Synthetic and Organic Fertilizer Incentives

Overview

Increased use of fertilizers for intensive arable crops has significantly increased nitrous oxide emissions in recent years, especially in developing economies. Indeed, global emissions from the use of synthetic and organic fertilizers rose 28% over 2000-2017, meaning it will be important for governments with net-zero targets to support targeted fertilizer usage and use of low-carbon products.

This area is particularly important for developing countries, as non-Annex I parties doubled fertilizer emissions over the period, in most part driven by China and India, which saw increases of 30% and 49% over 2000-2017. However, despite higher usage of fertilizers, the Asian countries have not seen significant yield improvements: even though the U.S. had lower fertilizer emissions, its cereal yield exceeded that of China and of India by over 2,000 kilogram and 5,000 kilogram per hectare.

Source: UN FAO, BloombergNEF. Note: All figures cover 2000-2017 and include synthetic fertilizer emissions and manure left on soil.

One of the main reasons why developing countries are seeing a rise in fertilizer emissions is government subsidies:  In India, for example, this funding is substantial – 1.3 trillion rupees ($11 billion) was included in the revised estimates for the 2020/21 budget, 4% of total government spending. Manufacturers receive the subsidy when the fertilizer has been sold to farmers or other buyers. But this shields them from market competition, while farmers are insulated from the true cost of the fertilizer and often there is no cap on purchases – hence over-use is common.

Impact

There have been proposals to replace the current subsidy system in India with direct cash transfers to farmers, enabling them to buy fertilizer from manufacturers at the market price. While some farmers may find it difficult to purchase fertilizer upfront, this proposal has also prompted concerns of how to ensure that this payment reaches the right recipients, given that there is not yet a database for farmers or farms. It would not be possible to rely on land records as these are not complete nor digitalized, and a significant share of farmers are ‘landless’ (ie, laborers who do not own or rent a farm).

The over-use of fertilizers and resulting decline in soil quality therefore prompted the Indian government to introduce Soil Health Cards. Under this voluntary program, soil samples are taken from a given farm and sent to testing facilities, which identify the soil’s composition, identify any deficiencies and suggest a recommended dosage of fertilizers. By end-2019, the scheme had achieved a national average of 94% of its target for distribution of the cards. However, in practice, the results have been mixed. Reasons have included a lack of awareness and knowledge, the prevalence of tenant and landless farmers, and the perceived risk of potentially jeopardizing the productivity of their crop if they trust in the recommendations from a laboratory.

Concerns around the environmental impact of fertilizers are not exclusive to developing countries: Germany has implemented several rounds of revisions to its fertilizer regulations to transpose fully the EU Nitrates Directive into national law. This piece of legislation focuses on the nitrate levels of groundwater. However, changes that came into force on January 1, 2021 should help to reduce fertilizer emissions. For example, in designated ‘red zones’, farmers must not use fertilizers for certain periods and, in general, should apply a fifth less than the regional average.

Opportunity

An alternative approach could be for government to promote agricultural strategies, which could enable usage of synthetic fertilizers to be reduced or replaced (table below).

Source: BloombergNEF, * William Blair, Precision Agriculture: The Agtech Revolution – Increasing Convergence of Industrial and Technology to Drive Next Wave of Productivity Growth, 2020.

There is a lack of government incentives in this area other than R&D funding. Some fertilizer makers (eg, Yara and Nutrien) as well as agro-chemical companies (eg, Corteva and Syngenta) and others have entered the precision agriculture market with digital tools, which enable more detailed analysis of fertilizer consumption. (The fertilizer manufacturers’ products focus more on nutrient recommendations). Regenerative and conservation farmers discourage the use of chemical fertilizers and are investigating outcome-based pricing models to shift incentives whereby growers pay fertilizer suppliers based on crop performance, rather than cost of chemicals.

Some governments promote organic farming: for example, Germany aims for 20% of its agricultural land to be organically farmed by 2030, as part of its Sustainability Strategy – up from just under 10% today. The state and federal governments provide almost 110 million euros ($133 million) toward this target. As well as a food-labeling program (Bio-Siegel), the government has recently expanded the Federal Program for Organic Farming and Other Forms of Sustainable Agriculture (BÖLN). The scheme had a budget in 2020 of almost 29 million euros ($35 million) for research funding, advisory services and events.

An alternative strategy would be for governments to increase R&D funding for new biologics: for example, U.S.-based Pivot Bio has developed a new nitrogen-producing microbe for corn and plans to devise a new product for wheat. The company identified microbes with inherent potential for nitrogen fixation and used gene-editing technology to enhance their ability to release nitrogen to the roots of crops. These products could reduce or even replace nitrogen fertilizer while improving yield. Another player – Joyn Bio, which is a joint venture between Bayer and Gingko Bioworks – has also developed soil microbes that could replace synthetic fertilizer.

Source

BloombergNEF. Extracted from G20 Policy Scoreboard report published on February 1, 2021.