In the wake of the hottest summer on record, companies around the world, including many in the dairy industry, are racing to rapidly decarbonize their operations to align with the shift to achieving “net zero” greenhouse gas (GHG) emissions. Many major brands are under mounting pressure from both consumers and policymakers to disclose their GHG footprint and climate-related goals.
While decarbonizing any industry is no easy feat, the food and beverage industry has an added challenge: a dynamic network of producers, distribution centers and processing plants that make up its product supply chain. Lifecycle GHG analysis of many mainstay food products shows that production of agricultural commodities (e.g., milk, meat, crops) comprises a lion’s share of the total emissions associated with a consumer product, making it essential for food retailers and consumer packaged goods (CPG) firms to work with their farm suppliers to balance their carbon budget.
This puts farmers in a unique position to lead decarbonization efforts that beneficially impact entire product lines. In doing so, farms can potentially earn valuable incentives for producing low-carbon ingredients that companies urgently need to achieve their climate objectives.
Carbon offsets
Businesses participating in carbon markets have historically relied on a common GHG accounting concept known as offsetting. Offsetting involves compensating for internal emissions by claiming reductions created outside the organization. A carbon credit is a tradable commodity that represents the reduction of 1 metric ton of GHG emissions through direct removal or avoidance. A carbon offset is therefore a carbon credit that can be transferred from the entity that produces the reduction to one that wants to claim the reduction.
The concept of offsetting has helped establish a global accounting framework to finance GHG reductions and create a market for emission reductions by putting a price on emissions. However, there has been growing criticism recently on the use of offsets, leading to a significant shift in the global carbon market. Much of the criticism is centered on the contention that using offsets allows companies to avoid implementing actual changes in their operations while still claiming progress toward net-zero claims. In addition, there are also concerns about the integrity of the emissions reductions created by certain offset project types. Due to the recent criticism, many leading carbon market institutions are reconsidering the role of offsets in meeting climate targets. In turn, an evolution toward a previously novel concept has emerged, and it is poised to play a big role in the future of carbon market – carbon “insets.”
Carbon insets
Insets are similar to offsets in many ways, as they are both outcome-based mechanisms to report and claim verifiable GHG reductions. The distinctions between them stem from their intended end use and the types of claims they can be applied to. Like offsets, insets must be produced by activities that lead to verifiable emission reductions, but insets cannot be claimed by just anyone. Emission reductions from insets are intrinsically tied to the production of marketable products, so insets stay with the products as they travel up the supply chain.
To generate an inset, there must be a practice change or “intervention” in the product supply chain that lowers the GHG footprint of the product. Companies that market the product must demonstrate that they have caused the intervention – by purchasing the inset or through other means of funding the practice change – to claim the associated reduction.
While insetting is a nascent concept, and there is still much debate as to how it should be utilized, it is gaining major traction as an alternative to offsetting. It represents a real opportunity for farms to receive compensation for improving the GHG footprint of their products. In response to top-down incentives, farms are implementing bottom-up change through global supply chains.
What exactly are 'supply chain' emissions and why are they so important?
In the world of carbon accounting, GHG emissions are typically classified into one of three scopes. Scope 1 emissions are direct emissions from all resources owned and operated by a company. Scope 2 emissions are emissions from the generation of energy purchased by a company. Scope 3 emissions encompass all other emissions across the entire product life cycle, from primary production to consumption and disposal.
The upstream emissions occurring during the production of the product are often referred to as “supply chain” emissions, and for companies that rely on a myriad of raw ingredients, scope 3 emissions can often dwarf their direct emissions. Scope 3 emissions have proven very hard to abate, largely due to three factors: the size and scale of global supply chains, the lack of sound data to track upstream emissions, and the absence of reporting standards for scope 3 emissions.
Since its inception in 2001, the Greenhouse Gas Protocol (GHG Protocol) has become the leading global standard for GHG reporting. Although the GHG Protocol has served as the gold standard for corporate GHG reporting over two decades, the principles for reporting are difficult to implement when tracking emissions occurring within the extensive web of relationships that comprise global supply chains. Experts around the world are working to develop scope 3 standards that enable accurate and verifiable GHG reporting by companies whose suppliers span the globe.
Why the food and beverage industry relies on farmers' collaboration to tackle scope 3
As most dairy farmers know, there is often a large degree of separation between milk production and the final products that depend on milk. Research has shown that about 75% of the GHG emissions from the production of milk occur at the farm, often referred to as “field to farmgate” emissions. These primarily include emissions from manure management, enteric fermentation and cropping practices. This means that as more companies start making plans to reduce their supply chain emissions, cutting field-to-farmgate emissions will become the focal point of their emission reduction strategy.
Incentives
While some global brands have rolled out pilot projects to incentivize scope 3 interventions on farms, the question of how to share the value of scope 3 reductions with farmers remains unanswered. Additionally, in exchange for receiving incentives for implementing on-farm interventions, farms will likely relinquish the exclusive right to claim these reductions, and in far-reaching supply chains there is much debate as to how these claims should be shared. Some incentive structures being tested include direct investment in farms or solutions providers, premiums for lower-carbon milk, and the production and sale of registered carbon insets.
Many companies and standard setters emphasize that farmers must be fairly compensated for taking on the risks involved in the early adoption of innovative low-carbon practices and novel technologies. Our hope is that this talk is matched with action. However, like with marketing milk, individual farms may have a hard time negotiating fair value in the context of global supply chains. This is why we always encourage farmers to educate themselves and to work with trusted advisers so they can make informed decisions tailored to their own goals and needs. Going forward, a dairy’s value will not only be determined by the quality of their milk, but by the scale of their climate impact.
References omitted but are available upon request by sending an email to the editor.
