Strategies for Avoiding Lower-Quality Offset Credits

Due Diligence Sample Case

This page presents answers to the due diligence questions for a sample case study of a fictional agricultural project.

Company X’s Sustainability Officer selected a project type from the Project Type Relative Quality Risk: Medium table: Agriculture and land use. The project type was appealing for its connection to Company X’s supply chain which relies upon agricultural products.

The Sustainability Officer, working with their offset broker, selected an improved fertilizer management project implemented in 2018 for further due diligence. The project developers claimed to be reducing N2O emissions (with a GWP 298 times more powerful than CO2) through a reduction in synthetic nitrogen fertilizer applied to cropland. The project, a 2,000 acre corn farming operation, implemented a precision fertilizer application system in which increased soil analysis and new GPS integrated tractors allow farmers to avoid over-fertilization by applying fertilizer only where soil analysis indicates it is needed. The baseline scenario was stated to be the application of fertilizer uniformly across the entire field.

The Project Type Relative Quality Risk identifies Agriculture and land use as having issues requiring due diligence for both additionality and quantification. The Sustainability Officer downloaded the Project Design Document (PDD) from the publicly accessible registry, the project’s verification report from the timeframe in which the credits were generated, as well as the protocol applied to implement the project via the offset program’s website. They then began to answer the questions using the PDD, verification report, and protocol project information as sources to locate answers. Note that not all questions from the due diligence section are presented, as the Sustainability Officer engaged local experts familiar with the project and consulted colleagues in the offset professional community to narrow down the questions that would be most pertinent to the project and its unique context.

Additionality: The project claims to be additional based upon a minimal rate of technology adoption within similar large-scale corn farms, upfront financial investment barriers to purchase new (more expensive) tractors and perform more detailed soil analysis that were overcome by carbon offset financing.

  • Are data and assumptions used to justify the project’s additionality available and easily accessible? AND How much information & data has the project provided to establish its claim to additionality? AND Is there a compelling argument that the project activity is not common practice?

The PDD references a study from the previous year that analyzed the technology adoption rate amongst large-scale corn farms nationally. The study is from a reputable peer reviewed journal and identifies an adoption rate of <5% of 250 surveyed similarly sized (large-scale) corn farming operations in the US. The PDD also includes financial analysis (ROI calculation) outlining the cost of implementing increased soil analysis and tractor improvements and the anticipated cost-savings from reduced nitrogen fertilizer applied to fields.

  • How large is the project’s offset credit revenue stream compared to other revenue streams or cost savings achieved by the project? AND Is there a clear and believable case that offset credit revenues were a decisive factor in pursuing the project?

The project’s offset credit revenue stream appears to be a small proportion (~15%) of total revenue generating from the project, yet the financial analysis was presented as the primary decision making tool for whether to implement the project. The project requires a large upfront investment of improved tractor technology and results in annual cost savings from reduced nitrogen fertilizer application. The cost savings of implementing the project, factored into the financial analysis and helped the project move forward with the investment – which was flagged for further follow-up because of the potential additionality concern. Upon closer examination of the project documents, despite the offset revenue being a small portion of the overall project revenue (and cost savings), the PDD made an effective case for this additional 15% revenue which tipped the scales during the financial analysis phase of project development. The addition of carbon revenue reduced the payback period from 10 to 7 years and thereby made the improvements economically viable for the farmer.

  • Would the project cease reducing emissions if it did not continue to receive carbon offset revenues?

After the project was implemented, it would likely not cease reducing emissions without the carbon offset revenue due to the large upfront investment in new tractor technology that is a ‘sunk cost,’ as well as the ongoing cost savings from reduced nitrogen fertilizer consumption. The project is limited by its offset crediting period of 10 years. However, if the project were to pursue a second 10-year crediting period, then its additionality would be highly suspect given that the ROI timeframe of the financial investment analysis will have elapsed.

Quantification: The protocol’s methodology calculates GHG reductions through estimation of the amount of fertilizer reduced from the baseline scenario and utilizes the protocol-recommended peer reviewed quantification tool. Quantification of project impact was completed through project verification (if accessible the verification report may provide useful information to answer the following questions).

  • Is the quantification protocol methodologically and scientifically sound?

An internet and literature search of the protocol’s quantification methodology finds numerous references citing uncertainty regarding the rate of release of N2O from applying synthetic nitrogen fertilizer to cropland. The quantification methodology assesses the expected release of N2O in the baseline scenario and actual release of N2O from applied fertilizer in the project scenario using the same method and conservatively underestimates the reduction – by reducing the impact claimed from measured fertilizer reductions by 10% to account for unforeseen circumstances – which decreases the risk of over-crediting. The literature is well established demonstrating that reduction in the amount of nitrogen fertilizer applied will reduce GHG emissions and that tracking the reductions of fertilizer applied can produce accurate measurements, to within +/-5% of overall climate impact. By applying a 10% reduction of impact, the quantification methodology uses a conservative approach to estimating impact in recognition of the inherent quantification uncertainties.

  • Are protocol-prescribed methods for addressing quantification uncertainties – including leakage risks – appropriate for the specific project being examined?

See above answer regarding quantification methodology uncertainties. The protocol requires tracking additional agricultural equipment usage by the project and associated additional fuel and electricity required. These associated additional emissions calculated in the PDD, however, were deemed to be ‘de minimis’ sources (i.e., negligibly small).

 

One possible concern for this project type is that reduced fertilizer use will reduce the crop yield, and given the responsiveness of the corn market, reduced production on one farm is generally thought to increase production (i.e., use of fertilizer) on other farm sites – thereby negating the effect of the project (see section ___ on leakage for more info). To account for this possible ‘market leakage’, the protocol requires that the project’s corn-yield data be compared against a baseline period to identify the site’s average yield. If yield was reduced following the fertilizer reduction regimen, the protocol provides appropriate recourse for adjusting the amount of fertilizer actually reduced by the project – to reflect the market leakage impact. The verification report for this project indicates that the precision fertilizer application change did not reduce the farm’s corn yield.