Opinion | How India can help its farmers by unlocking potential of carbon credits

Indian small farmers stand at the cusp of a transformative opportunity – to become carbon miners. By earning income through carbon credits for their sustainable practices, these farmers can significantly contribute to the global fight against climate change.  

With environmental management becoming a global priority, businesses, governments, and civil society organisations (CSOs) are embedding carbon management into their core strategies. This shift is driven by regulatory mandates like the European carbon tax (Carbon Border Adjustment Mechanism), ambitious goals such as net-zero by 2050, and the urgent need to mitigate the adverse business impacts of climate change.

Atmospheric commons and the global carbon budget

The earth’s atmosphere, a shared resource crucial for climate stability, has been disproportionately consumed by developed nations. The United States, with just over four per cent of the global population, has historically contributed around 25 per cent of cumulative carbon emissions.  

Similarly, the European Union, home to six per cent of the global population, accounts for roughly 22 per cent of historical emissions. In stark contrast, developing regions like India and Africa, representing over a third of the global population, have each contributed around three per cent of the global emissions historically.

Over the past two decades, the Global North has outsourced its carbon footprint, shifting pollution-intensive industries and waste to the Global South. This practice often manifests in carbon credits, where vast tracts of land in developing countries offset the emissions of industries in developed nations. While Europe boasts a 27 per cent reduction in emissions, its actual consumption-based emissions have risen by 11 per cent since 1990, exposing a gap in their green legislation.

The need for inclusive carbon markets is evident, especially for the millions of smallholders in the Global South, including India. To understand their impact, we must not just look at the opportunities but also address the significant challenges these farmers face daily.

How it may Impact small farmers

While carbon offsetting and insetting present opportunities, they also pose significant challenges:

• Land displacement and loss of livelihoods: In countries like Indonesia, carbon offsetting projects have converted agricultural lands into forest plantations, displacing smallholders and disrupting their livelihoods. In India, similar issues arise when large-scale afforestation projects encroach upon agricultural lands, forcing farmers to leave their ancestral homes and livelihoods.

• Inequitable financial benefits: Financial rewards from carbon offsetting rarely reach smallholders. With most small farms in India being less than one hectare, the business case for agroforestry is weak. Middlemen and rapidly sprouting carbon companies often capture the lion’s share of the benefits, leaving farmers with scant returns. Many Indian farmers find themselves working as contract farmers for carbon developers, with little to show for their efforts.

• Administrative complexity: The bureaucratic hurdles of carbon offsetting schemes are daunting. Smallholders struggle with the intricate requirements and high costs of compliance and auditing, further marginalising them. In India, the complexity of these processes can be a significant barrier, preventing farmers from accessing the benefits of carbon markets.

• Potential market exclusion: Insetting demands costly changes in farming methods, which smallholders in India often can’t afford. For example, small tea farmers in Assam might struggle to meet new corporate carbon standards, risking exclusion from supply chains. The added burdens of traceability and certification favour larger farms, threatening the economic stability and future of these smallholders in agriculture.

• Marginalisation of farmers in the carbon credit system: Expensive audit agencies and so-called experts establish complex rules for carbon standards, audits, and pricing, leaving farmers on the sidelines. This exclusion not only marginalises the very communities we strive to uplift but also jeopardises the integrity and inclusivity of sustainable development initiatives.

• Poor enabling environment: In India, income from carbon credits is not classified as agricultural income and is subject to a tax rate of 10 per cent under Section 115 BBG of the Income Tax Act. This differs from agricultural income, which is typically exempt from tax under Section 10(1). Additionally, transferring carbon credit dues from abroad adds complexity due to high transaction costs and the intricate process of receiving funds from outside India. Moreover, India increasingly aims to retain agricultural carbon credits to meet her Nationally Determined Contributions (NDCs), restricting the export of these credits.

What India can do to help its farmers

In the pursuit of inclusive markets, a multifaceted approach is essential. Here are some practical steps India can take:

• Implement transparent pricing mechanisms: India needs transparent pricing mechanisms that reflect the true value of carbon sequestration efforts and the costs incurred by farmers. This includes covering certification costs and providing financial incentives to make carbon farming viable and attractive.

• Introduce an enabling environment for carbon: Carbon produced by smallholders should be treated as agricultural income and receive a tax waiver under Section 10(1). Additionally, smallholder farmers may be given a waiver from the Nationally Determined Contributions (NDCs) and allowed to sell their carbon to the highest bidder.

• Efficient governance for carbon verification and trade: The Government of India should establish a robust mechanism for efficient governance of carbon verification and trade to avoid a “free-for-all” scenario. Efficient governance would ensure transparency, credibility, and accountability in carbon markets, thus attracting more investments and fostering trust among stakeholders. Centralised governance can streamline processes, reduce transaction costs, and provide clear guidelines for small farmers and businesses.

• Simplify carbon measurement and verification: Streamlining carbon measurement and verification processes can make them more accessible and affordable for farmers. Simplified methodologies that reduce administrative burdens and costs can encourage broader participation and compliance.

• Develop farmer-led standards: Carbon standards should incorporate traditional practices and knowledge from farmers themselves. This ensures that the standards are relevant and practical, reflecting the realities of smallholder farming.

• Address the price paradox: The current system, which pays high prices for carbon credits while squeezing small farmers on commodity prices, creates a paradox that undermines sustainability. Ensuring that farmers receive a living income or living wage supports the long-term viability of agricultural practices.

• Foster collaboration and capacity building: Collaboration between governments, businesses, CSOs, and smallholder farmers is essential for building an inclusive carbon market. Training and capacity-building programmes can help farmers understand and engage with carbon markets.

Climate and farmers: A win for both environment and livelihoods

The integration of carbon management into sustainability strategies offers a unique opportunity to empower smallholder farmers and promote a more inclusive and equitable system. By implementing transparent pricing mechanisms, promoting farmer participation, simplifying measurement processes, developing farmer-led standards, establishing direct benefit-sharing mechanisms, addressing the price paradox, and fostering collaboration, India can create a supportive framework that benefits both the environment and smallholder livelihoods.

As India moves towards a sustainable future, recognising the vital role that smallholders play in this journey is crucial. By co-creating solutions that empower farmers and promote inclusivity, we can turn the challenge of carbon reduction into an opportunity for sustainable development.

Dr Shatadru Chattopadhayay is the managing director of Solidaridad Asia and works with farming communities for sustainable development in agriculture. The views expressed are the author’s own.