Carbon Credits and Dairy Farming: Who Owns the Carbon?

The agricultural industry is being told that carbon is the next commodity. Depending on who you speak to, it is either a major new income stream or a complex market full of risk and uncertainty. For dairy farmers in particular, the situation is becoming increasingly complicated because carbon is no longer just about trees and soil. It is becoming embedded within milk contracts, retailer sustainability programmes and supply chain reporting.

The key question is deceptively simple:

Who actually owns the carbon value generated on a dairy farm?

The answer is often far less straightforward than many farmers realise.

Carbon Credits and Carbon Reductions Are Not the Same Thing

One of the biggest misunderstandings in the sector is the assumption that all carbon has a tradable value.

In reality, there are two distinct concepts.

The first is a carbon credit. This is a verified and tradable unit generated from activities such as woodland creation, peatland restoration or, potentially, accredited soil carbon projects. These credits can be sold to third parties wishing to offset emissions.

The second is a carbon reduction. This occurs when a farm lowers the emissions associated with producing milk. Examples include improved feed efficiency, reduced fertiliser use, renewable energy generation, better herd health and lower methane emissions per litre of milk produced.

Whilst carbon credits can often be traded, carbon reductions are increasingly being captured and utilised within food supply chains. This distinction is critical for understanding future opportunities and risks.

The Rise of Supply Chain Carbon

Over the past few years, processors and retailers have become increasingly focused on their own carbon footprints, particularly so-called Scope 3 emissions, which arise within their supply chains.

As one of Europe's largest dairy cooperatives, Arla has invested heavily in measuring and rewarding on-farm sustainability improvements. Through its Climate Check and FarmAhead™ Incentive programmes, farmers are rewarded for undertaking environmental improvements and providing data that helps quantify the carbon footprint of milk production.

This information has enabled Arla to develop partnerships with major customers including Aldi, Asda, Morrisons and Starbucks, allowing those businesses to demonstrate reductions in supply chain emissions.

This represents a significant shift in how environmental value is being commercialised.

Understanding Insetting

Most farmers are familiar with the idea of carbon offsetting.

Offsetting occurs when an organisation purchases carbon credits generated elsewhere to compensate for its own emissions.

However, many food businesses are increasingly interested in insetting.

Insetting keeps the carbon benefits within the supply chain itself. Rather than purchasing carbon credits from an unrelated project, a retailer supports emission reductions within the farms producing its food products. The retailer can then demonstrate progress towards its climate targets through improvements occurring within its own supply chain.

For dairy farmers, this trend may ultimately prove more commercially significant than traditional carbon markets.

So Who Owns the Carbon?

From a practical perspective, a farmer would normally expect to own the environmental value generated on their farm.

However, ownership is increasingly being defined by contract rather than by physical generation.

Questions that farmers should be asking include:

• Does the milk contract contain environmental or carbon clauses?
• Has participation in a sustainability programme allocated certain rights to a processor?
• Are environmental gains being used within a supply chain reporting framework?
• Has a separate carbon agreement been signed with a third-party provider?
• Does a tenancy agreement reserve environmental rights to a landlord?

These issues are becoming particularly important because environmental claims can usually only be made once.

The Danger of Double Counting

One of the fundamental principles governing carbon markets is the avoidance of "double counting".

A carbon reduction cannot legitimately be claimed simultaneously by multiple parties.

If a dairy farm sells the carbon benefit associated with a particular improvement to an external organisation, that same benefit cannot normally be claimed by a processor, retailer or another purchaser.

Arla has publicly acknowledged this challenge. The cooperative has indicated that if a farmer sells carbon reductions elsewhere, those reductions cannot also be accounted for within Arla's own programme and customer sustainability arrangements.

For farmers, this highlights the importance of understanding exactly what rights are being granted when entering environmental agreements.

Tenant Farmers Face Additional Complexity

Carbon ownership becomes even more complicated on tenanted land.

Questions that may need consideration include:

• Does the landlord own future environmental rights?
• Can a tenant enter a carbon agreement without consent?
• Who owns carbon stored in soils or woodland?
• How are environmental payments shared?

Increasingly, tenancy agreements are beginning to address these issues directly. Any dairy business operating under a tenancy should seek professional advice before committing to long-term environmental arrangements.

Looking Beyond Carbon

Carbon is unlikely to remain a standalone environmental market.

Over the next decade, many commentators expect increasing integration between:

• Carbon sequestration
• Biodiversity enhancement
• Water quality improvements
• Natural flood management
• Soil health outcomes

The result may be the emergence of broader "natural capital" markets, where multiple environmental benefits are valued simultaneously.

In such a world, preserving flexibility could become more valuable than accepting the first carbon opportunity that appears.

A Practical Checklist Before Signing

Before entering any carbon-related agreement, dairy farmers should carefully consider:

What exactly is being sold?

Is it a carbon credit, a carbon reduction, environmental data or future environmental rights?

How long does the agreement last?

Terms may range from a few years to several decades.

Who owns future improvements?

Does the agreement affect environmental gains not yet achieved?

Can other schemes still be joined?

Some arrangements may restrict participation in future opportunities.

Who owns the data?

Farm environmental data is becoming increasingly valuable.

Could future opportunities be lost?

A modest payment today could potentially restrict participation in larger markets tomorrow.

The Strategic Question for Dairy Farms

For many years the question was simply:

"Can my farm generate carbon credits?"

Today, a more important question may be:

"Have I already allocated the value of my carbon reductions through my milk supply chain?"

As sustainability reporting becomes more sophisticated and retailers seek credible reductions within their own supply chains, environmental value is increasingly being embedded in the dairy market itself.

For progressive dairy businesses, the challenge is no longer just understanding carbon. It is understanding the contracts, obligations and commercial relationships that determine who ultimately benefits from it.

As with any emerging market, the most valuable asset may not be the first cheque offered, but the freedom to participate in better opportunities still to come.