Carbon Intensity (CI) Scores and Incentives
Low-carbon fuel tax credits were translating into $0.10/bu premiums for regeneratively-grown corn in some U.S. cash markets last week.
This latest development is one of many set to premiere in 2023 due to new government and exchange-related reporting and compliance measures coming into force. It has long been understood that fuels consumed in transport contribute to pollution before being burned in tanks, but only recently has the North American grain trade used scoring mechanisms to pay for farm management data so that the full life cycle can be accounted for.
The California Air Resources Board (CARB) explains Carbon Intensity (CI) scoring as follows:
“Low Carbon Fuel standards are expressed in terms of the "carbon intensity" (CI) of gasoline and diesel fuel and their respective substitutes. The program is based on the principle that each fuel has "life cycle" greenhouse gas emissions that include CO2, CH4, N2O, and other GHG contributors. This life cycle assessment examines the GHG emissions associated with the production, transportation, and use of a given fuel. The life cycle assessment includes direct emissions associated with producing, transporting, and using the fuels, as well as significant indirect effects on GHG emissions, such as changes in land use for some biofuels.”
Changes in land use are the central focus of companies tracking and reporting Scope 3 emissions. Up until recently, corporations focused on the GHG emissions that they produced internally or purchased for use in the business. Now, the GHG emissions across entire supply chains are being tracked, reported, and ultimately reduced – quite significantly in the case of food and agriculture.
Government Initiatives
Premiums aren’t on the table in the Canadian grain market today, because renewable fuel credits aren’t payable outside of the U.S., but there are plenty of similar initiatives in the works. The big official one is the federal On Farm Climate Action Fund (OFCAF), that reimburses farmers for a long list of GHG-reducing field management practices – often the same ones that will lead to low farm CI scores.
Doubling Down on OFCAF
OFCAF got an added shot in the arm last week in the federal budget. It was announced that tariffs collected by Ottawa on imported Russian fertilizer last year of $34.1 million are being transferred into OFCAF.
Programs like ALUS, Ducks Unlimited, and Living Labs are offering additional payments to implement grazing periods into crop rotations. It might literally be free right now to set up planned grazing within a farm operation, by installing fencing and watering systems. Note these are assets that improve a farm’s balance sheet metrics.
Grazing isn’t for every farm, but it isn’t crazy. The reason for the focus on it in OFCAF is the speed at which multi-species pastures, combined with adaptive multi-paddock (AMP) grazing, restore soil health and sequester carbon… and help Canada meet international commitments.
There are national and individual benefits to grazing livestock in crop rotations. Increased biodiversity is a monetizable environmental attribute that will generate additional layers of value for farms as the measurements and trading platforms are formalized.
Governments around the world are unlikely to waver from spending policies that support clean energy in all of its forms. According to this article, Canada’s recent budget was designed to ensure economic competitiveness with the U.S. and to keep up with the environmental measures introduced with the Inflation Reduction Act.
Food CPG Brand Scorecards
Scorecards rolling out for tracking and reporting supply chain emissions (at some of the world’s largest food brands) are remarkably similar to the OFCAF criteria. When we look, for example, at McCain’s framework, it is possible to match levels of practice with OFCAF-approved activities.
This makes OFCAF a de facto MRV data capturing model. As explained in more detail here, a grain company could help Pepsi meet its goals today, just by aggregating grain ingredients from farmers in the program, because:
Submitting invoices to have qualified expenses reimbursed is a ‘measurement’
Describing the transition plan and submitting before and after photos is ‘reporting’
Approval for expenses to be reimbursed is ‘validation’ that the farms implemented beneficial new practices.
An OFCAF approval could be attached to a grain contract just as easily as a farm’s organic certification, and open up new value-added marketing options in the same way.
The list of new initiatives being launched by grain and food companies is growing by the day. One last powerful example: ADM recently launched Knwble Grwn, its own consumer-facing food brand that uses flax, hemp and quinoa. The announcement noted that the food line will help the company meet its goal of lowering Scope 3 greenhouse gas emissions 25% by 2035.
Summary
Prairie Routes Research reports are based on the view that new value-added marketing opportunities create an excellent pathway for landowners to capitalize on emerging markets for reduced-emissions farming practices. In addition to generating new revenue streams, farm businesses will become more economically resilient over the long run by reducing reliance on inputs.
To learn more about Regenerative Agriculture Farm Business Transition Support options, please head over here.
Together with Backswath Management, Prairie Routes Research is powering up a team of experts to position farm clients to capitalize on multi-monetizable land revenue opportunities.