Exploring land-based carbon investment

Agriculture and rural land use has been framed as a potential source of carbon assets, but is this really the right option for the types of businesses who are looking to invest in it?

For farmers and land managers, there may be potential for carbon as a new supplementary income stream, a way to add value to currently less productive land, and to meet supply chain compliance, such as through ‘insetting’ (i.e. carbon reduction projects that are funded, implemented and provide reductions attributed within the supply chain).

To ensure projects are financially viable – to operate as well as to invest in – current estimates indicate that their outcomes would need to be stacked; that is they must provide multiple outcomes, like carbon, biodiversity and other environmental benefits, each with their own income stream, to make the balance sheet add up. This flags risks of dependence on several income streams, and how conditions for these interact, such as additionality criteria. This should be a consideration (or concern) for the land manager, as well as the investor.

The transaction costs for getting carbon credits to the point of sale, can prove significant, especially for smaller scale projects (e.g. farm rather than landscape size), or those implementing new methods. These costs include monitoring, reporting and evaluation (MRV), as well as project management, legal and other professional fees, much of which cannot yet be automated. Given the current methods available, and both the costs and complexity of rigorous MRV for soil carbon offsets, there seems greater potential for Environmental, Social and Governance (ESG) investment in natural capital projects, than in the generation of carbon credits on a competitive global market, where the latter can be generated in developing countries far cheaper than in the UK.

Land-based business should also consider that selling of carbon and other natural capital assets could prevent future business opportunities and income, if those carbon markets were to collapse, increased or there was more stringent legislation or supply chain compliance. Both sellers and buyers of carbon and other natural capital credits should assess long term impacts on the carbon credentials, as well as income streams, under various potential scenarios, and projects should have plans to mitigate these risks. SAC Consulting offers advice and services to land-based businesses looking to assess their natural capital assets, management options and income opportunities.

It is important to understand these challenges, not only to urge caution for those interested in exploring selling or investing in carbon credits, but also in identifying alternative routes for investment in the land-based economy. Rather than looking to invest directly into farm businesses through investment in carbon credit creation projects, investors may find that some opportunities are more similar to conventional forms of investment, and the risk factors more centralised and manageable. These include supporting the development of emerging and fast-developing agri-tech, MRV equipment, and data-oriented software as a service (SAAS).

Through catalysing innovation, these would indirectly support land-based businesses to improve mitigation and sequestration activities (as well as optimise efficiency and long-term sustainability), both in practice and reporting, and reduce the transaction and implementation costs per unit of CO2 equivalent – an essential part of scaling the impact of carbon investment. Investors will want to keep an eye on proposed public-backed carbon price guarantees, which aim to de-risk and open up investment in carbon projects.

Another avenue is insetting of emissions in supply chains, allowing corporates with emissions targets to focus efforts and investment in carbon reduction within their own supply chain; this enables them to focus on what they know, and to collaborate with stakeholders who have collective interests and are accountable for outcomes of carbon reduction programmes.

The carbon investment landscape is evolving at a rapid pace, with new soil carbon codes and standards on the horizon to improve MRV and reporting of projects, and greater knowledge, resources and training available, enabling the industry to push for transparency in carbon trading and methodologies underpinning it. If you are considering investing in carbon projects and are overwhelmed by the variety of information available, seek advice from specialists to help make the right decision to suit your business.

Get in touch

anna.sellars@sac.co.uk