Why Carbon Markets Are Failing the World’s Farmers and What Budget Can Do About It

Carbon markets have re-entered the mainstream of global climate policy. Governments are operationalising Article 6 of the Paris Agreement, voluntary markets are being rebuilt around stronger integrity standards, and corporate demand for offsets has revived after a period of correction. Once again, carbon trading is being positioned as a key instrument for mobilising climate finance at scale.

Yet beneath this renewed momentum lies a persistent and largely unaddressed problem: today’s carbon markets remain structurally ill-suited to agrarian economies. They systematically fail to engage smallholder farmers, even though these farmers manage a substantial share of the world’s agricultural landscapes and therefore a large portion of global, low-cost mitigation potential, the outcome of how carbon markets have been designed.

Carbon markets were built around the production structures of advanced economies—large installations, long-lived assets, formal land tenure, and the ability to absorb high transaction costs. In smallholder agriculture across Asia, Africa, and Latin America, mitigation is dispersed across millions of small plots, shaped by seasonality, ecological variability, and livelihood risk. The result is exclusion by architecture: markets reward those who can measure cheaply and comply at scale, not those who mitigate most effectively.

Rapid Market Growth, Minimal Agricultural Presence
The scale of this mismatch becomes clear when market data are examined. Over the past five years, carbon markets have expanded significantly in both volume and value. Compliance carbon pricing instruments now mobilise over $100 billion in annual revenue worldwide. Voluntary carbon markets are far smaller but have experienced periods of rapid growth, alongside sharp corrections.

Yet agriculture’s share of this activity remains strikingly small. In 2024, non-forestry agricultural projects accounted for well under 1% of voluntary carbon market transaction value, despite agriculture being widely identified as a major mitigation frontier.

Equally telling is what the data do not show. There are no authoritative global statistics disaggregating agricultural carbon credits by farm size. Carbon registries do not track whether credits originate from large estates or smallholders. Their invisibility in market data reflects their marginalisation in market design.

Agriculture’s Promise—and Why It Remains Locked Out
This outcome is paradoxical. Agriculture is widely recognised as a critical mitigation opportunity. Practices such as diversified cropping, regenerative soil management, improved water use in rice cultivation, organic inputs, and low-input farming can reduce emissions while improving soil health, resilience, and farm incomes. Pilot initiatives across Southeast Asia, East Africa, and Latin America have demonstrated technical feasibility.

The problem is that agricultural mitigation does not align with the pathways on which carbon markets were built. Cropping agriculture is seasonal. Biomass is harvested two or three times a year. Carbon stocks rise and fall with crop cycles. The climate benefit lies not in standing biomass but in below-ground biological processes and gradual soil carbon stabilisation over time.

Applying plantation-style methodologies—based on permanent stocks, long-term lock-ins, and plot-level precision—to such systems is conceptually flawed. Seasonal biological cycles are treated as reversals, measurement costs escalate rapidly, and verification often costs more than the carbon itself.

Permanence rules compound the problem. Credits are retired immediately by buyers, while farmers bear long-term risks from droughts, floods, and livelihood pressures. Risk is transferred downward, discouraging participation precisely where mitigation potential is most widely distributed. At the centre of this system sits measurement, reporting, and verification, or MRV, which—despite being essential for credibility—has evolved into a costly, privatised bottleneck.

Green Carbon, Seasonality, and the Limits of Precision
The misalignment is not only institutional; it is biological. Agricultural mitigation operates primarily through green carbon—carbon captured via photosynthesis and stabilised in soils through roots, microbial activity, and soil structure. This process is incremental, spatially heterogeneous, and sensitive to climate and management. It responds to systems rather than to one-off interventions.

Green carbon cannot be “installed” or measured once and for all. It accumulates through continuity of practice over multiple seasons. Attempting to impose industrial precision on such biological processes leads to exclusion rather than integrity.

Why Institutions—and AI—Change the Equation
If carbon markets are to work for agriculture, the solution is not to abandon them but to redesign them around institutions rather than precision.

Agricultural carbon methodologies must shift from stock-based permanence to flow-based, system-level accounting, using rolling, multi-season baselines. Credits should reflect annual net improvements—reduced methane and nitrous oxide emissions and incremental soil carbon stabilisation.

MRV must be treated as public climate infrastructure, not a proprietary service. Advances in artificial intelligence now make this feasible. By integrating satellite imagery, weather data, crop models, and farm practice records, AI-enabled systems allow continuous, low-cost monitoring of seasonal agriculture. Mitigation outcomes can be inferred probabilistically and calibrated through periodic sampling rather than verified through infrequent, expensive field audits. This shift turns seasonality from a liability into an asset, making smallholder participation feasible at scale.

Aggregation, finally, must be institutional rather than extractive. Self-Help Groups, Farmer-Producer Organisations, and cooperatives are well-suited to drive practice adoption, peer accountability, and continuity. When aggregation is embedded in producer institutions rather than outsourced to intermediaries, carbon becomes a locally governed asset rather than an externally captured rent.

What the Union Budget 2026 Can Do
This places the Union Budget 2026 at the centre of the reform agenda.

First, it should fund agricultural MRV as public infrastructure by supporting a national, AI-enabled MRV backbone integrating satellite data, weather information, soil databases, and crop models.

Second, it should enable aggregation through existing rural institutions by supporting SHGs, FPOs, and cooperatives with digital systems, extension services, and contract management capabilities, ensuring carbon revenues accrue to farmer institutions rather than intermediaries.

Third, it should use public finance to absorb early-stage risk by providing interim working capital against verified practice adoption and managing climatic risk at the portfolio level rather than through farm-level permanence penalties.

A Test for Climate Leadership
The smallholder question is not peripheral to carbon markets; it is central to their legitimacy. If the Union Budget 2026 treats agricultural carbon not as a subsidy opportunity but as an institutional design challenge, India can demonstrate how climate finance, smallholder inclusion, and fiscal discipline can reinforce one another—and help shape the next phase of global carbon market governance.

(Sowmya Kolla, a Young Executive Lead at RySS – APCNF, Andhra Pradesh, assisted with researching this article.)