Dr. Kirby Krogstad, Assistant Professor, Department of Animal Sciences, The Ohio State University
The first, and most important, thing to recognize is that carbon markets are not a new concept. Carbon market systems have been around since at least 1997 when the first international carbon market system was established. Also, now that carbon markets are taking center stage, they will probably change rapidly as they mature and draw more participants.
Carbon assets being generated are not like a tractor that sits in the barn, they’re not nearly as tangible. Tracking and calculating carbon credits will be challenging, but best practices will emerge and change as the markets continue to develop. In the meantime, there are 3 important fundamentals to understand, and I’ll detail them below:
- What are “scope 3” emissions? - Scope 3 Inventory Guidance | US EPA
Large companies or corporations that are working to reduce emissions place them into three buckets: scope 1, scope 2, and scope 3 (Figure 1).
- Scope 1 are direct emissions from that company’s activities.
- Scope 2 emissions are controlled by the company, but they are indirect sources of emissions. For example, scope 2 includes emissions generated through utilities purchased from a utility provider by that company.
- Scope 3 are emissions that are not owned or controlled by the company but are emissions that are part of their supply chain – this is where dairy farms come into play for large corporations and milk users. When you hear “Scope 3”, it just means it is an emission in the supply chain of a company, but the company does not own or control the assets that generate the emissions.
Figure 1. A depiction of what is included within scope 1, 2, and 3 emissions. Adapted from the Greenhouse Gas Protocol (ghgprotocol.org).
For large milk ingredient buyers and users like Nestle, FairLife, Starbucks, or any other end-user, dairy farm emissions are scope 3 emissions. When calculating the carbon footprint of their business, the end-users include the carbon emitted during the production of milk on the dairy farm. The milk end-users (Nestle, Starbucks, DFA, etc.…) do not own the dairy farms or the cows, but they must include the emissions from the dairy farms into their greenhouse gas footprint, so they have a vital stake in the ability of dairy farms to reduce their carbon footprint.
- Inset vs offset?
The next bit of vocabulary that will come to the fore is “insetting” and “offsetting.” The dairy industry, at this point, is generally focusing on a carbon “inset” approach. An inset means that the benefit of a carbon credit will stay within the supply chain which uses the product that was generated. Here is how that looks in the context of milk production – if you feed an additive that reduces enteric methane emissions from cattle, you can then sell those credits to your milk buyer who can then apply that carbon credit to their carbon footprint. The carbon credit which you generated on the dairy farm stayed within the supply chain that uses it; it is an inset. This is beneficial for dairy farmers because they can receive cash for the carbon credit and have a lower carbon footprint for their milk at the grocery store.
Offsets, on the other hand, are carbon credits which are applied outside of the supply chain for which they were produced. In the dairy context, this would be like generating carbon credits by feeding an enteric methane mitigating feed additive and then selling those credits to Delta Airlines, Google, or Microsoft so that they can use the credit to offset their company’s carbon footprint. A farm would still receive financial benefit of having sold the credit, but they can no longer claim the carbon mitigated because it was sold to someone else to apply to their footprint. We can’t double count emission reductions!
- Are credits being created, bought, and sold right now?
Yes! The carbon market for dairy carbon mitigating practices is growing and credits are being generated, bought, and sold. Actually, Dairy Farmers of America bought the first feed additive carbon credits from a livestock carbon market place which were generated on a dairy farm in Texas. The carbon credit marketplaces are facilitated by carbon market platforms that verify carbon mitigation practices, such as feeding enteric methane reducing feed additives, are being employed correctly. The platforms will also do the accounting to estimate the amount of carbon mitigated and will facilitate the selling of the credits which have been generated. For this service, they will retain a portion of the revenue of each carbon credit sold.
The other important item to note is, currently, there is no regulatory authority overseeing these marketplaces. There are 3rd parties who provide verification and review the scientific research for new carbon mitigating practices, but there is no government regulation of these markets. It is reasonable to presume this may change with time.
What is the bottom line?
The main thing to be conscious of is that our dairy carbon credit system is growing quickly. It will most certainly change rapidly as it grows. Also, the demand for credits will be there so long as companies and governments stick to their carbon or greenhouse gas commitments. Stay informed, reach out if you have questions, and please share information as you learn it as well. These carbon markets are going to grow in the number of credits generated, and hopefully, their value will increase as well.