Better soil management: Which funding approaches have a positive effect on climate mitigation?

Soils play an important role as (potential) carbon reservoirs for climate mitigation. They also play a key role in promoting biodiversity and resilience to pressures such as global warming or pollution. Worldwide, soils store two to three times more carbon than the atmosphere. They act as natural climate protectors and are therefore also a key component of the EU's agricultural policy towards a net-zero future – provided they are intact. Only then can they reduce greenhouse gas emissions and/or sequester carbon. 

Some forms of agricultural use, such as monocultures, over-fertilisation or the drainage of peatlands, have led to a decline in soil carbon stocks. More sustainable soil management is therefore needed but is currently not usually worthwhile for those involved. How can we incentivise farmers to adopt nature-based measures to promote climate mitigation and biodiversity, such as more complex crop rotations or the rewetting of peatlands?

Action- or result-oriented economic incentives

Climate-friendly soil management can be promoted with economic incentives, among other things. In a recent study conducted by Oeko-Institut, Ecologic Institute and the University of Giessen on behalf of the German Federal Environment Agency, the researchers analysed the effectiveness of two funding approaches in more detail. Both approaches have strengths and weaknesses.

With action-based approaches, farmers are paid to implement a defined agricultural management measure. These approaches are appropriate for many nature-based climate-friendly soil management measures, although there is a high risk that the climate impact achieved will not be permanent. Measures with a lower risk of the stored carbon being released again, such as agroforestry, the rewetting of peatlands or the conversion of arable land into grassland, should therefore be prioritised for action-based approaches. In addition, the lack of flexibility in the choice of measures to be implemented reduces the attractiveness of these funding approaches and thus limits the opportunity to innovate. In contrast, these funding approaches cause low transaction costs for farmers and administrators, are predictable and can therefore support the maintenance of carbon stocks.

In the case of results-based payments, farmers receive payments for achieved climate mitigation, i.e. emission reductions or additional carbon storage. They offer greater environmental certainty as the impact of the measures is measured. They can therefore better incentivise cost-effective, nature-based mitigation measures with high mitigation potential, such as the rewetting of organic soils, the conversion of arable land to grassland or buffer strips. They can therefore be more efficient and cost-effective for these measures and offer farmers greater flexibility in deciding on their farming methods. However, as these funding approaches rely on monitoring, reporting and verification of results, they are not appropriate for climate-friendly management measures whose impact is difficult to quantify and which are therefore associated with high monitoring costs, such as reduced soil compaction. The mitigation impact achieved should also be set in relation to the monitoring costs: action-based approaches should be prioritised for measures with a lower climate mitigation impact per hectare. The benefits of verifying the mitigation impact would most likely not outweigh the monitoring costs that would be necessary for results-based approaches.

Offsetting is a subset of results-based payments approaches in which buyers use the credits to offset their own emissions. Offsetting approaches are not suitable for promoting climate-friendly land management as the risks to environmental integrity are too high. There is a risk that the emission reductions or carbon sequestration will not be permanent. There is also the uncertainty that the measures would have been implemented even without the incentive of the offsetting approach and are therefore not additional. Both would mean that offsetting would result in higher emissions overall.

Other result-oriented approaches such as contribution claims – financial contributions to climate mitigation without offsetting financed reductions against the company’s own emissions balance – and public result-based finance such as subsidies or tax relief offer an attractive alternative way of achieving environmentally-friendly climate mitigation for some climate-friendly land management measures.

Funding, promoting, demanding

Overall, a far-reaching regulatory environment is needed at EU level, to which additional private funding instruments should only be supplementary. Regulatory provisions or funding instruments like farmer upskilling are more favourable for measures with high monitoring costs and should be taken into consideration. A system-wide change is needed to anchor sustainability in agriculture. In addition to incentives for farmers, policymakers must promote change along the value chain and among consumers. In addition, the promotion of climate-friendly soil management measures needs to be geared towards the future: this includes supporting innovation in the form of new monitoring technologies and developing funding approaches that can be adapted to a changing legal framework in order to increase ambition for climate mitigation over time.

Final report ‘Funding climate-friendly soil management’ by Oeko-Institut

Infographic ‘How to maintain and increase soil organic carbon (SOC) stocks in soils to mitigate climate change’

Infographic ‘Challenges of soil carbon certification’