Understanding the two types of carbon market

Carbon markets – the world of emissions tradings and gaps greenhouse gases – are becoming an increasingly important part the economy. They are increasingly participating in global efforts to combat climate change. Jhey too increasing relevance for farmers and producers, as we recently discussed, representing an opportunityy for an additional income stream.

These carbon markets can be complex, but we’ll break down the basics in this series of articles so that you can understand what carbon markets are, how they work and What do you want to know.

One of the first steps in navigating carbon markets is to understand both vast types of market: the obligatory marketand the voluntary market. The obligatory market is to governregulated, where companies have a legal limit to their emissions but can buy or sell quotas with other companies ssimilar to the oldd milk quotas. The voluntary market is where companies can choose to offset their emissions by buying generated credits through carbon sequestration projects. Both markets operate on the basis that 1 carbon credit = 1 ton of CO2 equivalent.

Of these two, the voluntary market is the most relevant for farmers and producers, because there is a potential opportunity to sell carbon credits. However, it is still worth to be aware of the obligatory market, as buyers can ask their farmers to reduce their emissions within limits set by the government.

Both markets are explained below. If you want to know more about why you should care about carbon markets and what prices carbon credits can bring you, see our previous article.

Obligatorycarbon markets

More obligatory carbon markets operate on a “ceiling”andtrading system”. The government set a limit of how much greenhouse gas each company can issue – Hood”. If a business is under their allocation, they can sale their additional allocation to a company that would otherwise exceed their limit – exchange”. The level can be lowered each year to encourage companies at reduce andeir emissions.

In the United Kingdom, this market is managed under the UK Emissions Trading Scheme (UK ETS), which replaces the EU ETS which we were part of before. Eis a cap and trade system applies to energy-intensive industriesthe power generation sector and aviation. OOther than that, small emitters are given targets instead of a quota, and only ultra-small emitters to have to monitor their broadcasts. For companies covered by the program, company emissions are measured, verified and audited. Allocation for every businessthere Is then calculated.

Emission allowances are kept in the UK Emissions Trading Registry. This register follows who holds the allowances, how they are traded between issuers, and also holds details of verified emissions and allowances surrendered by operators.

The UK ETS does not cover agriculture. It is only when the mandatory scheme is linked to voluntary compensation schemes that there may be opportunities for farmers. However, it is it is good to have a basic understanding of mandatory schemes as they form an important part of global carbon marketsand the prices on these markets can influence the prices on the voluntary markets.

Want more details? Rou our leader Environments Carbon outlook.

Voluntary carbon markets

Inot voluntary walkingkets, participation is optional. Companies choose to to buyin in to reduce their carbon footprint. The carbon credits they buy can come from severall types of environmental projectseither those who “removement» emissions, or those who “avoid” emissions. Remobile shifts are generated from projects that extract carbon from the atmosphere, as to plant trees. Avoidance offsets are generated by projects that prevent emissions from being released intoto the atmosphere, as prevent an area of ​​forest from being felled.

The voluntary carbon market system is not regulated by governments. Instead, to ensure the integrity of traded carbon credits, there are independent certification bodies that have set standards to check projects against, providing accreditation. However, with multiple certification bodies, this leads to market fragmentation. The perceived the quality of the different carbon credits can too be changeablewhich in turn affects both the demand and the price of eohse credits.

Jhere is four key attendees on the voluntary carbon market:

  1. Project developers – Coordinate and manage carbon credit projects. In agricultureyouits might be for a single farm, or the work of several farms could be aggregated to make one more waitrasset package.
  2. Standards body – these set standards for projects, ensure the certification of carbon credits and keep records of these projects
  3. Brokers – buy carbon credits and resell them to end buyers
  4. End buyers – Buy carbon credits to offset their emissions

What voluntary schemes are available?

There are two UK specificvs accredited programs that landowners can get involved in Forest Carbon Code and the Bog Code. These schemes are backed by the UK government, and pdetails of the project are held in public view by IHS Markit in the UK Terrestrial Carbon Registry.

There are also many international systems and standards that could be used by farmers. It is possible to generate carbon credits through sequestration – by increasing soil carbon – or by reducing your emissions through improved agricultural practices. These programs are not supported by the government, but the projects are always subject to independent verification and accreditation.

What should farmers do now?

Measure your carbon footprint. This is important because over the years of benchmark data you can provide, the better. Even if you never end up getting into a carbon credit program, Carbon footprint measurement is becoming increasingly important, and you might find a buyer or decision maker asking for it in the future. The are a range of tools but the pick the one that works best for you and keep using it – consistency in method is key to implement improvements over time.

Consider your optionssee at diets that are available and ask yourself if they apply to you. There are many questions to consider, such as: Do they cover your businesses? Can you meet their requirements? Do I must own the land or negotiate with the owner? Owill I make a profit?

Deciding to act or wait. Sentiment around the markets too noted that carbon credits are likely to increase in value over the long term. Moreover, he may not be clear at present what requirements could be imposed on farmers in the future to reduce their own emissions. This may mean that it is better to wait to sell your potential carbon credits. However, others argue that if farmers are already making regenerative changes to their practice, they risk losing the monetization of etheir results if they wait.

Voluntary carbon markets can be a complex place, with the role of agriculture still developing. AHDB aims to clarify these areas in the future, to enable farmers to make business decisions in this area.

Want more information? See our previous article on why you should care about carbon markets and what prices carbon credits can fetch.

Good produce more analyzes in the coming months. In the meantime, you can read the opinion of our Environmental Manager Carbon outlook.