The Challenge of Certification Premiums

We have always contended that successful insetting programs must create short-term tangible value for the customer to be sustainable and resilient across economic cycles. One of those ways is the ability for insetting programs to complement certification premiums, which have seen a sustained decline.

In the world of soft commodities (i.e. coffee, cocoa, timber, etc.), certification labels have historically generated "premiums" which are payments in addition to the value of commodities, often passed on to the growers directly for meeting certain requirements. Our assessment of the market suggests that these premiums have declined significantly as certification labels have proliferated and become the norm. This has created a significant revenue gap for suppliers; in many cases, with a direct, adverse impact on the income of the growers (including small-holders).

Simultaneously, as retailers and buyers of soft commodities are required to ensure deforestation-free supply chains and reporting of environmental footprint, certification schemes alone fall short in meeting those demands due to the lack of required monitoring data.

Insetting programs (or Payment for Ecosystem Services), when designed and executed well, can meet the reporting needs for buyers as well as replace/augment the certification "premium" revenue stream for suppliers. Below is a concrete example of a program we are building with a UK-based tea company, whom we visited last month.

Insetting Case Study: Tea

Over the past few years, tea prices have seen a steady decline. This has been in addition to a sharp decrease in certification premiums tea has been able to command on the retail shelf. This drop in premium is equivalent to roughly 10-20% of the income of the smallholder growers.

For this tea company, this has significant short- and long-term impacts; loss in farmer income can lead to adverse ecological impacts as farmers look to substitute that income with new revenue streams, sometimes resulting in logging and encroachment of surrounding areas. Further degradation of local ecosystem makes it vulnerable to natural disasters, lowering the resiliency of the supply chain, creating a vicious cycle.

In this example, that past 6 years have seen a marked rise in flash floods and landslides creating a direct impact for this tea supplier, their buyers and retailers. As a result, this, along with their commitment to the local community, has prompted the tea company to build a program to rehabilitate community and surrounding areas of their sourcing region and incorporate elements of agroforestry (shade tree planting) into their supply base.

The Solution

Using our product, we were able to quantify the potential of this program to add roughly 500,000 tonnes of CO2 equivalent in biomass for their entire supply base. This will generate a carbon "premium" revenue stream of over $1.2M over 20 years. Using our monitoring capabilities, we are able to quantify the impact created (CO2e sequestered) at the plot level and ascribe and deliver the premium value (payment) to the plot or block(collection of a few hundred plots) level.

Benefits for Buyers

For their buyers this carbon premium equates to less than 1% of the retail price of the product, in exchange for which they benefit from the following:

  • Resilient Supply Chain: A supply base that has natural buffers that is less prone to natural disasters and disruptions in supply.
  • Carbon Reporting Data: Primary data to meet reporting requirements for ESMA, SBTi and TCFD and TNFD guidelines on climate related disclosures.
  • Compliance: Even though tea is not an EUDR commodity, many believe it will be in the future; this monitoring can provide them with the data to meet regulatory requirements.
  • Brand Value: The open nature of Epoch's datasets and methodologies can even extend to the end-customer, creating brand value or a "green premium."
  • Access to Capital and Incentives: Reportable data evidencing improvement in sustainability metrics can unlock green bonds and government incentives that can more than make up for the carbon premium.

Benefits for Suppliers

For the supplier (this tea company), this program more than replaces the dwindling revenue stream of certification premiums and can add between 10-20% to the farmer and community income, using very conservative overhead assumptions.

Conclusion

In summary, this program made possible through Epoch's technology will generate significant short-term monetary (and otherwise) value for the buyer, supplier, as well as the farmer, while sequestering over 500,000 tonnes of carbon from the atmosphere. The fact that it costs less than 1% of the retail value of the product to the buyer, while providing real benefits makes this sustainable (and a good deal) for the buyer and solves a significant challenge (replacement of a dwindling revenue stream) for the supplier and the farmers. This is what we believe creates sustainability and stickiness of insetting programs.