Carbon Chaos: A primer on carbon markets

Kraft Heinz makes a lot of salad dressing and mayonnaise, and they often make it with canola oil. Kraft Heinz, like a lot of companies, also pledges to be carbon neutral, or net zero, by 2050. This means the company’s complete value chain, including the farmers who produce their vegetable oils, will remove as much greenhouse gas from the atmosphere as it emits.

Kraft Heinz has a number of ways to meet that goal, and one is reformulation of products or changing to ingredients with lower carbon intensity. This where Canadian canola oil needs to shine if it is to remain a Kraft Heinz preferred ingredient.

Kate Yauk, Kraft Heinz’s global director of sustainability, says the company will look for partners who can prove that the carbon life cycle analysis of their ingredient is better than their competitors. “We call this smart sourcing,” she says.

Renewable fuel manufacturers also look for feedstock with lower carbon intensity. Carbon intensity is net emissions divided by tonnes of crop produced. The lower the carbon intensity of a feedstock, the less of it a fuel manufacturer needs to reach the carbon reduction standards. This is the feedstock fuel manufacturers want to buy.

At Canola Week 2023 in Calgary, Bob Larocque, president and CEO of the
Canadian Fuels Association, called carbon intensity a “game changer.”

The game, however, seems to change all the time.

In March 2024, the United States Securities and Exchange Commission (SEC) ruled: “While many investors today are using scope 3 information in their investment decision making, based upon public feedback, we are not requiring scope 3 emissions disclosure at this time.”

Scope 1 covers direct emissions from within a company’s operations. Scope 2 covers indirect emissions to produce the energy a company purchases for its operations. Scope 3 covers all other indirect emissions within a company’s value chain, including from farmers who produce ingredients and truckers who deliver goods to Superstore.

Did the SEC scope 3 decision change how canola processors approach their programs with farmers?

Daiana Endruweit, Bunge’s senior manager for corporate reputation, says “our approach to sustainability is based on doing the right thing, not on SEC requirements.”

Endruweit says Bunge’s “decarbonization approach” includes reduced emissions in its direct operations and supply chains. “We believe that the agriculture of the future is low-carbon, and we want to be the strategic partner of farmers and customers in sustainable solutions for oilseeds, commodities and related ingredients,” Endruweit says.

However, some momentum has left the agriculture carbon market. Sally Flis, director of sustainable agriculture programs for Nutrien, says the carbon market in general has changed a lot since 2021. “While many companies were quick to offer programs in the early days, there are fewer options on the market today as our industry learns more about the carbon market and the best ways to promote sustainable agriculture practices,” Flis says.

Marty Seymour left FCC three years ago to start CarbonRX. His new company works with large farmers – large landowners – to extract extra revenue through carbon credits. “I severely underestimated the amount of lifting it would take to help commercialize a quality carbon credit on Western Canadian farms,” he says.

More on these companies in a bit. First, we need to distinguish between carbon intensity and carbon credits.

Carbon intensity

Carbon intensity is a measure of the carbon required to produce a tonne of output, say canola seed. The goal is lower intensity.

Anything that reduces the carbon inputs per tonne of crop will improve the intensity. No-till, for example, will reduce carbon inputs in terms of diesel fuel and possibly also increase carbon sequestration through increased organic matter. Increasing output through higher yields per input will also improve the intensity score.

The lower the carbon intensity, the more competitive canola is vis a vis other feedstocks,” says Chris Vervaet, executive director of the Canadian Oilseed Processors Association. “While estimating carbon intensity on aggregate has its shortcomings, the datasets and methodologies are constantly improving, allowing for a good measure of performance for a whole production zone.” This approach, Vervaet adds, relieves individual farms from the duties of measurement and data tracking, while still supporting continuous improvement.

Carbon credits

Carbon credits are often considered the currency of voluntary or mandatory carbon markets and fit into two primary boxes – inset and offset.

Corporate environmental, social and governance (ESG) commitments drive voluntary markets while government regulations drive mandatory markets. Both markets use carbon inset and offset credits to incentivize emission reductions.

Inset credits.

These come from companies within a supply chain. Perhaps a publicly-traded company in the canola industry needs to show shareholders that it is taking action on carbon, based on ESG commitments. It sets up a program to promote emissions reduction practices within its supply chain, and will pay participants based on how much carbon they remove.

Offset credits.

These are from outside a supply chain. Someone generates a credit, say through sequestration of carbon in soil, and someone else buys it. A company buying credits can deal directly with big farmers or, in most cases, with farm credit aggregators.

The key, Seymour says, is that carbon offset credits pay for new practices that a farm wouldn’t otherwise do if not for the payment. Credits are based on a measured change from baseline soil carbon to a new higher level of stored carbon. It must be additional to any improvements that would come from standard practice, and it has to be permanent.

“People paying for credits – people who think the world is on fire – are asking, ‘what have you done for me lately.’ They’re not looking back,” Seymour says. “They want to see continuous improvement.”

Going after carbon credits

Farmers can generate credits through practices that sequester carbon in the soil or reduce emissions. Formulas convert these practices into tonnes of carbon dioxide equivalent, and farmers can sell those credits. Aggregating companies source credits from a great number of farms that are too small and generate too few credits on their own to arrange deals directly with credit buyers. The aggregator of carbon credits is like a grain company that collects grain from many farmers for big bulk shipments.

“If you own land, you are in a powerful position to leverage the carbon removal potential of that land,” Seymour says. Agriculture
and forestry are the two industries with the most potential to sequester carbon.

And yet, most farmers avoid the carbon market.

University of Alberta graduate student Nimanthika Lokuge, in a 2022 paper, cited World Bank research showing that only about one per cent of global carbon credits are generated through agriculture. Lokuge also wrote that farmers “hardly participate” in the Alberta Emission Offset Program, one of the most active credit exchanges in North America.

In her paper, “Carbon-Credit Systems in Agriculture: A Review of Literature,” published in The School of Public Policy Publications, Lokuge explained why farmers stay away: “This appears partly due to a history of regulatory risk: the agriculture sector has seen the revocation of carbon-credit eligibility for certain practices, and invalidated credits can lead to significant financial losses for farmers. Farmers are also reluctant to participate due to the inadequacy of offset credit revenues in covering the foregone costs of implementing emission-reduction practices given current carbon-offset prices and the emissions level per farm.”

Alberta farmers will often take on carbon-reducing practices for their own economic reasons, Lokuge writes, but will hold off on the credit market until it pays better.

But is waiting the right strategy? Seymour’s advice is that farmers looking to sell carbon credits in the future should measure their soil organic matter and soil organic carbon now before making any major changes. This is no simple step. “The biggest barrier is the cost of soil sampling,” Seymour says. Seymour uses Saskatoon company Xact Ag that measures soil carbon through remote sensing. “This is the only way to scale. Grid sampling takes the economics out of it,” he says.

“Carbon is a data play,” Seymour adds. “In the absence of data, you can’t participate.”

Once the baseline is established, farmers can take on
practices to improve soil organic matter and soil organic carbon. And generate credits.

Accurate measurement and collection of data are essential because “companies are very careful to protect themselves against greenwashing,” Seymour says.

Credits could be reversed if an audit shows they’re not legit. In that case, farmers run the risk of paying back for damages – a risk that Lokuge noted. Seymour would like to see carbon credits protected through some sort of public insurance, like crop insurance. “Price stability and even a price floor could be strengthened if buyers knew the credits purchased were insured against an Act of God or if a farmer changed practices,” he says.

Farmers could reduce this risk by avoiding programs that lock them into long-term commitments. One example is Nutrien’s Sustainable Nitrogen Outcomes Program, which pays farmers for adopting practices that reduce emissions from fertilizer use. It started as a pilot program in 2021.

The protocol is based on 4R nitrogen management practices, with equations to calculate emissions reductions in tonnes of carbon dioxide equivalent (CO₂eq).

Nutrien pays $65 per tonne of CO₂eq, which usually works out to $2 to $7 per acre, Flis says. Moving from basic to intermediate to advanced 4R will increase the payment.

The program does require a “fairly heavy data lift,” Flis says. Farmers need to show all nutrient input with as-applied maps, show receipts and may need to take date- and location-stamped photos showing what crop is growing where. “Our program is a good way to get introduced to what data collection for a carbon market would look like,” Flis says.

Flis says Nutrien started this program for a few reasons: to contribute to its own sustainability goals, to help major farm product end-users measure and reduce their scope 3 emissions, and to support its agronomy and nutrient sales business.

Growers interested can go to their local Nutrien retail, which provides basic details and connects them with the company’s regional sustainable agriculture managers.

While Canadian farmers contemplate whether they’re ready to jump into carbon credits, the whole industry strives for improved carbon intensity – mostly a collective effort at this time.

How does Canadian canola compare
on carbon intensity?

(S&T)² Consultants conducted a study for the Canadian Roundtable for Sustainable Crops (CRSC) to calculate the carbon intensity of Canadian canola. The November 2022 report calculated average greenhouse gas emissions for Canadian canola at 164 kg CO₂eq per tonne of seed yield. This is based on direct on-farm energy use, including for field equipment, trucking and grain drying, emissions associated with fertilizer manufacturing, emissions associated with the production of seeds and pesticides, direct and indirect nitrous oxide emissions from agricultural soils, and changes in soil organic carbon from land management changes.

“It’s important to highlight that everything farmers have done up to today is captured in these numbers,” Vervaet says.

Also in 2022, the Global Institute for Food Security at the University of Saskatchewan commissioned Nicole Bamber and colleagues at the University of British Columbia to produce the report, “Carbon footprint analysis of Saskatchewan and Canadian field crops and comparison to international competitors.” It compared canola greenhouse gas (GHG) lifecycle emissions for a few countries and a few key crops, including canola. The report concluded that Australia had the lowest GHG per kilogram of canola produced, with Canada second, France third and Germany fourth. This changed somewhat when the totals included soil carbon change. Canada is the only country increasing soil carbon, largely through reduced tillage and reduced summer fallow. With soil carbon change included, Canada and Australia GHG emissions per kilogram of canola are almost the same, and Saskatchewan alone is better than Australia.

Vervaet says Canadian canola has credible numbers to support its carbon intensity, and there is a lot of rigour behind those numbers. “Do we need to lower our carbon intensity? You bet,” he says. “The more you can reduce carbon footprint, the more attractive Canadian canola is for biofuels, food and feed.”

Vervaet is not just blowing smoke. At the World Agri-Tech Innovation Summit in San Francisco in March 2024, the author of this article sat in on a table discussion with Patrick Sheridan, vice president global agriculture, sustainability and seed for Kraft Heinz. Sheridan was talking about procuring tomatoes for ketchup. He was asked how one producer with a lower carbon intensity per tonne of tomatoes is rewarded for that achievement. “That producer gets our business,” Sheridan says.

“Monetization of carbon is likely here to stay,” Vervaet says, but that monetization may not always be a payment per tonne of carbon reduced or sequestered. Vervaet expects the market will eventually move to how Sheridan described. Lower carbon intensity will be a demand driver and determine how crops will compete. And ultimately, that will be reflected in the canola price at elevators and processors.

The general advice, for now, is to keep an eye out for opportunities, for a shift in carbon priorities, and for a rise in carbon credit prices.

“Stay curious,” Seymour says. “I believe all things in the future will be measured by emissions.”

As for the canola industry in general, Vervaet agrees that the Canadian canola industry wants to show leadership on this. “We want to show continuous improvement. We want more adoption of different practices to improve our carbon score.”