Farming and the UK Emissions Trading Scheme

In Wales Climate Week it’s timely to examine the critical role farming and land management can play in managing atmospheric carbon. Net zero is unreachable without it. Earlier this year the UK and devolved governments consulted on introducing farming into the UK Emissions Trading Scheme (UK ETS) in its unique capacity to remove greenhouse gases. Government and the sector will need to create a system to ensure fair representation and reward for doing the job.

We all know that Wales’ Sustainable Farming Scheme has a special role to play to meet Government policy on climate change, but its’ value has been put in sharp perspective. Many carbon-dependent industrial processes – for fundamental materials manufacture and aviation, for example - are approaching their technological capacity to decarbonise. This means government targets to reach net-zero are unattainable without removal technology.

Wales’ largest industrial greenhouse gas emitter, Tata Steel, has called on government to invest an eye-watering £1.5 billion as (only) a 50% contribution to technical advances to reduce its’ emissions. Technologies that extract and neutralise greenhouse gas emissions from the air are in their infancy, they don’t exist at scale and are consequently very expensive. Currently, existing emissions trading schemes only control emissions at-source: incentivising lower-carbon processes, carbon capture and storage.

How does this affect agriculture and land management? The missing link to meet net-zero is greenhouse gas removal (GGR), something nature does discreetly, constantly, without reward. For land managers it’s an opportunity: carbon sequestration through changes in management, afforestation, peatland restoration and “blue carbon” – sequestration in water.

If adopted, it would make the UK Emissions Trading Scheme (UK ETS) among the first to include removal. Three conclusions arise. First, this faces-up to ideological objections to market-based solutions to meet the challenge because public funding will never suffice: private investment will have to be mobilised. Secondly, the inclusion of another key sector should make the scheme more powerful. Consequently (and thirdly), the scheme’s wider and UK-wide remit could lead to it taking some regulatory responsibilities.

Building farming into the UK ETS looks challenging. We have a multiplicity of businesses and land units, dispersed and diverse in nature. Agriculture’s very different from industries already locked into a scheme. The sector will need a robust, representative body to work and negotiate with the scheme and with government.

The UK won’t be the first to look at this. Most existing ETSs now include agricultural emissions as offsets. Some even incentivise farmers to “farm carbon” and “sell the crop”. Under Australia’s Carbon Farming Initiative (2011), the government itself acquires the offsets and redistributes the benefits in grants and subsidies. We know that EU scheme designers - at least - like the look of this.

We were advised that the Consultation was not intended to dive into the process of controlling agricultural emissions. However, we were told that the exercise was an opportunity to call for evidence about how the monitoring, reporting and verification (MRV) for agriculture could work. It’s early days, the land management community has started to think about this.

ETSs work on the “cap-and-trade” principle. Limits are set for emissions and are then reduced over time. Participants buy allowances and they’re traded in a secondary market. For this to work, sectors need to be able to monitor accurately - and this needs to be scrutinised. This clearly reveals challenges for the land-use sector – and it may explain why this year’s Consultation doesn’t specifically go there.

To harness the land’s capacity to remove greenhouse gas, three essentials must be established. The first is that farming and wider land use should be treated together. Secondly, there’s a fundamental need for an agreed carbon metric and an accounting system. We need new technology, such as remote-sensing and earth observation, but they must also be trustworthy and economical.

Carbon removal assets must be “ear-tagged” to ensure they’re not sold in duplication and the longevity of the asset is determined. Finally, legal structures must clarify ownership of assets and liabilities in contractual relationships, which can be complex and involve many parties. Clarity needs to exist around the role of crops and livestock, biomass, energy-crops and nature-based solutions. Moreover, establishing an effective market requires a clear structure, regulation by clear standards and sets of rules. Prices need to reflect the viability of the process (including transactional and regulatory costs). If a cap-and-trade compliance market is formed, it needs to fit with the voluntary market. All this raises very many questions.

Farmers and land managers will look to government to create a structure with capacity to make improvements, intervene in case of crisis – and maybe even manage a set of safety-nets in case of failure. Another role will be to monitor and prevent “carbon leakage” – when companies offshore processes to minimise liability – and equally to assess carbon import. There is little point in running a very good scheme if cost-sensitive consumers buy imported food that is heavily laden with emissions – notably in transport.

The difficulties of controlling carbon emissions from land use are many, and the science of GGR is young. The global crisis imperative will drive all this forward, but it will be important to move forward with great care possibly using a pilot scheme. We may admire how in the past twenty years or so, some of our heavy industries have adapted to meet the challenge, however we look in awe at the cost in productive capacity, competitiveness and jobs in what we used to call our economy’s “foundation industries”

Has the EU ETS delivered?

Founded in 2005, the EU ETS set a 2020 target to cut greenhouse gas emissions by 20% compared with 1990, to reduce energy consumption by 20% compared to the 2007 baseline scenario, and to achieve a 20% share of gross final energy consumption from renewable energy sources - all of which was achieved. A 2020 study estimated that the EU ETS had reduced CO2 emissions by more than 1bn tonnes between 2008 and 2016 or 3.8% of total EU-wide emissions. Many schemes have played an important role in supporting R&D and major investment in zero-carbon technologies. Any scheme involving agriculture needs to support an innovation pipeline.

On the downside there’s no question that the EU ETS has accompanied – even contributed to - the decline of traditional foundation industries. Market history shows us how carbon prices can vary from 5-to-50 Euros per tonne – and they’re most expensive when sectors look to increase production – and difficult to sell in recession, when industry looks to “circle the wagons.” The result: dampening of agility - suppression of ramp-up, and hindering of scale-down, and extra cost to pass into the chain.