November 30, 2022

Carbon credits quantify emissions reductions

BLOOMINGTON, Ill. — Just as a bushel is used as the volume of soybeans traded, a carbon credit of one metric ton equivalent unit is a measurable verifiable emission reduction.

“The standard currency that’s oftentimes used around carbon credits is a carbon dioxide equivalent or CO2e,” said Adam Kiel, AgOutcomes executive vice president.

AgOutcomes is a subsidiary of the Iowa Soybean Association.

Kiel, who also co-administers the Soil and Water Outcomes Fund with ReHarvest Partners, was the presenter in the Illinois Soybean Association’s ILSoyAdvisor webinar on carbon markets and related issues.

The carbon dioxide equivalent as related to carbon credits could include avoided greenhouse gas-based emissions or the removal from the atmosphere. It may also include nitrous oxide reductions.

The carbon credits can then be sold in the carbon markets that are typically large companies that want to reduce net emissions.

“There are many different things that make up a carbon credit, but all of the programs use standard units in that one metric ton of carbon dioxide equivalence is the tradable, sellable unit,” Kiel said.

Reduction Vs. Removal

Carbon credits can be accumulated for reduction or removal of emissions. Reductions are opportunities to reduce the emissions that are resulted with producing a crop or on the farm.

“Actually, reducing the amount of CO2 that’s emitted into the atmosphere or the amount of nitrous oxide that is emitted, those are reductions. Those have a higher value in today’s market,” Kiel noted.

“So, if we’re going to emphasize an area where carbon credits should be produced, it’s probably in the emission reduction. The good thing about emission reductions is emission reductions that occur in one given year can’t be reverse in a subsequent year. When a reduction occurs, it occurs.”

Carbon removal is oftentimes more associated to generating a carbon credit in discussions.

“This is carbon farming, soil storage or soil sequestration. This is taking CO2 from the atmosphere and putting in the soil through photosynthesis and keeping it there. This is where a lot of opportunity lies, but there’s also a lot of risk,” Kiel said.

Soil storage can be reversed if farmers revert back to intense tillage or stop doing certain practices. Therefore, they’re a little higher risk and slightly less valuable when it comes to the carbon credit market.

Offset, Inset Credits

“Not all carbon credits are the same. There are two different types of carbon credits, depending on who purchases the credits,” Kiel continued. “Offset credit is probably what you think of when you think of a carbon credit.”

An offset credit is a carbon credit generated outside of a country or company supply chain to compensate for a country’s or company’s emissions.

An example is carbon credits that are produced on farms that are used by airlines to offset emissions when they fly and burn jet fuel.

“Agriculture has very little to do with airplanes flying and the fuel usage outside of sustainable airline fuel. But traditional petroleum-based airline fuels have nothing to do with on-farm carbon credits. Therefore, the credit that an airline purchases from agriculture is called an offset credit. It’s offsetting emissions that are associated with a company’s operations,” Kiel said.

Inset credit is a carbon credit secured through investment within a company’s supply chain.

“A good example of this is PepsiCo, which uses a high volume of corn for high fructose corn syrup. If there’s a credit that’s generated that’s purchased by Pepsi and that credit is produced on a farm that’s in a draw area for a Pepsi facility, that’s called an inset credit. So, there’s a stronger tie to a company and the commodity and the product through an inset credit,” Kiel said.

There is currently a greater interest in inset credits in agriculture than there are offset credits.

“Offset credits oftentimes get a bad rap because companies are purchasing their way out of some sort of commitment that they’ve made by purchasing offsets,” Kiel noted.

“Airlines are a good example. Other countries that have high emissions also fall in this category where they don’t do the things that they could do to reduce emissions and they’re purchasing offsets as a way to achieve their goals. Is that the right or wrong way to do things? I’m not the one to say that, but just know that offset credits fall in that category.

“Whereas with inset credits, we’re really trying to produce a lower carbon intensity commodity that’s used by someone along a supply chain, whether that’s the first point of purchase, the processor or creator of a food product or the end retailer. There’s a closer tie to a specific supply chain when you’re dealing with inset credit.

“My prediction is that in agriculture you’re going see more emphasis placed on inset credits, meaning companies within the ag and food and beverage supply chain are going to want to work with farmers to produce these credits and less of a focus on offset credits.

“The Soil and Water Outcomes fund only deal with inset credit. We work with ag and food and beverage companies to produce credits from farms that are in specific supply chain.”

Credit Generation

There are multiple ways to generate carbon credits. Direct air capture involves removing carbon dioxide from the atmosphere and compressing it to be injected into geographical storage or for some other use.

Kiel said one example is capturing CO2 emissions from ethanol plants, pumping it to certain locations and putting the CO2 deep into the ground.

“All of those tons of carbon dioxide that are capture are carbon credits that are being put in the ground and stored there for a long period of time. Those are high value credits because they’re stored in the ground for generations, probably forever, but that comes at a high cost — constructing pipelines, construction of air-capture technology,” he said.

“That comes at a high cost per credit. Over time that will probably become more cost effective as technology improves, the government seeks to promote that kind of activity and perhaps subsidizes or provides tax credits for those technologies. That is going to create a lower cost per ton on the technology side.”

Other examples of generating carbon credits are anaerobic digestions of waste streams and grassland and forest restoration.

Farming

Most carbon programs are focused on carbon farming that sequesters carbon in the soil or implementing practices that reduce greenhouse gas emissions.

Practices that reduce greenhouse gas include nitrogen use efficiency, lower fuel usage through less field passes and digesters.

“Removals are ways that we can pull and keep carbon in the soil. Cover crops, more diverse crop rotations, reduced tillage, continuous cover are things farms can do to pull CO2 from the atmosphere, put it in the soil and keep it there,” Kiel said.

“The key is keeping it there. These removal activities can be reversed, which is a challenge for the future and how farmers are going to view and enter into carbon markets. The purchasers of the ultimate asset are going to have to decide whether or not they’re comfortable with the reversal risk that exists within this carbon market.”

Tom Doran

Tom Doran

Field Editor