Short-term carbon sequestration in agriculture can be converted into permanent emission reductions by means of an offset ratio

Article: Offset ratios and temporary contract designs for climate integrity in carbon farming

Authors: Lötjönen Sanna, Kulovesi Kati, Lång Kristiina, Ollikainen Markku

Journal: Carbon Management

Year: 2024

How can short-term carbon sequestration in agriculture be transformed to match permanent emission reductions?

Carbon sequestration from agricultural carbon farming practices is often short-term. Short-term carbon sequestration does not match the permanent emission reductions that operators in other sectors make to offset their own emissions. If agricultural carbon sequestration is included in the carbon market, it is important to consider the temporary nature of sequestration to ensure climate benefits.

In this study, an offset ratio approach was developed to examine how short-term carbon sequestration in agriculture can be converted into a permanent emission reduction. The offset ratio is a measure of how much of a unit of emissions is replaced by a unit of temporary carbon sequestration. The offset ratio can therefore be used to determine how much short-term sequestration is needed to sell one carbon credit unit, i.e. one unit of permanent emission reduction.

The offset ratio was calculated using a discounting method, a concept used in economics to calculate the present value of future monetary income. Payments received at different times need to be made comparable. The idea is that a euro received today is worth more than a euro received a year later. Similarly, reducing emissions or increasing carbon sequestration now is more valuable for climate change mitigation than a similar change in a year’s time.

The use of catch crops as an example of a carbon farming practice

The offset ratio was applied to the profitability of carbon farming, assuming that a market price was established for the carbon credits produced. Catch crops were chosen as the carbon farming method. Three countries, Finland, Denmark and France, were included in the analysis to capture different climatic conditions.

The study looked at a situation where a farmer contracts to grow a catch crop for the duration of the contract and is compensated for the carbon credits produced. In order to focus on the analysis of the offset ratio calculation, certain assumptions were made about the carbon loss, the impact of the catch crops and the farming practices. Without catch crops, carbon loss was assumed, and even with catch crops, the assumed baseline was net carbon loss. The use of catch crops in mineral soils without ploughing was assumed to add 175 kg of carbon per year to the soil in Finland, 258 kg in Denmark and 166 kg in France. This carbon input was assumed to decrease annually by 3% in Finland and 1% in Denmark and France. These figures are based on previously published studies. The calculation took into account the cumulative carbon increase over the contract period, i.e. in practice the farmer would be paid for adding carbon and maintaining the stock of added carbon.

The cost of the catch crops used in the study was 77€ per hectare for Finland, 41€ for Denmark and 57€ for France. For Finland, the cost was based on ProAgria’s Tuottopehtori service. To avoid overestimating the climate benefits, it was assumed that the farmer would stop carbon farming after the contract ends.

In Finland, longer carbon credit contracts or higher carbon prices are needed compared to countries further south

The economic viability for farmers varies from country to country: in Denmark and France, carbon farming can be profitable with shorter carbon credit contracts, while in Finland longer contracts or higher carbon credit prices are needed.

• According to the study, 5-year contracts are not profitable for farmers in any country at the carbon credit prices studied, ranging from 20–80€/tCO₂e (tonnes of carbon dioxide equivalent).
• A 10-year contract is profitable in Denmark if the carbon price is at least 50€/tCO₂e and in France if the carbon price is at least 80€/tCO₂e.
• In Finland, even a 15-year contract is only profitable when the price per tonne of CO₂ equivalent is 80€.
• If the carbon price is 20€/tCO₂e, contracts must be 30 years in Finland and France, but in Denmark a 15-year contract is sufficient.

In practice, the length of contract and the price of carbon credits needed for economic viability vary from farm to farm and from year to year. For example, a higher annual cost of using a catch crop will increase the required contract length or carbon credit price.

Researchers recommend using an offset ratio to compensate permanent emission reductions through carbon sequestration in agriculture

The discounting method showed that the existing crediting programmes provide more credits than would be justified in terms of climate benefits. The use of offset ratios and the recognition of the temporary nature of contracts will improve the climate integrity of carbon sequestration contracts. The economic viability of carbon farming depends on the length of contracts, the amount of carbon sequestration and the price of carbon credits. Existing programmes need to assess and possibly adjust their offset ratios to improve their integrity and climate benefits.

The next phase of the study will examine the impact of a potential increase in crop yield by carbon farming on economic profitability.

The research was part of the STN MULTA project of the Carbon Action network.