What are Carbon Markets?
May 11, 2023 | By ForGround by Bayer
Carbon markets are trading systems where governments and companies buy and sell carbon credits. Carbon markets, part of the larger ecosystem services marketplace, can play a part in helping governments and organizations achieve their target carbon footprint reduction goals. One carbon credit equals one metric ton of carbon dioxide or equivalent greenhouse gas reduced, sequestered or avoided altogether.
How Carbon Markets Work
Carbon markets deal in ecosystem services. Ecosystem services are provided to us by the natural environment. They can include maintaining clean air and water and preserving or restoring biodiversity. Some examples are using groundwater for irrigation and insects pollinating fruits and vegetable crops.
A marketplace of ecosystem services is a way to trade the conservation or restoration of these services. For example, a company may reduce its emissions of carbon into the air by half, but the other half isn’t economically feasible or possible to reduce. The company may then choose to compensate someone else who can sequester the carbon to offset their remaining carbon emissions.
There are two types of carbon markets: compliance and voluntary.
Compliance carbon markets are generally driven by government policy and require mandatory trades from national, regional or international players to regulate carbon emission allowances.
Voluntary carbon markets are where carbon credits are traded on a voluntary basis through various market-based systems. Voluntary carbon trading has some unique benefits, including direct financing for projects that drive biodiversity protection, pollution prevention and public health, and investment into finding new ways to lower the cost of adopting emerging climate tech.
How Carbon Markets Developed
Carbon markets aren’t new. The Kyoto Protocol in 1997 committed nations to reducing their greenhouse gas emissions by creating voluntary carbon market registries. From 2003 to2010, the Chicago Climate Exchange traded six greenhouse gasses, three of which relate to agriculture: carbon dioxide, methane and nitrous oxide. This market eventually closed due to a large amount of volatility in carbon credit prices.
In 2016, the Paris Agreement was signed by 194 nations. It created a goal to limit global temperature rise and established a framework for carbon trading systems. Most recently, the 2021 United Nations Climate Change Conference established a rulebook for carbon markets and declared a halt to deforestation by 2030.
There are several standards and markets which include international frameworks such as the Greenhouse Gas Protocol and the Science Based Targets initiative. Voluntary carbon market carbon standards include Gold Standard, Climate Actions Reserve, SustainCert and Verra. And finally, there are product labeling protocols such as the Carbon Neutral Product, Climate Neutral Certified and Responsible Source Certified.
Why Carbon Markets Are Needed
Carbon markets are emerging as a tool to help mitigate climate change and conserve natural ecosystems. The push to fight global warming has been gaining momentum among companies, consumers, and governments, each with its own unique set of values and considerations.
Corporate interest through voluntary approaches is driven by increased demand from investors and consumers to report the impact they have on the environment. Many corporations responded by making sustainability commitments which are tracked through initiatives like the Science Based Targets.
Globally, 1,957 companies have created science-based targets. Within the US alone, 566 companies have made commitments and 42 are from the Food and Beverage industry, including General Mills, Hormel, Kellogg’s, Johnsonville, Mars, McCormick and Co., PepsiCo, Coca-Cola, Tyson Foods, ADM, Cargill and Dairy Farmers of America. (1)
Consumer expectations have put these companies under pressure to make an impact on climate change. As Millennials and Generation Z become the largest groups of consumers in the world, they’re focused on purchasing products from companies with social and environmental initiatives.
A recent survey found that 75% of US consumers are concerned about the environmental impacts of the products they buy, and that 66% are willing to pay more for sustainable products. (2)
The current US government is pro-climate change mitigation, and politicians have spent billions of dollars to achieve it. It’s been surveyed that two-thirds of Americans think the government should do more about climate change, (3) and many climate-smart policies get support from both parties. The money allocated for climate-smart programs impacts the country in ways which may provide opportunities for additional income for farmers.
One example of this spending is the Inflation Reduction Act which included $20 billion for USDA programs ACEP, CSP, EQUIP and RCPP, plus it created potential for the US biofuel sector. Thanks to investments and tax breaks on renewable diesel and sustainable aviation fuel, new refineries and expansions are planned in the US and Canada.
Farmers may have the opportunity to supply those refineries with grain that has a lower carbon intensity score (i.e., grain grown using regenerative farming practices like cover crops, strip-till or no-till) so that the refinery gets a larger tax credit. That money can then be provided to farmers through premiums on grain.
ForGround by Bayer can help farmers get a jump on adopting cover crops, strip-till and no-till practices and earn income through the Bayer Carbon Program. With exclusive agronomic resources and discount programs, ForGround helps implement these new techniques and rewards farmers with reliable income streams for adopting them. (4) Farmers may also share in the upside if carbon credit prices increase.
The benefits for farmers – improved soil health and resiliency, new income streams and overall stronger farms – will benefit everyone else around the world, too.
1. Companies taking action. Science Based Targets. https://sciencebasedtargets.org/companies-taking-action. 2. Majority of US consumers say they will pay more for sustainable products. Sustainable Brands. https://sustainablebrands.com/read/marketing-and-comms/majority-of-us-consumers-say-they-will-pay-more-for-sustainable-products. 3. Tyson A., Kennedy B. Two-thirds of Americans think government should do more on climate. Pew Research Center. https://www.pewresearch.org/science/2020/06/23/two-thirds-of-americans-think-government-should-do-more-on-climate/. 5. Payments subject to: (a) verification by Bayer that the selected practices have been performed and, for historical payments, that carbon assets have been generated; and (b) all other applicable terms of the Bayer Carbon-Smart Master Services Agreement.
This Bayer Carbon Program described in this material is subject to the current version of the Bayer Carbon-Smart Practices Master Agreement. The information is to aid in the understanding of the Bayer Carbon Program and does not change or modify the Bayer Carbon-Smart Practices Master Agreement in any way.
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