Document, entitled "Final Report: Financing Climate-Friendly Agriculture", assesses appropriate policy instruments and limits of market-based approaches to support climate-friendly agriculture in Europe. The report was prepared by Anne Siemons, Dr. Lambert Schneider, Hannes Jung, Hugh McDonald, Aaron Scheid, Dr. Ana Frelih-Larsen, Prof. Andreas Gattinger and Dr. Wiebke Niether. It was published by the German Environment Agency in January 2025.

Main points of the report:

• Evaluation of funding approaches: The report assesses how results-based and action-based financing approaches should be used to support climate-friendly agriculture in Europe. The aim is to achieve climate change mitigation and support the transition of the agricultural sector to net-zero emissions. It identifies significant potential but also significant challenges in supporting climate-friendly agriculture measures using these approaches. Both approaches have their strengths and weaknesses.
• Carbon Mechanism Analysis: The report examines ten existing carbon credit mechanisms related to climate-smart agriculture, identifying a number of shortcomings. Based on the evaluations, it discusses the suitability of two financing approaches to support different types of climate-smart agriculture measures.
• Recommendations: The report states that action-based financing approaches are suitable for many climate-smart agriculture measures. However, there is a high risk that the climate impact achieved will not be durable. Results-oriented financing approaches that do not focus on compensation, such as entitlements and public funding for results achieved, are best suited for some climate-smart agriculture measures. Offset approaches are not an appropriate instrument for financing climate-smart agriculture. If certificates are used for offsets, there are too high risks to environmental integrity (higher aggregate emissions than without offsets) due to the lack of durability of the climate impact, the lack of additionality and uncertainties in quantifying this impact.
• Key priorities: Prioritising climate-friendly agriculture measures should take into account their mitigation potential a accompanying benefits. Measures with the greatest climate impact should be prioritized. Those measures that offer greater co-benefits (e.g. climate change adaptation, increased biodiversity, water quality) and lower risks of negative environmental impacts should be prioritized. All measures that store carbon in soil have a significant risk of impermanence. Support for these measures must go hand in hand with incentives to ensure long-term carbon storage.
• Natural solutions: All measures assessed are natural solutions, except for biochar, which is assessed separately. Natural solutions are defined as locally appropriate, adaptive measures for the protection, sustainable management or restoration of natural or modified ecosystems. The aim is to address targeted societal challenges (such as climate change mitigation) while improving human well-being and providing benefits for biodiversity.
• Biochar: Biochar, an external input consisting of charcoal produced by pyrolysis, stores carbon and can be incorporated into the soil. However, uncertainties regarding the impacts of biochar on soil health and biodiversity require limiting funding for large-scale biochar deployment until further research demonstrates the conditions under which biochar can be safely applied and establishes criteria for the sustainability of its implementation.
• Compensation risks: The report highlights that compensation may be attractive to policymakers, but to ensure environmental integrity A number of specific challenges need to be addressed. This means that offsets must not lead to higher aggregate greenhouse gas emissions than would have been the case without the mechanism. Compensation issues:
  • Lack of permanence
  • Lack of additionality
  • Uncertainties in quantification impacts
  • Risk of double counting
• Analysis of selected carbon certification systems: The report evaluates ten certification schemes, including the American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard (GS) and Verra Voluntary Carbon Standard (VCS). It found that methods have significant shortcomings, in terms of avoiding double counting of emission reduction results. Information on credits and their use is insufficient. It was also found that the methods are unlikely to ensure environmental and social standards, despite existing examples that could be implemented in all methods.
• The need for a comprehensive approach: The report points out that additional private financial instruments are only part of the picture. There is a need a more comprehensive supporting regulatory framework at EU level and in the Member States. Other approaches such as regulatory provisions or funding instruments (e.g. for further training of farmers) should also be considered. Furthermore, it is essential to ensure that the financial structures of the Common Agricultural Policy are geared towards sustainability.
• The importance of integrity: Environmental integrity is key in offsets. This means that compensation must not lead to higher aggregate emissions greenhouse gases than would be the case without the compensation mechanism. Environmental integrity is also understood from an ecological perspective, which means that compensations should not negatively affect biodiversity and ecosystems.
• Action vs. performance payments: The report compares action-based and result-based payment approaches, taking into account their strengths and weaknesses in supporting climate-friendly agriculture. Result-based payments are considered to be more suitable for some measures, especially where it is difficult to precisely identify actions to achieve climate objectives. Action payments are appropriate for many measures, but there is a risk that their climate impact will not be sustainable.

Recommendations:

• It is necessary to prioritize natural measures, which have significant potential to mitigate climate change, protect biodiversity and support the achievement of other societal goals.
• To achieve sustainable agriculture, it is necessary comprehensive approach, which includes regulations, financial instruments and support for farmers.
• Compensatory approaches are not a suitable tool to finance climate-friendly agriculture, and if used, there are too high risks to environmental integrity.
• When designing financial instruments, it is necessary to address problems related to permanence, additionality and quantification influences.
• When implementing projects, it is necessary transparency a stakeholder engagement.
• It is important to implement robust registers, which transparently document emissions, transfers and cancellations of carbon credits.
• Certification programs must have clear rules to avoid double counting and to ensure environmental and social sustainability.
• They should develop guidelines for achieving the Sustainable Development Goals (SDGs) at the level of individual projects.
• Projects should also be evaluated in terms of their support adaptation and resilience in the host country.

Overall, the report highlights that climate-friendly agriculture has significant potential for climate change mitigation, but several challenges need to be addressed in its financing and implementation. It is necessary to move towards systematic and comprehensive approach, which takes into account not only climate impacts, but also broader environmental and social aspects. Spring