Agriculture and Net Zero

Manufacturing industries have been a focus for reducing carbon emissions. However, agriculture also has its fair share of emissions. Agriculture contributes up to 24% of GHG emissions worldwide. Moreover, the contribution of agriculture in methane emissions is 25-30% — the highest in any human-related activity. Hence reducing emissions in agriculture becomes critical.

49% of emissions come from livestock, mainly through burping and flatulence. In addition, 22% comes from energy use, 16% from rice methane and 13% from soil fertilisation.

Some approaches to reducing emissions in agriculture are:

  • Shift to renewable energy/ biofuels
  • Increased use of biochar
  • Increasing forests and biodiversity
  • Improved farming techniques, including no-till planting, enhancing soils with cover crops, making better use of crop residues
  • Reducing flatulence and burping among cattle through methane reducing feed additives and supplements
  • Reducing stubble burning by incentivising farmers, mechanically cutting stubble and composting stubble.
  • Using drip irrigation to reduce rice methane

The shift to net zero is imperative, and agriculture has a significant role to play.

Cheating Carbon Pricing

Carbon pricing is an efficient mechanism for reducing carbon emissions. Carbon taxes can be a way to force polluters to pay for harming the environment by burning fossil fuel. The World Bank has estimated that 45 countries and 34 subnational jurisdictions have adopted some form of carbon pricing – carbon taxes or emissions trading systems. While these schemes have helped reduce emissions in these countries, they’ve had unintended consequences.

A recent study by Luc Laeven and Alexander Popov of the Centre for Economic Policy Research (CEPR) examined more than 2m loan tranches involving banks doing cross-border lending between 1988 and 2021. This was the period during which time many countries imposed carbon pricing. The study finds that the imposition of carbon taxes at home led banks to reduce lending to coal, oil and gas companies. At the same time, it had a perverse effect of banks increasing lending abroad. The shift was most pronounced for banks with big fossil-fuel-lending portfolios. Thus, the lending simply shifted from countries with carbon taxes to countries with no carbon taxes. Another paper suggests that banks increase cross-border lending in response to stricter climate policies at home. This is a regulatory arbitrage tool to shift dirty loans to countries with relatively lax climate policies. This is akin to companies moving their production facilities to countries with lower compliance requirements, climate or otherwise.

EU’s proposed carbon border adjustment mechanism attempts to level the playing field. However, more countries and blocs need to adopt methods to thwart such actions. The shift to net zero may be in peril without such measures.

Cheating Carbon Pricing

Carbon pricing is an efficient mechanism for reducing carbon emissions. Carbon taxes can be a way to force polluters to pay for harming the environment by burning fossil fuel. The World Bank has estimated that 45 countries and 34 subnational jurisdictions have adopted some form of carbon pricing – carbon taxes or emissions trading systems. While these schemes have helped reduce emissions in these countries, they’ve had unintended consequences.

A recent study by Luc Laeven and Alexander Popov of the Centre for Economic Policy Research (CEPR) examined more than 2m loan tranches involving banks doing cross-border lending between 1988 and 2021. This was the period during which time many countries imposed carbon pricing. The study finds that the imposition of carbon taxes at home led banks to reduce lending to coal, oil and gas companies. At the same time, it had a perverse effect of banks increasing lending abroad. The shift was most pronounced for banks with big fossil-fuel-lending portfolios. Thus, the lending simply shifted from countries with carbon taxes to countries with no carbon taxes. Another paper suggests that banks increase cross-border lending in response to stricter climate policies at home. This is a regulatory arbitrage tool to shift dirty loans to countries with relatively lax climate policies. This is akin to companies moving their production facilities to countries with lower compliance requirements, climate or otherwise.

EU’s proposed carbon border adjustment mechanism attempts to level the playing field. However, more countries and blocs need to adopt methods to thwart such actions. The shift to net zero may be in peril without such measures.

Financing the Shift to Net Zero

The shift to net-zero requires both a transition in global energy and a significant reduction in greenhouse gases emitted by industries. Both require huge levels of investment.  However, most investments required to shift to net zero are large, complex, and risky. This raises an interesting question of where the money will come from to achieve net-zero goals? I address this question in this piece.