Carbon market scrutiny can boost credits’ integrity

Carbon farming is one of the hot topics in agriculture, with a range of views on what it means for investors in the sector.

Is it a nice-to-have additional revenue stream? A chance to burnish your ESG credentials while producing the food and fiber that people need?

Or is it still a wild west, with an immature market unable to determine the integrity of a carbon credit and how valuable it truly is?

One of the most interested parties in this debate is GreenCollar, one of the largest providers of nature-based Australian Carbon Credit Units in the market and a partner to many farmers and landowners.

The firm has already drawn attention from the private finance world, with Ontario Teachers’ Pension Plan and KKR’s Global Impact Fund each taking significant ownership stakes in GreenCollar itself.

Co-founder and CEO James Schultz addressed the Farm Writers’ Association of NSW in Sydney last week and was clear that shoring up the integrity of the market was a crucial step to increasing the value of ACCUs.

“There’s a lot of conversations around how we reduce cost, and I think that’s the wrong way to think about these markets that we’re trying to evolve,” he said.

But, he explained, there is always a trade-off between value and cost, with the cost of measuring the amount of carbon in soil relative to the price of a single ACCU being a major inhibiting factor in the market’s development.

“While the price [of carbon] was suppressed due to policy reasons, the other option was to go and look at how we reduce cost. It’s a challenge – and it’s not just for soil, but for all methods.

“When you try to do things with cruder data, then you’ve got more uncertainty. And the way you deal with uncertainty is becoming more conservative in your assessment.”

Schultz pointed to the failure of the Chicago Climate Exchange, arguing it had favored ease of participation in the market over accuracy of measurement of its carbon credits.

“If we avoid doing the measurement, then you risk falling into that vacuum where we can’t actually demonstrate the integrity of what we’re doing. And if we do that, well, the product goes out the window entirely,” he said.

“There is lots of innovation happening and costs will continue to come down. But we want to be focused on that value question, because if you’ve got one credit worth $100, that’s a hell of a lot better than having 10 credits worth nothing.”

While the underlying investment product is obviously completely different, we have seen water markets in Australia go on a similar journey: arguably world-leading in its ambition, with question marks raised over integrity before regulators began to get involved more. This, in turn, should only serve to shore up the integrity of the water market and help it mature as an asset class, proving attractive to institutional investors.

Healthy skepticism around carbon farming is no bad thing and a focus on measurement and integrity should be a rising tide that lifts all boats in the sector. After all, the opportunity appears huge – not just financially, but in terms of the boost it could give to global efforts to reduce climate change.