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Carbon credits serve as a mechanism for climate justice by compensating farmers who implement sustainable practices such as direct-seeded rice, natural farming, agroforestry, zero tillage, alternate wetting and drying in rice, the application of biochar, or the use of biogas digesters that provide environmental services. These practices often do not offer direct financial benefits and may not be adopted due to the inherent risk of yield loss. One carbon credit represents one ton of CO2 equivalent, either removed from or avoided from entering the atmosphere. Farmers who adopt climate-friendly practices can, in principle, earn additional income by selling credits in carbon markets. However, the institutional mechanisms involved in obtaining carbon credits are complex and require an intermediary partner to facilitate farmers in obtaining and trading them.
For farmers, trading carbon credits is challenging due to the lack of defined metrics for measuring, verifying, and valuing carbon dioxide reduced by agricultural practices. Two market mechanisms exist: compliance and voluntary. In compliance markets, industries have mandated emission reduction targets, with regulator-issued credits offsetting emissions under cap-and-trade. Companies need high-quality compliance credits at premium prices. India's Perform, Achieve and Trade (PAT) and carbon credit trading scheme (CCTS) are part of the compliance market. Voluntary carbon markets (VCM) involve organisations buying project-based credits for self-imposed climate goals through private standards like Verra or Gold Standard, resulting in variable prices and quality.
The voluntary carbon market within India’s agri-food sector is currently in its early stages. As of December 2024, there were 242 agri-food-related projects listed or registered under Verra and Gold Standard. The majority of these projects focus on afforestation and reforestation, followed by initiatives in sustainable agriculture and rice emission reduction. However, only 21 projects have actually issued credits since 2005. The projects related to sustainable agriculture and rice emission reduction have yet to deliver issued credits. Recently, agro-tech company Sow&Reap Agro bagged the first-ever credit for Alternate Wetting and Drying (AWD) in rice cultivation.
In the meantime, the volume of credits in India’s VCM in the agri-food sector has increased, reaching 3.19 million credits issued by 2024. However, the retirement of credits, meaning their actual use by buyers, lags behind, with only 1.9 million credits retired by 2024. This indicates a persistent gap between credit creation and market uptake. Nonetheless, India remains a significant player in the VCM. It is projected that by 2030, the country could earn US$ 20–40 billion from voluntary carbon credits.
Despite the promise of carbon credits, several challenges prevent them from becoming a mainstream solution for sustainable agriculture. First, farming practices vary across crops, regions, and agro-climatic conditions, making them complex and heterogeneous. Unlike industrial projects with clear measurable reductions, agricultural projects involve multiple practices that cumulatively reduce emissions, making carbon savings difficult to quantify. The monitoring, reporting, and verification MRV process is costly, and transaction costs often exceed carbon credit values, questioning project viability.
Second, permanence and additionality pose challenges. Agricultural projects focusing on avoidance credit remove emissions temporarily without storage, creating permanence risks. These risks occur because agricultural practices can reverse due to market shifts and climate shocks, potentially nullifying emissions reductions. Additionality is difficult to prove when practices like micro irrigation are already being adopted through policy incentives or economic benefits, making it hard to demonstrate that carbon savings wouldn’t have occurred without carbon finance.
Third, price volatility undermines carbon credit project viability. Global carbon credit prices range from US$4 to over US$200 per credit. Since developing carbon projects requires intensive time and labour for baseline scenarios, emission reduction estimates, MRV protocols, implementation, and approval, volatile prices deter private sector financing. Without upfront blended financing, many small-scale developers may struggle to survive.
Fourth, carbon market, like any other market for that matter, works on the foundations of trust. Because of the complexities in MRV and the risks associated with permanence; agricultural credits are often rated lower on the trust scale by global carbon project rating agencies. Because of this, agriculture-based carbon credit often fetches lower prices. This is also one of the major reasons for lower rate of retirement of carbon credits from agriculture.
According to CEEW, in India, 75 per cent of registered AFLOU projects have taken 1,689 days, versus 623 days in rest of Asia. Higher timeline delays carbon credit payments and creates barriers to scaling carbon projects.
There is a lack of transparency in benefit sharing. Given that the institutional framework of the carbon market requires intermediaries to link farmers with the market, it is crucial to prioritise farmers in carbon projects. Carbon projects must be developed in a participatory manner with farmer involvement, and the benefit-sharing mechanism must be transparent to prevent potential disputes.
India’s Carbon Credit Trading Scheme (CCTS) provides a crucial framework, but for agriculture to truly benefit, much more needs to be done. Digital monitoring, reporting, and verification (DMRV) tools such as artificial intelligence–enabled sensors, remote sensing, and blockchain platforms can make the process more efficient and less costly, while ensuring transparency. Strengthening farmer capacity is equally vital. Smallholders often lack knowledge about how carbon markets function, and many remain unaware even when they are part of projects. Organising farmers into cooperatives or producer organisations can reduce transaction costs, enhance bargaining power, and make participation more meaningful.
Transparency in benefit sharing is critical. Farmers must be central to carbon projects, with safeguards ensuring equitable revenue distribution. Most projects are developed by private players, with limited public institution involvement. Projects can scale up through grassroot institutions and farmer collectives. A national carbon project rating agency could assess Indian projects’ quality and strengthen buyer confidence. The Government of India’s National Designated Authority oversees carbon projects, authorises credits, and prevents double counting.
Should carbon credits drive sustainable agricultural transformation? Yes, but with cautions. Not all sustainable agri practices suit carbon projects due to complexities, and not all target carbon. Carbon finance should be one market-based strategy alongside green credit, ecosystem payments and voluntary standards. We must rethink policies and governance to promote national carbon markets that offer credible credits.
Kiran Kumara T M is Scientist, ICAR-National Institute of Agricultural Economics and Policy Research (NIAP), New Delhi
Aditya K S is Scientist, ICAR-National Institute of Agricultural Economics and Policy Research (NIAP), New Delhi
Views expressed are the authors’ own and don’t necessarily reflect those of Down To Earth