McKinsey sees momentum behind ag emissions reduction

Partner Josh Katz says companies across the supply chain are increasingly focused on how agriculture will fit into future emissions regulation.

Increased focus on resilience following covid-19 could help sustain growing momentum towards emissions-reduction efforts in which agriculture is likely to play a key role, according to a partner at McKinsey and Company.

“Obviously, carbon management is not a global pandemic. They are quite different, but some of the ways companies have to respond have consistency to them,” McKinsey partner Josh Katz told Agri Investor.

“If you believe post-covid we’re all going to have some view of what needs to be done from a resilience standpoint, some of the challenges that climate change can raise tests our resilience in different forms.”

Katz is a partner in McKinsey’s Global Energy and Materials practice whose work focuses primarily on agriculture. He described his client base as including pension funds, private equity and growth capital firms, as well as start-up companies and the world’s largest global agribusinesses.

Across the agricultural supply chain, he said, companies are beginning to display more creativity in business models designed to benefit from potential future regulation that would likely involve setting a price for carbon emissions.

Though there is not yet consensus among clients as to whether and when a larger carbon market will develop – and if so, at what level of government it is most likely to be imposed –  Katz said voluntary pledges by individual companies and firms are also contributing to a greater focus on emissions-reduction in ag.

“The mood feels different than it did several years ago,” he said. “This year, in many ways started off with what felt like what could be the year of sustainability – it was getting a lot more focus versus the past several years – I think that thread will make it into the recovery [from covid-19]. We’re already seeing that in certain businesses.”

Still, he said, the lack of a large-scale carbon market has limited commitment among investors to finance emissions-reductions that do not present a clear return on investment.

“That materially will change if at some point that [carbon pricing] becomes part of the return calculus for a grower,” Katz added.

In the meantime, he said, even those skeptical about the viability of future carbon markets can find many areas to invest in to help reduce emissions from agriculture, which account for about 20 percent of global greenhouse gas emissions when combined with forestry.

Last month, McKinsey published a report analyzing existing farming practices that reduce emissions and are sufficiently mature to be considered candidates for large-scale investment. In addition to carbon dioxide, the report also addressed agriculture’s contribution to emissions of methane and nitrous oxide.

The report noted that although agriculture accounts for a “large, growing and impactful” share of global GHG emissions, its adoption of emissions-reduction technology has lagged other important sectors like energy.

“Throughout the course of human history, agriculture has responded to humanity’s greatest challenges,” the report’s authors wrote. “The sector now has an opportunity to make yet another major contribution to humanity’s success during this crucial window for action.”

McKinsey’s report synthesized existing academic research to identify 25 food production practices that, if taken together, could result in a 20 percent reduction in emissions from agriculture, forestry and land-use change by 2050.

Categorizing the practices among energy, animal protein, crops and rice cultivation, it also presented dollar per metric ton estimates of carbon dioxide emissions abatement costs or savings ($/tCO2e) to farmers for each (see below).

Among the practices included are improvements to the efficiency of on-farm equipment and fishing vessels, adoption of low or no tillage farming, reduction of fertilizer use and animal feed mix optimization, among others.

“There’s something for everyone to do,” said Katz.