ANALYSIS: 'Next generation' rice methane carbon credits set to double in price
Quantum Commodity Intelligence – The next generation of rice methane credits is likely to transact at double the prices seen previously in the sector, reflecting lower expected issuance per project and the high cost of monitoring, reporting and verification in the space, according to industry sources.
The sector is currently undergoing a deep transformation prompted by growing interest in reducing greenhouse gas (GHG) emissions in rice producing countries, net zero commitments from food suppliers, new carbon offsetting methodologies and the growing uptake of remote sensing technology.
Rice, one of the world's major food crops, is thought to be responsible for between 10% and 14% of global methane emissions, a highly potent GHG with a global warming potential 27-30 times greater than carbon dioxide (CO2) over 100 years, and 40% of all irrigation water used globally.
Flooded rice fields encourage bacteria and the progressive decay of plants, turning them into methane emissions. In major rice producing countries, the crop's share of both methane emissions and water use is much higher than the percentages mentioned above.
Emissions can be reduced by approximately half by adopting alternate wetting and drying (AWD), a technique that consists of removing water at specific intervals during the growth period of the rice in the paddy field.
To date, attempts to use carbon markets to curb methane emissions from rice cultivation have been stop-and-go. The Clean Development Mechanism (CDM), a carbon crediting scheme created under the UN's Kyoto Protocol, adopted a methodology for reducing methane emissions from rice production in 2012, but interest waned rapidly because of an EU ban on imported carbon credits.
The main CDM methodology for AWD, called AMS-III.AU 'Methane emission reduction by adjusted water management practice in rice cultivation', was later transposed to voluntary carbon markets, where it started to see some take-up.
AWD was given a new lease of life in 2020 as offsets rose in price, prompting many developers in China and India to apply the technique. By early 2023, nearly 300 projects were registered or in the pipeline at US-based registry Verra, which was used by most schemes.
But rapid growth in a short amount of time prompted an internal review at Verra, which concluded that many projects were not sufficiently additional, the proof that carbon finance is needed by a project.
Verra's concerns were related to Chinese projects, nearly all of which qualified as "small scale" under its rules because they had under 60,000 tonnes of CO2 equivalent of annual emissions reductions. This gave them more leeway in demonstrating additionality, when in fact many were located in nearby areas and operated by the same organisations. Verra paused all crediting activities surrounding AMS-III.AU in February 2023 because of these concerns.
The standard is currently developing a standalone methodology for rice methane reduction activities with help from consultants Atoa Carbon, Bayer, Shell and GenZero, a unit of Singapore-based investment firm Temasek.
According to Germany-based chemicals giant Bayer a "smooth, seamless and sustainable shift" to AWD or another technique, called direct seeded rice (DSR – see box), requires "a robust support system involving handholding, capacity building, and regular monitoring is crucial".
It added: "The expenses associated with deploying teams and implementing operational activities for this transition make carbon finance a critical resource. Moreover, the inherent qualities of rice methane credits, with consistent greenhouse gas reduction each season, provide a distinct advantage."
In 2023, Bayer, oil major Shell and GenZero announced a wide-ranging cooperation to promote rice methane projects, involving training for smallholder farmers "while utilising measurement, reporting and verification (MRV) mechanisms incorporating remote sensing technology".
The potential for AWD and DSR is thought to be the greatest in the world's largest rice producers – China, India, Indonesia, Pakistan, Bangladesh, Vietnam, Thailand, the Philippines and Japan – and in locations that use a flooding irrigation system, a key requirement for projects.
In the meantime, developers have been encouraged to use a different Verra methodology, VM00042, which covers soil organic carbon removals resulting from the adoption of improved agricultural land management practices and has been described as a "step change" in integrity given its focus on leakage areas and other aspects.
Industry sources said this protocol, as well a recent methodology published by Switzerland-based Gold Standard, result in far fewer credits than AMS-III.AU, and will in time boost carbon credit prices.
In one prominent Asian country, the VM00042 methodology has resulted in three times fewer credits than AMS-III.AU, or about five tonnes of CO2 equivalent per hectare, according to a developer operating in the region.
"The original methodology used a country average and yielded about 15 tonnes of carbon credits per hectare...because local farmers often put the straw back into the paddy fields, which creates further anaerobic digestion," said the developer. "In reality, we think it should be about five tonnes per hectare, based on large-scale GHG analysis of the samples we've collected," it added.
The Gold Standard methodology for the sector, which was published last July, also yields considerably fewer credits than AMS-III.AU, said sources.
"The old methodology allowed rice methane projects to earn 12 tonnes per hectare (t/ha). We chose a conservative path and were at 6 t/ha. The Gold Standard protocol is closer to 4 to 4.5 t/ha," said one source in India.
A third company based in Thailand told Quantum that the latest Gold Standard protocol yields around 4.5 to 4.8 t/ha, a 25% reduction from projects using AMS-III.AU. This, in turn, has made projects more challenging to put together and has required an increase in carbon credit prices.
Developers that can demonstrate that AWD is being applied thanks to remote sensing technology have sold carbon credits in the forward markets for between $20-25/tCO2e, according to another source. This is far more than the $5-12/tCO2e range associated with historical credits from China and India.
"Rice methane is a quick, cost-effective and scalable abatement versus other project types." said Jon Pierre, chief executive of UK-based Mantle Labs, which operates in the sector.
A webinar earlier this year heard that the new rice methodology planned by Verra will include "significant updates" compared with AMS-III.AU, including on project monitoring, emissions quantification and project development guidelines.
In short, the updated rice methane methodology is going to be stricter in some respects and more flexible in others. The new protocol, which is set for publication in the fourth quarter of this year, will be largely inspired by VM00042 and one of its attached modules on biogeochemical modelling, VMD0053, although it will seek to be easier to use.
Sami Osman, chief executive of Atoa Carbon, said the new methodology will include more detailed "agronomic guidance" for developers, safeguards on biodiversity, new guidelines to train rice farmers in using AWD techniques and potentially an option for new rice farms with irrigation systems already in place. Reduced biomass burning at paddy fields, if it can be proven, may also earn carbon credits in the new methodology.
Positive list
Meanwhile, the consultant is looking to create a "positive list" of activities that would automatically qualify for carbon offsets to simplify processes, it said. A big uncertainty is whether the new methodology will include an option to verify carbon credits remotely.
Atoa Carbon said during the webinar that, at the very least, the protocol will include "extra guidance" for time, date and geo-stamped photos and survey-based approaches, which are likely to remain critical in future protocols.
"Most likely we will not see any mandatory requirements to use remote sensing, but we're already seeing how incredibly powerful and useful this technology can be," said Sami Osman during the webinar. "For these rice systems, we expect the majority of projects to be dealing with a very large number of impoverished smallholder farmers," he added.
What makes the sector so promising as a source of methane reductions is also what makes MRV so complicated. In major producing countries, rice output is spread out across hundreds of thousands of hectares and millions of individual farmers. For example, there are an estimated 140 million smallholder rice farmers in Asia alone.
"MRV is the main challenge. We've seen projects that still largely rely on notebooks and trust, they're not able to demonstrate clear adherence to AWD. Sometimes it's not clear if developers have done AWD for one or several rice growing seasons, which massively impacts the results," said one source.
In the last few years, promising new technology has emerged to help verify adherence to AWD and the companies promoting it say it is reliable. "Previously, measuring methane was hugely expensive and time-consuming, requiring the use of in-field scientific methods," according to the International Rice Research Institute, one of the rice sector's main research organisations
"However, new technology now uses remote sensing, automated sensors and satellite data to provide accurate, low-cost real-time data on methane emissions. On top of that, sensors can be used to monitor other important agricultural parameters, such as crop growth, soil moisture and water usage," it said.
Last October, France-based start-up CarbonFarm closed a €2.5 million ($2.65 million) seed fundraising round to develop its technology based on remote sensing data calibrated with ground measurements and field samples.
The company has developed some in-house models to monitor farming practices, and estimate methane emissions from different types of rice, soil and regions, and says it works with food giants such as Mars, which want to reduce methane in their own supply chains.
"The technology works really well, with proven results in six different countries," said Vassily Carantino, the firm's co-founder. "Satellites are able to monitor a large range of farming practices, including water-management, to estimate methane emissions with great accuracy at farm level and for entire project areas," he said.
Verra recently announced that it was working with Mantle Labs on an audit of the Chinese projects that were suspended last year. Mantle Labs has also developed technology to monitor ongoing projects and they are working globally in this area.
Clement Atzberger, co-founder and head of research, said typically the first step is to assess rice and non-rice farming areas, followed by an additionality test on single projects to verify that paddy fields have been drained and for how long.
"Rice identification is using remote sensing is well established...We can do this not only for current crops but also over the prior decades using available satellite data," said Atzberger.
"Radar reacts very nicely to the surface water of rice paddies. You can see how long it was drained. You can see if it was common practice before the project started," he added.
But, while many developers have welcomed the changes, seeing it as a way to ensure integrity and boost carbon credit prices, others have been loath to move to these updated practices, according to industry sources.
BOX: Observations on AWD and other rice production techniques
The alternate wetting and drying method (AWD) was first documented by academics and the International Rice Research Institute in the early 2000s as a way to save water, rather than reduce methane emissions, but it is the latter that explains the acceleration in interest seen over the last few years.
Until now, the technique has seen little take-up in the developing world because it requires additional labour and does not boost rice yields – it may even lower them if done badly.
"The wider adoption of AWD is currently still held back by the lack of irrigation infrastructure as well as awareness and technical knowledge among farmers," a spokesman for BASF, a major Germany-based chemical manufacturer with expertise in rice production, told Quantum.
Another technique, called direct seeded rice (DSR), does away with the requirement to grow seedlings in nurseries and then transplanting to the fields, and is also proven to save both emissions and water.
"Compared to the conventional transplanted rice method prevalent in Asia, direct seeded rice delivers faster planting and maturing, conserves scarce resources like water and labour, is more conducive to mechanisation, and reduces emissions of greenhouse gases," said BASF.
However, the growth of weeds, the exposure of seeds to birds and pests, are notable downsides to the technique.
Bayer, another chemicals firm and also based in Germany, noted the following limitations for both AWD and DSR: "limited training, insufficient access to machinery, and low confidence in support systems, along with challenges in machinery infrastructure such as timely availability of seed drills and knowledge to operate them".
It added: "Farmers face psychological barriers due to potential yield reductions, unfamiliar practices, and overall uncertainty associated with adopting AWD or DSR techniques."
INTERVIEW: BASF discusses its role in sustainable rice production
Quantum spoke to the Germany-based chemicals giant about its role in sustainable rice production.
Q: What is the potential for carbon finance to help here. Is it minor or significant?
At BASF we believe that the overall potential for carbon finance to support sustainable rice production is significant. However, it is not going to be a silver bullet for the wide-scale adoption of sustainable practices.
There are still many other challenges rice farmers – especially smallholders – face today that need to be overcome. These include land ownership issues and, by extension, carbon credit ownership, poor infrastructure, unclear/non-existent legal and regulatory frameworks, and poor financial literacy rates.
In addition, carbon finance is still a secondary driver for farmers to practice carbon farming, looking more at incentives/de-risking. The primary driver would/should be the improvement in soil health, soil fertility, efficient input use, and/or yield from adopting climate-smart agriculture practices and by extension, increased profitability for farmers.
Q: Any countries where potential is stronger than others?
The potential for carbon finance in different countries depends on a whole range of factors. However, it is true that some regions have a stronger potential for carbon finance than others, e.g. driven by the need to reduce irrigation water or their ability to adopt new technologies.
Q: How do AWD and direct seeding differ in terms of their methane benefits?
According to recent scientific studies, AWD systems are notable for their significantly lower methane emissions compared to continuous flooding. Methane benefits of direct-seeded rice (DSR) depend on the respective type of DSR. For example, direct dry seeding will curtail methane emissions considerably compared with direct wet seeded.
However, please note that one cannot only look at the single lens of methane minimisation since other greenhouse gases (GHG) as well as rice yields need to be taken into account as well.
Q: Is BASF developing new carbon methodologies for the sector?
No. We are working with Gold Standard (GS) and Verra. BASF follows Verra's "VM0042 Methodology for Improved Agricultural Land Management", that quantifies GHG emission reductions and soil organic carbon removals resulting from the adoption of improved agricultural land management practices.
Q: What are the most important trends, and what will improve integrity of methodologies?
Rice is a crop where there is still plenty of room for technological improvement and adoption. It is also one of the most GHG-intensive crops, so there is also pressure for mitigating this environmental impact. In addition to that, rice is the second most planted food crop in terms of acreage – second only to wheat. The number and geographical extent of countries having rice as their main staple food is also considerable.
The most important component of any reputable carbon system is that it must use robust and scientifically credible methodologies that ensure any removals and/or reductions are not only measurable, but also monitorable, reportable and independently verifiable using validated and peer reviewed systems and methods. This is why we only follow GS or Verra for agriculture.