Regenerative agriculture: the farms race of the carbon markets

Introduction

Globally, current agricultural practices are dominated by large-scale intensive farming, which incorporates high inputs of fertilisers and water, a lack of cover cropping, and significant soil disturbance. Whilst these practices result in large yields per hectare, they can also degrade soils and result in declines in soil carbon and overall soil health. The term regenerative agriculture encompasses a variety of activities with the shared goal of changing modern agricultural practices to improve soil health and reduce carbon intensity (Figure 1). Through these changes, emissions can be either avoided through altering chemical and water inputs or removed from the atmosphere through enhanced soil sequestration.

While regenerative agriculture in general is becoming more widely adopted around the world as a means of reducing emissions and increasing soil health, it is not without its barriers. Some of the main barriers include: 

1. Financial barriers relating to a potential temporary or permanent decline in yield and subsequent loss of revenue.

   a. In some countries, financial barriers are further increased due to subsidies that incentivise traditional crop planting. 

2. Cultural and/or social barriers such as cultural practices, social norms, attitudes and beliefs, that oppose regenerative agriculture practices.

3. Technical barriers such as a lack of access to equipment or technical knowledge for implementation of regenerative agriculture practices.

The VCM offers a means to overcome many of these barriers through access to additional finance. This is of particular importance in these early stages of the sector's development due to the need for upfront finance to establish the landowner support systems that these projects put in place. 

Notably, recent reports and articles have criticised the low revenue from carbon finance for enrolled landowners, suggesting that they are unlikely to provide sufficient financial incentives to overcome financial barriers. However, this does not consider the proportion of carbon finance which is used by the project developers to aid in overcoming cultural, social, and technical barriers, which are sometimes the more prevalent barriers to project adoption. Furthermore, this does not consider the additional potential financial benefits landowners receive over the long term through altering their practices and gradually improving their land’s fertility, reducing their reliance on costly inputs. 

Recently, numerous regenerative agriculture projects have been established, within the VCM (Figure  2). For example, there are now 57 projects in validation, 33 projects in development and 3 either registered or awaiting verification under Verra’s VM0042. This makes VM0042 the methodology that has the most associated projects in this sub-sector, despite only being active since 2020. Other methodologies in the sub-sector include Verra’s previous regenerative agriculture methodology VM0017 which was made inactive on 31st March 2023, the Climate Action Reserve’s U.S. Soil Enrichment Protocol Version 1.1, Gold Standard’s Soil Organic Carbon Framework Methodology v1.0, Plan Vivo’s Small-Holder Agriculture Monitoring and Baseline Assessment, and Nori’s US Cropland methodology.

Further, there is a growing interest in the sub-sector from a range of stakeholders across the VCM, due to the sub-sector’s ability to provide scalable, long-term carbon sequestration, and credits which are highly likely to be CORSIA eligible. Other factors which may be driving the large-scale interest in regenerative agriculture in the VCM include the generation of ‘close to home’ credits for buyers (most projects are established in the global north), and the corporate appeal of such a tangible sub-sector. Nevertheless, ensuring the quality of credits issued by these regenerative agriculture projects is still paramount to ensuring the necessary up-front and continual funding for these projects to succeed in the VCM.

The projects currently being developed under VM0042 have an annual total issuance of 65 million credits and a total cumulative planned issuance of around 2 billion credits between 2017 and 2121 (Figure 3). When considering the VCM issuance in 2022, if all projects are approved, then regenerative agriculture would become the largest NBS sub-sector by annual issuance, and second in issuance only to renewable energy which has issued 97 million credits.

Within this piece, we take a look at the regenerative agriculture sub-sector, and potential factors influencing our ratings of projects employing the foremost VCM methodology chosen by projects in this subsector, Verra’s VM0042.

The leading methodology - VM0042

As discussed above, whilst there are only a few methodologies through which regenerative agriculture projects can be accredited in the VCM, the one that is currently receiving the greatest attention is Verra’s VM0042 Methodology for Improved Agricultural Land Management, which has been active since 2020. This methodology quantifies the greenhouse gas emissions reductions from altering inputs and soil organic carbon removals resulting from the adoption of improved agricultural land management practices, relative to a historic baseline period. It includes multiple activities that can be applied to both arable (crop-producing) and pastoral (livestock grazing) agricultural land (Table 1). 

The methodology is associated with complexities related to reliably estimating soil carbon stocks, which play a key role in most eligible project activities. Further complexities are introduced as this methodology allows for multiple parallel approaches to be used to estimate soil carbon stocks. 

Table 1. A summary of the eligible regenerative agriculture activities that projects can conduct to issue carbon credits under VM0042, the type of credits issued and which land types they can apply to - pasture and/or cropland.

Additionality of regenerative agriculture projects

The primary additionality considerations for projects in this sub-sector are barrier analysis, common practice, and policy support.

Aside from financial barriers to the adoption of regenerative agriculture projects, there are many social and technical barriers which include but are not limited to: 

• Lack of access to necessary equipment and technology.

• The risk tolerance of landowners and their beliefs about the feasibility of adopting new practices. 

• A lack of landowners' openness to new ideas and perceptions of the magnitude of the change. 

Where barriers are cited by a project, we will assess the supporting sources, and consider alternative sources for comparison. Common practice is typically analysed with respect to the penetration rate of regenerative practices nationally or regionally. Our review of relevant literature will inform our assessment of any benchmark rates of adoption used to determine additionality. 

Policy typically plays an important and often complex role in the agriculture sector in many countries. Policy analysis therefore forms an important part of our rating assessment. This requires assessing in particular the relevant regulations, subsidies and incentives that support the use of regenerative agriculture or that may hinder it by encouraging traditional intensive techniques.

Carbon accounting & regenerative agriculture

VM0042 proves a multi-faceted example of carbon accounting in regenerative agriculture as it allows for the use of all the three main methods of accounting: direct sampling, modelling and the use of literature values. Projects operating under VM0042 can quantify their emission reductions using these three different approaches (Table 2) with each approach being applicable to a different selection of carbon pools from which carbon credits can be claimed. The first two approaches focus on soil carbon quantification, while the third is more relevant to the calculation of greenhouse gas fluxes from changes in inputs or practices. For the purposes of a Soil Carbon focus, we will discuss approaches 1 and 2 below.

Table 2. A summary of the three approaches that projects can take to quantify carbon avoidance and removals under VM0042. 

Of these approaches, the one we see predominantly being adopted is the measure and model approach. This approach allows projects to develop larger aggregate projects which include multiple landowners and span multiple fields covering multiple jurisdictions, as once the model is calibrated it can be supplied with inputs from multiple sites.  

The most prominent source of leakage risk in the sub-sector is that related to reduced production relative to the baseline scenario. Reduced production could lead to either market leakage or activity shifting leakage, depending on multiple factors. Where landowners have other land available that’s not managed under regenerative agriculture practices, any loss of productivity may result in more intensive farming practices being adopted in these areas. Alternatively, where the landowners' overall productivity is impacted, then market leakage is likely to occur. 

Nevertheless, regenerative agricultural practices are likely to have a positive leakage impact. One particular example would be positive ecological leakage, where the project practices have a wider effect on soil quality in areas outside of the project area. If productivity increases, there is the potential for positive market leakage as the project's products could displace the production of products from more carbon-intensive sources. Finally, positive activity leakage could occur as other local landowners observe the benefits of project activities, and choose to adopt them themselves.  

Uncertainty risk in quantifying soil carbon stocks

Estimating soil carbon stocks possesses some inherent uncertainty due to the potential high variability of soil carbon stocks spatially and with depth. Minimising this uncertainty is fundamental to the generation of high-quality carbon credits. 

We assess each project's standard operating procedure for soil sampling, considering factors such as sampling density, stratification, and sampling repetition, basing our view on academic literature and in-house expertise. There are many commonly adopted sampling techniques (Figure 4), however, those that best account for the aforementioned factors are most likely to reduce over-crediting risk. 

There are other notable sources of uncertainty for regenerative agriculture projects such as those introduced by soil carbon modelling, and those introduced through the selection of control sites which VM0042 seeks to quantify and minimise. 

To account for uncertainty from imprecisions in the model input data, projects using approach 1 under VM0042 conduct an uncertainty assessment using an error propagation technique to quantify the effects of the imprecisions derived from the input data. Under these techniques sampling and modelling uncertainty are assessed and discounted prior to project issuance, reducing the associated over-crediting risk. We consider this approach to be good practice and likely to account for errors in the calculation of predicted ex ante issuance.

Approach 2 to soil carbon stock quantification introduces a new aspect of uncertainty, the use of control sites. The distance between control sites and the project locations, soil types, climatic conditions, or minor deviations in baseline practices can all impact the suitability of a control site. Therefore, the choice of appropriate control sites, as described in Figure 5, is paramount to minimising uncertainty risk and plays a key role in our assessment of over-crediting for projects employing this approach. 

Once all uncertainties are quantified, the combined uncertainties are then deducted from the project’s issuance. The method by which uncertainties are deducted varies by methodology, with VM0042 introducing a more conservative approach compared to past regenerative agriculture and soil carbon methodologies (Figure 6).

Sub-sector-specific non-permanence risks 

Soils can possess long carbon residence times of up to millennia under certain conditions. As a nature-based sub-sector, projects must assess non-permanence risks and deposit a proportional volume of credits into the standards bodies Agriculture, Forestry, and Other Land Use pooled buffer account. 

One of the main risks of non-permanence for regenerative agriculture projects is landowner compliance with chosen project activities, as reverting to previously conducted, more carbon-intensive activities could lead to a reversal in achieved emission reductions. This risk is particularly poignant for regenerative agriculture projects as soil carbon stocks are relatively sensitive to changing activities.

In order to confirm the landowner’s compliance with the project’s land management practices, and reduce the risk of non-permanence, monitoring of activities is often conducted via an app or device into which landowners detail and record their land management practices by area. This is often combined with monitoring of fields through remote sensing techniques. In some cases, farm machinery and its usage may be monitored via GPS to provide further evidence of land management compliance (Figure 7). We consider the implementation of these monitoring techniques to be key to establishing permanence in regenerative agriculture projects.

Sources of information risk

The regenerative agriculture sub-sector faces certain sources of information risks that can impact our assessment of the project's carbon efficacy. For example, as previously discussed, a fundamental risk of non-permanence in regenerative agriculture is the prolonged compliance of the landholder. This is typically assured through a contract between the landowner and the project developer, the terms of which will vary between projects. The duration, and penalties for non-compliance set out in this contract are one of the pivotal points of our assessment of potential non-permanence risks of projects within this sub-sector. 

Another hurdle to assessing the carbon efficacy of regenerative agriculture projects operating in the VCM is information disclosure relating to the spatial distribution of enrolled fields and a breakdown of the agricultural practices occurring within each of them. However, disclosure of such data raises concerns relating to the privacy of enrolled landowners and may result in projects being unable to publicly disclose such data. 

The role of ex ante ratings

As discussed in the previous section, regenerative agriculture projects face potential information risks due to landowner privacy, thankfully BeZero has a solution. Unlike our ex post rating, our new ex ante rating allows for our analysis to consider private information shared under a non-disclosure agreement. Thereby, removing this information disclosure barrier and allowing us to better assess projects within the regenerative agriculture sub-sector. 

Furthermore, due to the nascent nature of the sub-sector, with nearly all current VM0042 projects being in the development, validation, or verification stage, the ratings of future (ex ante) credits would aid in establishing confidence in the sub-sector. Ex ante ratings also align well with projects in this sub-sector, as those employing approach 1 to estimating carbon stocks employ modelling techniques which reduce the risk of overestimating future credit issuance, particularly when combined with the aforementioned uncertainty quantification and deductions employed by the methodology. 

Conclusion

Regenerative agriculture is a rapidly expanding sub-sector, with high interest being expressed by various stakeholders. However, with a limited number of registered projects questions remain as to the quality of credits produced by these projects, emphasising the need for carbon ratings agencies within the sub-sector. 

In our view, greater focus should be given to the discussion around non-financial barriers to regenerative agriculture adoption, such as traditional, social and technical barriers. In most scenarios is a combination of all of these barriers that necessitates the need for additional sources of funding, such as carbon finance.

One of the most important aspects of regenerative agriculture projects is ensuring that landowners stay enrolled in the project, and continue to operate under the prescribed activities. This can be better ensured through the use of clear contracts between the project developers and landowners, effective monitoring of land management activities, and the appropriate distribution of carbon revenues. 

Finally, uncertainty risks are introduced for all projects including soil carbon, particularly concerning carbon stocks' quantification. Nevertheless, methodologies have adapted over time to account for these risks, through the inclusion of appropriate sampling campaign guidance and the application of more rigorous uncertainty deductions.