon prices are so low. One reason is that the suppliers – farmers and foresters – want carbon offsets to remain voluntary. Prices in voluntary markets will always be lower than prices in regulated markets. This is the most important reason.
The other two reasons relate to additionality. First, foresters and farmers are so proficient at providing massive amounts of carbon storage for free, they have driven down the price of carbon. Second, worries about getting caught with some of this non-additional carbon lower demand.
Unfortunately, it won’t be easy to solve any of these problems, meaning nature-based carbon prices are likely to remain low for the foreseeable future. The recent decision by SBTi to finally admit that carbon offsets were also science-based and allow them to be used by companies trying to meet stringent targets, however, could provide a demand boost for the nature-based market. So far, we haven’t seen a significant change, but this could change in the future.