How to stop climate-positive becoming the price of entry

January 30, 2022

Victor Hugo is credited with the saying, “Nothing is more powerful than an idea whose time has come.”

The idea of the inextricable link between farming and climate action feels like it is in that powerful phase now. Every day we are exposed to more reasons to link the two together, and more examples of ways that farmers can be rewarded for their role in adapting to, and providing solutions for managing climate change.

There are several key ways that climate-positive action can be recognized and rewarded:

  • Direct payments for the provision of carbon credits
  • Improved pricing and other favorable incentives from supply chain partners
  • Access to lower-cost finance and risk solutions

Choice in ways to be rewarded can work against farmers.

Choice is a good thing, but in functioning markets, the balance of supply and demand sets the price.

It is hard to ignore the recent dramatic increase in prices for carbon offsets, especially high-quality offsets like ACCUs supplied by Australian farmers. The price direction appears to be largely a function of demand outstripping supply, but there are complex reasons for the imbalance. Many of these programs are complex, proprietary, and effectively lock farmers into a specific style of economic reward.

Long-term lock-in can tip the balance to supply, and oversupply will drive prices ever downward.

Recognition needs to be decoupled from reward

Farmers are wary of certification and compliance programs because eventually, they tend toward zero-margin.

When everyone must supply products with the same required specifications, there is no differentiation in supply, and prices for premiums will evaporate. To prevent this commoditization of sustainability and climate-action credentials, the recognition of an outcome needs to be able to attract different types of rewards without uneconomic switching costs. If prices move too far down, the farmer can switch programs.

You might call this a requirement for the fungibility of ecosystem service credits.

The good times are unlikely to last without the flexibility of reward.

There is exciting momentum to see farmers properly recognized and rewarded for climate-positive action.

Before we get too distracted with the bull-run on offset credits, we need to make sure that farmers will have a choice in ways to see their efforts rewarded, and not end up with a plethora of incompatible trading systems that leave farmers with impossible choices and vanishing rewards.

This post was created with Typeshare