Hemp’s Role in Carbon Offset
Even in the hemp industry, virtually all facets, including extraction equipment and greenhouse grows, ultimately have a large carbon footprint. In fact, According to the Global Footprint Network, just one joint generates around 1.5 kg of CO2 emissions, roughly the equivalent of leaving a 100-watt light bulb turned on for an entire day. This figure is an incredible statistic, but only captures such a small piece of our market and an inconsequential piece of the global carbon footprint. However, hemp is often touted as a carbon-negative material and regurgitated by many people as such.
Serving almost as an accumulation of the efforts of the ‘70s until now, the Kyoto Protocol forced countries’ hands to comply with determined emissions standards. However, the 2005 signed agreement provided flexibility to countries that did not meet their carbon emissions requirements by allowing them to purchase offsets from emerging countries. This setup ultimately bled into corporate strategy. Specifically, Voluntary Credit Offset (or VCO’s) proceed after the Kyoto Protocol, serving as a “pay to play” method for companies to sell their offset carbon to those who were not able to meet their targets. Buyers in the VCO market consist of airlines, natural resource companies, and more recently, Lyft made a splash by committing to offsetting all emissions worldwide.
Voluntary markets co-exist with compliance offset markets driven by mandated caps on greenhouse gas emissions, which in 2019, was a significantly larger scale totaling $214.5 billion. Compliance carbon markets are regulated entities that obtain and surrender emission permits (allowances) or offsets to meet predetermined regulatory targets. In the case of cap-and-trade programs, participants – often including both emitters and financial intermediaries – can trade allowances to make a profit from what they have not used or to meet regulatory requirements. The most active compliance carbon offset program is the United Nations Clean Development Mechanism, the source of offsets for Kyoto Protocol Signatory Counties and buyers in the European Union Emissions Trading Scheme.
What the voluntary carbon market lacks in size, they make up for in flexibility – spinning off innovations in project finance, monitoring, and methodologies that also influence regulatory market mechanisms. For example, the voluntary carbon market has spawned its standards, registries, and project types beyond the scope of existing compliance market mechanisms. In recent years, governments worldwide have increasingly turned to voluntary carbon market mechanisms – particularly standards and registries – to inform the development of or serve as compliance instruments themselves.
According to the Financing Emissions Reductions for the Future: State of the Voluntary Carbon Markets 2019 report, the largest increase in transacted volume was driven by offsets associated with “nature-based solutions,” which are projects that reduce emissions by improving the management of forests, farms, and fields. Volume in the Forestry and Land Use sector, for example, grew 264%, from 13.9 MtCO2e in 2016 to 50.7 MtCO2e in 2018, while volume in all other offset types grew just 21%. The average price in the period remained stable at $3.06 per MtCO2e (roughly 8x lower than prices in mandatory markets) and, prior to COVID-19 implications, is expected to increase even further based on demand trends in 2019. Just like in the nascent hemp industry, the price per unit softened as sellers entered the market before the buy-side was established.
While all this is encouraging news, industrial hemp participates in this market remains questionable at best. First and foremost, the relative immaturity of hemp best management practices make it difficult to perform, let alone offer a high degree of confidence in the aucortial process that bona fides a credit. Recent advances in GIS methodologies, such as the services provided by IndigoAg, are a good starting point. However, it is exceedingly unlikely that firms will be able to secure the capital investment required to ascertain viable carbon credit applications. This application won’t change until the industry has sound product characteristics details, commercial volume representation in a major sector, and price transparency.
Much like the VCOs, what hemp lacks in its maturity it offers in flexibility and could be a major contributor to carbon trading markets in the not so distant future. Studies conducted worldwide appear to offer a range of potential sequestration values – 8 to as much as 35 Mt per hectare (3.57-15.56 Mt per acre). Concerning the price offered above ($3.06 per MtCO2e), it would equate to potential increased revenue of $10-47.00 per acre in the VCO market. As much as $87.40-380.90 per acre if accredited by the mandated cap and trade platforms, respectively, thus negating the potential transitional and, or operating cost of production significantly.
This potential productivity is getting noticed, especially in the relatively mature production markets of Europe. Thanks to the previous studies conducted by the Nova Institute, the European Industrial Hemp Association was expected to seek priority funding for further research and commercial steps on the topic. Although, with the recent novel-food designation, it remains to be seen if this will be the case. Substantive research on this topic in North America is limited, but as the agronomic research capabilities mature and industrial (grain, fiber, and hurd) production increases within the US, it can be expected this topic will gain further traction.
While these processes work themselves out, a significant opportunity may present itself by way of hemp-based manufacturing. Like the majority of the market, hemp suffers from a lack of certification criteria. Fortunately, and unlike floral derivatives, several standards exist for green building and carbon-neutrality. Therefore it could be considered an “easier” uphill to attain these specifications, as opposed to developing them. Industrial hemp’s work is cut out for it.