How a New Financial System for Farmers Could Enhance Natural Capital

January 17, 2018 | News

At the recent Oxford Farming Conference, Environment Secretary Michael Gove spoke on how the provision of financial support for farmers would change post-Brexit. He mentioned, at several points in his speech, about the need to base any future scheme on natural capital thinking.

In principle, the recently reformed Common Agricultural Policy allows for this already, with the so-called new ‘greening’ payment. Indeed, the UK Government has its own Countryside Stewardship Scheme which encourages many of the land management practices that Gove pointed to in his Conference speech, including: the protection of wildflower meadows, woodland improvement and improvements in water quality.

Setting aside the fact that the introduction of ‘natural capital thinking’ might already be possible, and is indeed already practiced to a degree within the EU, how might such a system be further developed?

A framework for natural capital accounting

A good starting point is the Natural Capital Protocol (NCP)[1] which sets out a clear framework designed to inform business decision making. Whilst not prescriptive, the NCP sets out a clear process for understanding, scoping, measuring and valuing an entity’s natural capital.

It is important to first understand some basic concepts. With natural capital we are concerned about stocks, flows and value. Primarily, the aim is to protect and enhance stocks to ensure the continued delivery of flows and value. For agricultural products, this means protecting the quality and quantity of natural resources (e.g. soil, water, minerals, biodiversity and so on) to ensure maintained or increased product yields and the associated business and/or societal value (revenues, jobs, health etc).

a model of environmental stocks flows and value

An interesting study by the Food and Agriculture Organization of the United Nations (FAO; 2015[2]) looked at the natural capital costs for a range of crop (rice, soybeans, wheat and maize) and livestock (pork, poultry, beef and dairy) types across a range of geographies which together represented 80% of global production.

Key environmental impacts

Following a screening assessment, the study distilled six key environmental impacts that needed to be estimated to determine the use of natural capital:

  • Greenhouse gases
  • Air pollutants
  • Water abreaction
  • Water pollutants
  • Soil pollutants
  • Land use change

Through the use of Environmentally-Extended Input-Output (EEIO) analysis, a method not without its limitations[3], the study translates the physical units of environmental impact (cubic meters of water, tonnes of greenhouse gases, hectares of land and so on) to their financial equivalents.

Globally, the study found the production of rice to have most impact on natural capital, followed by soybeans, wheat and maize; a range of around $900 to $400 per tonne. An analysis of livestock production showed beef to be the most impactful product (around $35,000 per tonne), followed by pork, poultry and dairy (at about $6,000, $2,500 and $550 per tonne respectively).

For both crops and livestock, the approach seemed sensitive enough to pick up the difference between different production methods and geographies, at least at an aggregated level.

In principle then, it seems possible and feasible to build an incentive scheme aimed at protecting and enhancing natural capital. However, the EEIO method is certainly not robust enough to allow for the single-farm measurement that any new payment system would require.

Use of the Cool Farm Tool for natural capital assessment

This is where calculators such as the Cool Farm Tool[4] could pay a role. Unique in that it is global and covers both crops and livestock, the CFT is industry-backed and farmer-friendly. What is more, the CFT already covers several of the natural capital impact categories that the FAO identified, such as greenhouse gases, water, biodiversity and, to a degree, land use change and soil quality.

The CFT would also seem to meet Gove’s requirement, that he has set for a simplified Countryside Stewardship Scheme, that farmers should be able to complete any application process within a working day. Our experience with the Cool Farm Tool is that it takes considerably less time to produce a result. Furthermore, the CFT offers integrations to existing farm software to further save time by automating data collection and reporting. You can find more information at https://coolfarmtool.org/.

Craig Simmons
Chief Technology and Metrics Officer, UK

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