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Key points for investors and carbon credit buyers
Multiple companies in the US, Australia, Europe and now the UK have launched soil based carbon credits in the past 12 months. New measurement technologies, standards and assurance methods are emerging and gaining scale
Soil based carbon credits could contribute an estimated 10-20% of annual farming incomes especially if aligned to farming subsidies. As confidence and data improves we should see credit pricing increase, potentially 2-3 times from current levels
There are Investment opportunities across the ecosystem – monitoring companies, project management, issuance and over time, secondary trading on voluntary markets
Globally, soils are estimated to contain about 1,500 Gt (1.5 Trillion Tonnes) of organic carbon to a depth of 1m and 2,400 GtC to 2m depth. Scientists have estimated that soils, in particular agricultural ones, could sequester over a billion tonnes of additional man-made carbon each year if farmers follow well understood farming and soil management practices such as reducing or eliminating tilling the soil, using cover crops, avoiding nitrogen fertilisers and crop rotation. These practices, commonly known as regenerative agriculture, bring many other environment and bio-diversity benefits and can also deliver higher yields. Several countries have already placed restrictions on ploughing carbon-rich land, including Australia, and others, including the Republic of Ireland are considering it. The largest trial of regenerative farming is in the state of Andhra Pradesh (known as the ‘rice bowl of India’) where 750,000 farmers have rolled out Natural Farming under a government supported scheme over the last 10 years, with noticeable benefit in yields and public health.
These regenerative farming methods alongside receiving payments for soil carbon sequestration (sometimes called “carbon farming”) are set to grow from a cottage industry today (less than 1% of all carbon credits are based on agriculture today according to Berkeley University research, vs 46% on forestry) and become more widespread, the question is how significant could soil based credits become and what impact on farming economics and CO2 emissions could it have?
Paying for better soil
A number of companies in the US, Australia and Europe have launched soil-based carbon credits in the past two years. One of the largest issuers is Indigo Ag, based in Boston, which has now enrolled over 2,000 farmers, 5 million acres and are selling credits to the like of JPMorgan, Shopify, Barclays, BCG, IBM and Microsoft. Nori claim to have issued 117,000 tonnes of CO2 soil credits, worth over $1m and also sell directly to consumers as well as companies.
Respira , an established mission-driven carbon finance company, specialised in nature-based solutions, is also entering the soil carbon market, and today announced the first UK carbon credit arrangement with Philipson Estates on Blaston Farm in Leicestershire UK involving 230 hectares (568 acres) and absorbing 5,000 tonnes of CO2 over an initial 12 month growing season (as well as increasing worm count by 7 times). The baseline and net measurement, carried out by Ecometric, includes the total CO2 sequestered, less greenhouse gas emissions from across the farm and its wider activities over the same period. Whilst much smaller than the US, if the Soil Carbon Code under development is progressed and government subsidies aligned to soil carbon, we could also see more such deals in the UK in future.
Elsewhere in Europe a large ecosystem of issuers, measurement firms and assurance firms is also emerging with the likes of Soil Capital issuing credits across France, Belgium and the UK, and companies such as Downforce and Ecometric providing satellite and physical based soil health measurements including carbon density. Downforce pioneer the analysis of SOC (Soil Organic Carbon) by creating a ‘digital twin’ of the land in question looking at not just farming impacts and methods but natural changes such as rainfall. In Australia, the Australian Soil Carbon Accreditation Scheme (ASCAS) has been developed to pay farmers a credit of $25 per tonne for following soil carbon sequester practices. Downforce are also providing SOC measurement and verification across Australia as the practice grows
The process for establishing and paying for these credits is becoming more standard. A baseline assessment is carried out either by the issuer directly or a 3rd party assessment firm. This baseline exercise assesses the level of carbon in the soil as of today based on the quality and amount of organic matter in the soil. It also estimates the potential for improvement, anywhere from 1-5 tonnes per acre. This is referred to as SOC potential. In order to achieve the SOC, the farmer has to commit to various best practices, in order to qualify and begin the process of capturing the carbon. A contract that provides cash for credits to the farmer, typically between 5 and 10 years, is then established. Typically 10-20% of the credits are withheld as an insurance policy in case practices are not followed or for other events (providers such as Indigo also take on the risk themselves). The issuer passes typically 70-80% of the value of the carbon credit to the farmer, some include the cost of monitoring and some do not – at present these costs can be significant.
New technologies will address the challenge of measurement, confidence and costs
No two soils are the same and whilst satellite imagery and monitoring has moved a long way, soil sampling at the baseline and through the duration is still essential, and relatively expensive. Leading companies such as Ecometric or Downforce are combining physical measurement from sampling, with satellite imagery and machine learning (using growing historical data sets) and ‘digital twins’. Ecometric claims 90% accuracy and the equivalent of 100 points per hectare of measured land. Despite these advances, costs for monitoring, verifying and reporting SOC changes can still be significant, in many cases even exceeding the SFI (Sustainable Farming Incentive) payments available. On top of this is the cost of new drilling and seeding equipment, to replace the old ploughing methods. As technology data improves, these costs should also reduce.
There are many measurement standards!
The question of which standards is not yet clear – there are various soil standards evolving and in use – initiatives such as the sustainable soils alliance in the UK, there is a European Database (ESDAC) that contains standard measures on soil qualities. Indigo in the US uses Verra (VM42 for soil), a well-known independent verification body, to certify the quality of the soil offsets, and there is also the ‘Gold Standard’ of SOC based on the UN’s SDGs which includes the SOC Framework Methodology and the Nori or Regen approaches in the US. These are just a few of the emerging standards broadly adopted for SOC measurements. The lack of clarity and on which standard might prevail or win in the standards race is an inhibitor today for the market, and a particular issue that holds back the UK market. Many industry experts argue that we need a ‘soil code’ similar to the Woodland Carbon Code (WCC) such as the Soil Carbon Code under development by the government backed Sustainable Soil Alliance.
The economic case is growing, but a pricing gap remains
The wide range of payments reflect both the difference in soils as well as the confidence and acceptance in this type of offset. Some schemes price per acre, some per tonne CO2eq – pricing can range from $7-$50 per acre depending on the initial soil carbon baseline and practices used (implying 3-30$/ Tonne Co2eq). This is low compared with carbon pricing in compliance markets. With more confidence in measurement and integrity, carbon pricing of today’s EU ETS price around €70 per tonne would imply a maximum of €140-$210 per year per acre. Indigo Ag have issued 20,000 credits now at $40 each, with total value of $800,000. This is an indication that the pricing gap of 2-3 times should close as confidence increases in practices and measurement increases and scale improves
Compared with the estimated cost of soil degradation in the UK $1-1.5 Billion, the case for higher payments, at least at a macro level is clear. Based on a quarter of farms in the UK participating in Carbon Offsets, this would generate £100m of additional payments (around 5% additional income per average participating farm) and sequester approximately 7 M CO2 Tonnes per year, a significant part of the UK’s 2035 net zero target and twice as much as the planned carbon capture schemes committed in the UK’s industrial decarbonisation target
The voluntary carbon market (VCM) is estimated to grow to $50B per annum, with nature based solutions such as forests, agriculture, land use representing a large proportion of the total. Soil credits in Europe, Australia and the US are probably no more than a few million outstanding today at best, so there is clearly a long way to go and a lot of demand. The other advantage of soil carbon capture credits, especially compared to other schemes such as forest restorations, are that financial, environmental and carbon benefits can be delivered within a year and there is almost no capital investment and small upfront costs.
In particular with rising fuel and fertiliser costs, the cost advantages of avoiding ploughing and laying fertiliser are even better. With land essential for food production restored and regenerated, the natural capital benefits are also clear. With improved testing, assurance and confidence these benefits are likely to become clearer, and as pricing for each tonne of carbon continues to increase, we should see more widespread adoption in both the US and across Europe as soil credits become a multi-million business for credit providers, measurement companies and significant revenue earner for farmers.
Fig 2. Soil Credit Issuers and Managers
Fig 3. Measurement Firms
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