Australia and New Zealand are revamping their emissions trading schemes to tackle the urgent need to combat climate change and hit their national targets. One question with big implications for food & agriculture is: should major emitters be allowed to use nature-based offsets (e.g., re/afforestation, soil carbon sequestration, etc.) to meet their climate targets? 

On one side, some argue that allowing big emitters to use the relatively cheap offsets from forestry, land, and agriculture (or “FLAG” sectors, as they’re commonly called), is a cost-effective way to combat climate change..

On the other side, some believe we should force emitters to do the hard work to reduce their emissions, rather than allow them to net out their emissions with removals that come from other places. 

Rather than weigh in, let’s imagine we live in a future where, as the FLAG guidance from the Science Based Target Initiative (SBTi) advocates, we separate emissions from geologic carbon cycles (i.e., fossil fuel related) from emissions from biogenic carbon cycles (i.e., from FLAG sectors). 

What would such a change mean for agriculture and agtech?

Big costs to big industries

In this future, companies outside agriculture and food with big GHG footprints would not be able to source carbon credits from the agricultural sector as they’ve done in the past. This means fewer opportunities for farmers to earn additional income by selling carbon credits into (voluntary) offset markets.

Instead, these companies will scramble to reduce their emissions at source, making massive investments in new technologies. This is likely good for the planet, but could have pretty scary consequences for energy prices (and therefore downstream markets in agriculture like fertilizer) in the near term. 

Business model scrutiny for agtech startups

Recently there’s been a massive influx of agtech startups working to help producers improve their emissions credentials. While some approaches also stack up commercially for the producers (e.g., because they have a productivity benefit), others have business models that are dependent on revenues from carbon credits. 

In a world where we bifurcate emissions by source, will these companies crash and burn or find ways to pivot? There could certainly be new opportunities to retarget agricultural emissions-focused trading infrastructure, like a per animal ‘cap and trade’ system for ruminant livestock.

Bye bye carrots, it’s sticks for producers 

It might seem like this future would mean less complexity for producers, as they’d no longer need to navigate whether, and how, to participate in offset markets. 

However, companies embedded in the FLAG sectors, such as food & fiber processors, CPG companies, and grocery retailers, will still be under pressure to reduce their emissions, and will uniquely be able to leverage removals that come from the farms in their upstream value chains.

Rather than offsets, though, the “insetting” strategies these companies use to incentivize practice change could be quite different from the traditional model of paying a price per tonne of CO2e to farmers. While right now companies are offering premiums, when they no longer have to compete with the “carrot” of an offset payment, a more stick-like approach might emerge. 

Ultimately, efforts to reduce emissions on farms may become a requirement to access certain value chains, sources of finance, and downstream markets. 

So, could bifurcation of emissions actually happen?

This is just a thought experiment, as it’s uncertain whether the separation of geological and biogenic emissions will be implemented on a global scale. But with SBTi leading the charge with voluntary rules that companies are adopting, it’s at least possible.

When it comes to the rules set by regulators worldwide, there’s much less certainty. 

For example, in the EU, heavy industries cannot use offsets from land and agriculture sectors. In New Zealand, they can use forestry offsets but not agricultural ones. Meanwhile, in Australia, heavy industry can use offsets from any source, including forestry and agriculture.

So one possible future is that there might still be demand for agricultural offsets in regulated carbon markets in some parts of the world, while demand in voluntary markets may decline. 

Amidst all this change, clarity can be hard to find. However, one thing is crystal clear: we need to take climate action urgently, and we can't afford to wait and see. The costs of inaction are just too high.

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