Carbon markets could be outstripped by demand within next ‘handful of years’ – Indigo Ag

JPMorgan, IBM and Barclays are among the first companies to agree to a carbon credit purchase price with Indigo as global corporate sustainability targets threaten to outstrip supply.

The carbon credit market could experience supply constraints in the next “handful of years” as regulation and self-imposed company targets accelerate demand, Indigo Agriculture’s senior vice-president told Agri Investor.

“There is a very clear trend of increasing regulation and increasing voluntary action in parallel,” said Ben Allen. “All of that points to rapidly increasing demand around the carbon credit markets.”

A Goldman Sachs report in June – an updated version of a report published by the firm last September – suggested the demand for quick results could focus attention on decarbonization technologies already at scale, and thus help to create a “two speed decarbnonization.” This could lead to delays in investments targeting the technological breakthroughs necessary for long-term goals, while the adoption of lower-cost approaches such as “natural sinks”, which includes agriculture, could surge ahead.

“In the next few to a handful of years, there is a very real opportunity for carbon markets to be supply-constrained. That is a real issue,” said Allen.

He explained that the covid-19 pandemic had produced only a brief pause in the torrent of emissions reduction target announcements from businesses, some of which will use the carbon credits market Indigo supplies.

“The market took a breath and then quickly resumed its path of prioritizing climate change as a topic,” said Allen. He highlighted the growing role of activist investors and a public letter on climate change by BlackRock chairman Larry Fink as key drivers in building the market’s momentum prior to the pandemic.

“You can now verify the cost of capital impact that it has when companies are valued through an ESG lens,” he explained. “That flow of funds is part of the trend that says there is fairly high confidence that this climate focus is not just going [to go] away and that demand is in its very early days.”

Flagship Pioneering-backed Indigo secured its first carbon credit acquisition commitments in October from eight buyers, including JPMorgan Chase, IBM, Barclays and Boston Consulting Group. The credits were priced at $20 per ton of carbon dioxide equivalent sequestered and abated.

The sequestration is achieved through the adoption of regenerative farming practices, such as cover crops and no-till farming, by agricultural producers managing millions of acres across the US that are enrolled in a program managed by Indigo. The data Indigo collects through that program is certified by partner organizations to create a financial instrument used to meet sustainability goals.

Roughly 16 percent of global carbon emissions are currently taxed at an average price of $3 per ton, according to the June report by Goldman Sachs. It noted that there were more than 61 carbon pricing initiatives underway at the time across 46 national and 32 regional jurisdictions worldwide.

Carbon credit quality

Allen said that early buyers in the carbon market “have a high need to understand that their funds are going to actions that are of high integrity for climate activity” and can transparently demonstrate their quality.

He said Indigo had responded to these demands with technology that includes satellite analysis and biogeochemical modeling, which helps reduce costs of measuring and validating practice changes at a farm and field level.

“We need to be able to credibly forecast what we believe is possible in order to be able to scale the project in general,” he said. “It drives the economics of everything that every party touches.”

Allen explained that although Indigo’s first round of carbon credit sales have been priced in the buyer-facing terms of dollars per ton, the economics of carbon farming at the producer level will ultimately depend on how many carbon credits can be derived from each acre.

“We are still working on that and have a long way to go there, but ultimately we’re excited about the opportunity to do two or three tons per acre. You just probably don’t do that in year one.

“That is going to take building up the projects and the confidence in the data sets and some more revisions around processes. Our methodologies, as they have been approved, technically allow for those revisions and improvements on these massive data sets. It is one of the precedent-setting pieces of the methodologies.”

Establishing a new market

Allen said Indigo was helping to build demand for carbon credits through avenues such as government relations work related to the Growing Climate Solutions Act. The legislation, he said, could help the market by encouraging the US Department of Agriculture to officially include agricultural producers among its verified solutions for climate change activities.

He explained that Indigo’s near-term focus will remain on enrolling farmers into its program, starting with those it already encounters in three of its lines of business: microbial, digital grain marketplace, and transport.

The carbon offset offering it has already sold also includes a partnership with one of its first customers: New York-headquartered Givewith, a platform focused on helping companies fund environmental and social programs that plans to facilitate future sales of Indigo’s carbon credits.

“In any market that is maturing quickly, partnership can be a powerful tool,” Allen said.

Allen added that because farmland funds sit in a unique position within the value chain that can afford them control over production practices, it is clear that such managers will also have a role to play in the broader effort to integrate agriculture into carbon sequestration efforts.

“We are aware that those groups are trying to consider the best path for their portfolios right now and whether or not this is an enhancement to their returns,” he said.

Asked if Indigo might pursue direct partnership with a farmland fund, Allen said it was “potentially possible.”

“We don’t comment on ongoing perspective deal conversations,” he added.