Payment for the Environmental Quality of food as a market alternative to carbon credits against climate change
Introduction:
Several studies suggest we may soon fail to achieve the Paris Agreement's goal of limiting global warming to 1.5°C. Scientists say we may reach this average temperature rise by the early 2030s¹ . To meet the agreed targets, it is vital that we significantly scale up our climate ambitions and actions. This can be done by strengthening current mechanisms and introducing new decentralized and agile mechanisms to complement carbon credits and the targets set by the Paris Agreement.
In this context, we discuss and analyze here why "Payment for the Environmental Quality of Agricultural and Livestock Production" – a system that rewards the impacts of adopting sustainable agricultural and livestock practices – could quickly become a promising and scalable alternative market mechanism in the fight against climate change.
Payment Mechanism for the Environmental Quality of Food:
Payment for Environmental Quality (PEC) is based on the adoption of regenerative farming practices and Nature Based Solutions (NBS) known to improve the environmental quality of a farm or a supply chain. It has also been proven that regenerative farming practices can help increase the profitability of some crops , by optimizing the use of local resources and reducing dependence on external inputs through improvements in soil and agro-ecosystem health. The result is more resilient systems, with greater long-term profitability.
In this context, a farm's environmental quality is assessed by comparing its current environmental characteristics (which ensure the sustainability of production) with their maximum potential, considering local environmental conditions. The characteristics relate to four main categories underlying the sustainability of a farm’s agricultural production: carbon stock, biodiversity integrity, water resource health and soil health.
Measurement of environmental quality and the possible pricing of food based on that quality rest on two fundamental aspects, one conceptual and the other, market related.
The conceptual aspect:
The conceptual aspect of the Environmental Quality of production comes from the well-established economic theory of "environmental externalities" as the main cause of environmental degradation in agricultural activities. The price of commodities traditionally disregards any environmental footprint left by their production. This means that farmers who employ sustainable practices receive no bonus at all for their efforts, even when they contribute essential ecosystem services to society at large. This problem, known as "freeriding”, arises when the environmental costs of a sustainable grower's or a supply chain's behavior benefit society with no impact on food prices. Therefore, the exclusion of environmental quality from the price of produce can discourage adoption and lead to an under-supply of ecosystem services from sustainable practices that are neither appreciated nor priced.
The market aspect:
The market aspect refers to creating environmental insetting markets to satisfy corporate demands to meet environmental targets. Most food and beverage companies, agricultural commodity traders and financial institutions that finance the sector are now aiming to reduce their operations' carbon footprint by 50% by 2030 and to achieve neutrality by 2050, including scope 3³ emissions. In addition, ambitious targets for zero deforestation, reducing water footprints and promoting soil health are also being adopted more widely⁴ .
The growing number of clear corporate reporting standards, such as SASB, GRI, TCFD, TNFD, CDSB/CDP, and IIRC⁵, are all still voluntary, and do not spell out measurement protocols needed to prove a company's progress towards its sustainability goals. As a result, around a third of the world's 2,000 largest corporations in terms of revenue have publicly declared very ambitious sustainability goals, but with no clarity on how to achieve and substantiate their objectives⁶. Studies show, for example, that scope 3 emissions account for 81.4% of the sector's total emissions⁷, but there is no evidence of positive impacts on their supply chains.
The market for Payment for the Environmental Quality of food:
Considering that Brazil's agricultural output is still predominantly conventional and that Brazil's agribusiness exports totaled US$ 159 billion in 2022, it is significant that a large share of those exports is managed and financed by traders, food companies and large financial institutions. These institutions indeed set clear sustainability targets, but as mentioned earlier, they still have no effective mechanisms to demonstrate progress towards such targets, through more sustainable production. This is why we are developing a significant parallel market focused on environmental "insetting", i.e. measuring, accounting for and improving "scope 3" environmental assets through sustainable practices adopted and financed by players in these companies' supply chains.
The multiple bottlenecks in this emerging market can be defined by three main aspects:
1. Reliability of measurement: An environmental measurement market used to inset and price environmental quality-based programs must be able to make reliable, transparent and traceable measurements, to generate information compliant with ESG reporting frameworks and to define measurement protocols that are scalable over millions of hectares and multiple fronts, and recognized as technically sound.
2. Cost of measurement: The more precise and detailed the measurement, the higher the cost. LandPrint's experience shows that costs of these measurements can vary from R$30 to R$500 per hectare, depending on key factors such as the total size of the area to be measured and the precision and number of indicators. The cost must be factored into market structures that recognize and offset the price of measurement.
3. Ownership of measurement: Ownership of measurement is what defines the Payment for Environmental Quality market. The corporate and financial sector must acquire information from its supply chain to prove the impact of its operations.
This last item (ownership of measurement) is the key factor defining a market for Payments for Environmental Quality in food. Financial institutions and corporations need these measurements to show they have met their corporate goals and to issue certified green bonds. There are three main ways to acquire environmental asset bonds that certify such impacts:
● Direct acquisition: Using this method, corporations or financial institutions are responsible for directly measuring a farm's environmental characteristics. The significant additional cost, especially if done on millions of hectares, can be offset by a slight increase in the final price of the products. This price increase should be proportional to the farm’s level of environmental regeneration (the greater the regeneration, the higher the value of the commodity). The aim is to sensitize markets to perceive this cost as a necessary investment for sustainable supply chains, i.e., a current investment to preserve environmental assets in the future. Buyers and/or consumers are thus offered a chance to contribute to the process of regenerating our planet through conscious decisions that are only marginally more expensive (e.g., up to 5% more). Another aspect to be shown is that this measurement can also be an indicator for the potential generation of carbon credits, as well as the impact of environmental quality payments on the additionality of such credits.
● Indirect acquisition: The indirect approach is when a corporation or financial institution acquires environmental quality information from a farmer, to prove the product’s environmental quality to the market. In this case, the farmer bears the costs of obtaining the information; in return, the farmer is rewarded with a small "premium" based on the environmental quality achieved, to offset the costs of measurement and transition efforts, and to reward the generation of environmental benefits. This premium can then be passed on to the market as explained above.
● Compulsory acquisition: The compulsory form is perhaps the least efficient, most time-consuming, and bureaucratic, since it requires legislative regulation that could take decades to establish, as in the Carbon Credits market. Here, the focus would be less on the market and more on the environmental regulation of production processes.
It is important to underline the aim of Payment for the Environmental Quality of production: to democratize access to sustainably produced food. As mentioned above, sustainable production has been shown in many cases to be more viable and profitable than conventional production, but several challenges and transition risks delay the large-scale adoption of sustainable practices. Recognition of a small premium for sustainable farmers (up to a maximum of 5%, for example) could also be seen as a system for reducing or sharing risks in the farmer's transition process, as well as a way to build environmental quality into food prices, as a major step towards removing negative externalities and free riding from our economic system. The table below outlines major tangible benefits and limitations that a Payment for Environmental Quality food system would generate.
Testing the Payment for Environmental Quality mechanism:
The LandPrint Rating System (LRS) is an innovative framework, equipped with cutting-edge digital technologies and meticulously precise measurement protocols. It has been specially designed to facilitate implementation of corporate environmental insetting programs and Payment for the Environmental Quality of production.
Through its LandPrint digital platform, the LRS enables validation of key information on a large scale, providing insights about the environmental condition of individual farms and entire supply chains. As a result, farmers, corporations, traders, and financial institutions have a valuable tool for strategic planning and finance at their fingertips, to improve each farms' environmental quality and overall performance. With the LRS, valuable technical information is converted into tangible environmental assets through a traceable, third-party verified digital certificate, which can be used to set prices based on Environmental Quality using LandPrint's econometric algorithms, organize and define insetting programs based on regenerative agriculture and finance the transition to regenerative agricultural practices by issuing green bonds with LandPrint's third-party verified metrics.
The LRS is a complete system made up of three different scores, which provide thorough, quantitative assessments of a farm's regenerative practices, its environmental quality, and its productive resilience.
Regenerative Practices Adoption Score: This component of the LRS verifies the adoption of regenerative agriculture practices on the farm. At the same time, LandPrint draws up and supervises tailor-made plans based on each farm's unique profile, to ensure the successful adoption and evolution of regenerative practices.
Environmental Quality Score: This component quantifies how close a farm is to its optimum potential in terms of biodiversity integrity, carbon stock and balance, water resource health and soil health.
Productive Resilience Score: This final component measures a farm's ability to optimize its productivity and profitability, while minimizing negative impacts from economic and climate-related variations.
Image of the LandPrint platform and the LRS
All these scores together make up the LRS, providing a holistic assessment of a farm and its ability to achieve the highest levels of environmental restoration and adoption of regenerative practices, while also increasing its profitability and yields.
How can the LRS be used?
The LRS equips farmers, corporations, and financial institutions with tools to guide their sustainability efforts towards Environmental, Social and Governance (ESG) goals. Its effective quantification of biodiversity impacts, carbon sequestration, soil health and water management enables LandPrint, through the LRS, to generate cycles of positive changes uniting farmers, financial institutions, corporations/traders and consumers on the same platform around programs to structure their activities and provide beneficial impacts at different scales.
About LandPrint:
LandPrint was created on the initiative of Adapta, a participant in the Sustainable Soy in the Cerrado Program (PSSC), with the aim of monitoring the adoption of regenerative practices by farmers and quantifying the environmental impacts generated by them. Profile of its founders:
● Daniele Cesano, CEO
● Felipe Caltabiano, COO
● Marco Curatella, CFO
References:
¹ UN, 2020: Emissions Gap Report 2020
² LaCanne CE, Lundgren JG. Regenerative agriculture: merging farming and natural resource conservation profitably. PeerJ. 2018 Feb 26;6:e4428. doi: 10.7717/peerj.4428. PMID: 29503771; PMCID: PMC5831153.
³ IPCC. (2018). Global warming of 1.5°C - An IPCC Special Report. Retrieved from https://www.ipcc.ch/sr15/
⁴ WWF. (2020). Living Planet Report 2020 - Bending the Curve of Biodiversity Loss. Retrieved from https://livingplanet.panda.org/en-gb/
⁵ Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), Taskforce on Nature-related Financial Disclosures (TNFD), Carbon Disclosure Standards Board (CDSB/CDP), International Integrated Reporting Council (IIRC).
⁶ The Economist, 2022: The UN takes on corporate greenwashing
⁷ Schulman D. et al, 2021: Supply chains (Scope 3) toward sustainable food systems: An analysis of food & beverage processing corporate greenhouse gas emissions disclosure. Cleaner Production Letters Volume 1, December 2021. https://doi.org/10.1016/j.clpl.2021.100002
* Daniele Cesano is CEO of LandPrint; Felipe Caltabian is COO of LandPrint; and Marco Curatella is CFO of LandPrint.
This publication was produced by LandPrint. The authors’ views expressed in this publication do not necessarily reflect the views of the Land Innovation Fund for Sustainable Livelihoods.