Fertile ground: How soil carbon can be a cash crop for the climate age – RBC Thought Leadership –

The Discovery
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Canada’s vast area of cultivated agricultural land is the 12th largest globally.
Soil has the potential to store or “sequester” carbon, pulling it out of the atmosphere where it contributes to climate change. Canada’s agricultural land could sequester between 35MT and 38MT of annual GHG emissions—cutting about 25% of potential 2050 emissions, according to our estimates.
Through practices such as cover cropping, reduced tillage and nutrient management, farmers not only increase soil carbon, they also improve water and air quality and preserve biodiversity.
Degradation from heavy tillage and practices like mono-cropping (where a single crop is grown year after year on the same land), have halved the amount of carbon stored annually in agricultural soil over the last two decades.
Sustainable farming eventually enhances yields. But upfront costs (including for new equipment) and the potential for initial yield loss can pose significant obstacles. This is particularly true for farmers operating on slim margins.
Financial incentives can boost farm income and assist producers with the costs associated with the transition. Storing 38MT of carbon in soil per year will require incentives of up to $4 billion annually. To secure those funds, we’ll need to find the right financial instruments and funding sources.
Carbon offsets will also be important. But uncertainties about systems to measure, report and verify soil carbon (MRVs) persist across all financial instruments. And Canada’s public funding for sustainable agriculture lags peer economies.
But significant obstacles to MRVs persist, including the lack of standardization.

For generations, Canadian farmers have been financially rewarded for the food they produce. The more bushels of wheat a farmer grows—and the greater price that commodity fetches on markets—the larger the return will be.
Yet by embracing sustainable practices, farmers also hold unparalleled power to cut emissions, and to improve air and water quality, soil health and biodiversity.
Tapping that power will require capital. While the current potential of sustainable agriculture is robust, the economics underpinning it are not. We’ll need to price in sustainable practices while supplying the funding and financial instruments to de-risk and incentivize their use. And we’ll need to rethink an economic system that wholly rewards agricultural production while placing little value on preservation.
These efforts—supported by national MRV protocols, and cross-industry partnerships—can be the foundation of a world-leading sustainable agriculture strategy.

What are MRVs?
Measurement: A tool monitors reduction of emissions by farming activity.
Reporting: The measurement is submitted to a third party verifier.
Verification: The third party verifier certifies emissions.

Agriculture could be a much larger source of emissions reduction and removal
Source: Elis (2021). BCG Analysis

What are insets and offsets?
Insets: Organizations directly avoid or reduce emissions within their own supply chains.
Offsets: Companies or individuals purchase tradeable credits generated by renewable energy or other emissions-reducing projects. This credit negates or offsets the same amount of carbon emissions created by the buyer.
In this paper, we examine three financial instruments that could boost carbon storage in soil and create other benefits: carbon offsets, carbon insets, and government funding. All of these tools are currently operating at varying scales. However, their potential to make an immediate impact on sustainable farming ranges.
Insetting is currently the most effective mechanism to incentivize farmers to adopt new practices. Though broad consumer demand for sustainable food has yet to develop, agri-food companies have displayed a willingness to pay more for sustainable inputs as a way to reduce emissions in their own supply chains.
Government support will also be critical in the early days of this transition. Yet as it stands, Canadian government funding is lagging that of its global peers. This discrepancy could put Canadian farmers at a disadvantage as sustainable and reliant food systems become more important in the global marketplace. In all cases, reliable measurement, reporting and verification systems (MRVs) are key. Offsets are particularly reliant on MRV trials to build a foundation of market integrity and trust. Developing these systems will take time.

• What are they?
• Opportunity
• Challenge

What are they?

Tradeable credits, each representing one ton of carbon emissions. Buying one negates or “offsets” a ton of emissions that a company or individual releases into the atmosphere.

Opportunity

If challenges are addressed, the agricultural credit market could grow to $2B-$4B by 2050 (if 38MT in emissions are removed).

Challenge

The market has been held back by uncertainties about MRVs, which have impacted the quality of credits. Regulatory uncertainty and fears of greenwashing are related problems.

Tradeable credits, each representing one ton of carbon emissions. Buying one negates or “offsets” a ton of emissions that a company or individual releases into the atmosphere.

If challenges are addressed, the agricultural credit market could grow to $2B-$4B by 2050 (if 38MT in emissions are removed).

The market has been held back by uncertainties about MRVs, which have impacted the quality of credits. Regulatory uncertainty and fears of greenwashing are related problems.
A farmer using sustainable practices receives roughly $8 to $13 in carbon credits per acre. But due to imperfect science and shaky measurement, a large portion of these credits may be withheld. That’s before multiple project costs deduct as much as 60% (35% for costs, 25% for fees) and another 20% for insurance. In the end, the farmer’s share is just $2 to $4 per acre, a sliver of total farm receipts.
Poor revenue

Carbon credits per acre
Large deductions
Weak incentive
Carbon credit per acre after deductions
Source: Research on North American MRV trials; BCG analysis

Soil sampling takes a small volume of soil for lab analysis. Measurement for organic and inorganic carbon is conducted through heat or acid tests. While accurate, it is not scalable due to price, scalability barriers including repetitive and timely lab tests and inconsistent data standards.

A process-based model is an algorithm that is interpreted on real-world data to predict future carbon soil activity accurately. While inexpensive, it has a larger margin of error and should be coupled with either soil sampling or remote sensing to be valuable.

Through the use of ground-based sensors or satellite imaging, farms can be viewed geospatially to help producers monitor carbon sequestration. Though highly scalable, this requires further global infrastructure development to become a universally adopted solution.
Though every MRV is different, the most effective deploy the following:

Organizations directly avoid or reduce GHG emissions in their own supply chains.

Insetting programs enable companies to shrink their carbon footprints, demonstrate their sustainability commitments and future-proof their businesses against more stringent emissions regulations. The higher price they pay for sustainable goods can compensate farmers for costs and yield losses stemming from the transition to more sustainable practices.

The need to coordinate with farmers and other stakeholders—and to measure and verify emissions reductions—can be time-consuming and difficult. The lack of standardization and reliable measurement can also make it difficult to confirm and share results. As a result, the need for a green premium may be unclear to consumers and need to be absorbed by the company.
The process helps companies avoid or reduce Scope 3 emissions in their supply chains and better prepares for them for future regulations that may be more stringent. These supply chain initiatives can also be used for marketing purposes.
1. Including shoppers often/very often purchasing sustainably and considering themselves as sustainable; 2. Including shoppers that sometimes buy sustainably; 3. Includes non-buyers that would be willing to pay a >5% premium at parity of other benefits.
Source: BCG sustainability consumer survey (June 2022);
BCG project experience and analysis; BCG-WEF Report (2023)
Reasons given to pay green premium

Government funding to support farmers who are conserving, sustainably managing and restoring agricultural ecosystems. Programs include CAP and On-Farm Climate Action Fund.

$0.6B-$1.5B in additional agricultural climate initiative funding is needed in Canada to match U.S. and EU levels. Without competitive funding, Canadian farmers could be at a competitive disadvantage.

Beyond the size of funding, there is an opportunity to improve access & delivery of support, to include broader sustainability initiatives and to improve data on program impact.

United States
Total farm receipts¹
$545B

Ag support as a % of receipts
$64B|12%
Climate funding as a
% of total farm receipts
~1.7%
 
Inflation Reduction Act (IRA) includes $27 billion for agricultural conservation and stewardship through 2031

European Union
Total farm receipts¹
$699B

Ag support as a % of receipts
$122B|18%
Climate funding as a
% of total farm receipts
~1.8%
 
Common Agricultural Policy includes about $224 billion through 2027 for ‘climate-relevant initiatives’
Canada
Total farm receipts¹
$83B

Ag support as a % of receipts
$8B|10%
Climate funding as a
% of total farm receipts
~0.5%
The Sustainable Canadian Agricultural Partnership could commit $500M in added funding, and $800 million in On-Farm Climate Action Fund & Ag Clean Tech funding
For more information see appendix

Glossary of sustainable farming practices
Reduced Tillage | Reducing soil disturbance by limiting tilling in croplands improves carbon storage
Nutrient Management | Applying fertilizer from the right source, at the right rate, at the right time, and in the right place, using as little as required
Silvopasture Integrate trees, forage, and livestock grazing in the same area to improve soil nutrients and livestock wellness
Crop rotations | Planting different crops sequentially to improve soil health and nutrients, while combating pests and weeds
Manure Management | Manure can be turned into energy through anaerobic digestion or used as a natural fertilizer
Biochar | Converting crop residue (i.e., waste) to charcoal; when used as a fertilizer, it can increase carbon storage

For more, go to rbc.com/climate.

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Lead author: Youssef Aroub, Project Leader, Boston Consulting Group
Boston Consulting Group
Keith Halliday, Director, Centre for Canada’s Future
Chris Fletcher, Managing Director and Partner
Thomas Foucault, Managing Director and Partner
Shalini Unnikrishnan, Managing Director and Partner
Sonya Hoo, Managing Director and Partner
Pilar Pedrinelli, Consultant
RBC
Darren Chow, Senior Manager, Digital Media
Naomi Powell, Managing Editor, Economics and Thought Leadership
Mohamad Yaghi, Agriculture and Climate Policy Lead
Colin Guldimann, Economist
Trinh Theresa Do, Senior Manager, Thought Leadership Strategy
Zeba Khan, Digital Publishing
Aidan Smith-Edgell, Research Associate
Shiplu Talukder, Digital Publishing Specialist
Gwen Paddock, Director, Sustainability & Climate – Agriculture
Arrell Food Institute, University of Guelph
Evan Fraser, Director
Ibrahim Mohammed, Ph.D. Candidate, Environmental Sciences
Deus Mugabe, Ph.D. Candidate, Plant Agriculture
Lisa Ashton, Ph.D. Candidate

Acknowledgements
In addition to those cited in this report, we’d like to thank the following individuals for their insights:
Appendix: Where Canada sits in a global landscape
United States
The Inflation Reduction Act (IRA) is the largest piece of federal legislation to ever address climate change, increasing the pool of funding for conservation efforts by US$20 billion. It expands the Partnerships for Climate-Smart Commodities program which seeks to remove 50 million metric tons of carbon dioxide. It has allocated US$3 billion to 141 projects on crop and livestock farms across all 50 states and Puerto Rico. And it involves collaboration among more than 100 universities, 20 tribes and tribal groups, and 60,000 farms, on over 25 million acres of working land. The project will remove the emissions amounting to the equivalent of 12 million gas-powered vehicles.
European Union
The Common Agricultural Policy (CAP) program was revamped in 2022. It includes €387 billion, a third of the EU’s entire 2021-2027 budget, to assist in the transition to Net Zero farms and rural communities. Its goal is to cut greenhouse gases by 55% by 2030—in line with EU’s Green Deal targets. In all, 40% of the CAP’s financial plan is explicitly dedicated to climate relevant activities and a further 10% of the EU’s budget outside the CAP is directed towards biodiversity efforts.
Australia
The Emissions Reduction Fund is Australia’s flagship program for fighting climate change. It supports farmers, businesses, and rural communities in decreasing greenhouse gases by providing carbon credit units that can be sold on to public or private buyers. The scheme actively promotes soil carbon projects by sharing the upfront costs of soil sampling. The program expects Australian farmers to earn over AUD 400 million from the sale of credits from soil carbon sequestration by 2050. The federal government is also dedicating AUD 64 million in funding to promote the development of soil carbon measurement technologies and an additional AUD 54.4 million to encourage active soil testing and national data sharing.
Brazil
Brazil is offering farmers low-interest loans through the ABC Plan. Farmers are given credit and financing options to adopt sustainable farming practices like no-till, intercropping, crop rotation, and recovering degraded pastures. Launched in 2010, the program was recently revamped with the goal of storing 41MT annually of carbon dioxide over 177 million acres of farmland across the country. In its last financing round, over 62,000 contracts were signed. This made Brazil the second highest ranked nation in the world for no till farms (around 18% of Brazil’s total agricultural land).
 
Disclaimer
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
A collaboration with BCG Centre for Canada’s Future and Arrell Food Institute at the University of Guelph
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