Scaling carbon farming to boost investment and support ecosystems

By Friederike Schilling

Over the past decade, agricultural soils and food systems have gained growing recognition for their role in addressing climate change. One central focus is soil organic carbon – the carbon stored in soil from decaying plant and animal matter. Higher levels of soil organic carbon improve water retention, reduce erosion and support plant growth. In regions facing increasingly frequent droughts or erratic rainfall due to climate change, healthy soils can make a significant difference for farmers. At the same time, soil carbon plays a critical role in climate change mitigation by removing carbon dioxide from the atmosphere, thereby helping to reduce greenhouse gas concentrations and limit global warming.

Hundreds of millions of smallholder farmers world-wide manage agricultural land that could potentially store more carbon through improved practices. Agricultural practices that can increase soil carbon are well known, including the use of cover crops, agroforestry and reduced tillage – also referred to as carbon farming practices. Yet adoption remains limited, especially among the 500 to 600 million smallholder farmers in Africa who often lack the financial means to invest in these practices. This creates a mismatch: the societal benefits of carbon farming practices are clear, but the costs for individual farmers can be high. Without ways to scale adoption, carbon farming’s potential for improving soil health, mitigating climate change, and supporting resilient food systems will remain largely untapped.

Overcoming adoption barriers – carbon markets and projects

Carbon farming projects aim to overcome these adoption barriers by aggregating smallholder farmers and connecting them to carbon markets, where greenhouse gas reductions can be sold as carbon credits. Farmers receive payments for the ecosystem service they provide by storing carbon in their soils and vegetation. One carbon credit represents the removal or avoidance of one metric ton of CO₂ (or its equivalent for other greenhouse gases). Projects follow established methods to measure, report and verify reductions, with standards and registries ensuring transparency and credibility.

While government-funded programmes, usually referred to as payments for ecosystem services (PES), exist, carbon farming concerns initiatives that tap into private-sector capital through carbon markets. Individual smallholder farmers do not interact directly with these markets. The certification and monitoring processes required to verify carbon credits are complex and expensive. Instead, carbon farming projects typically work with large groups of farmers, aggregating their efforts to generate carbon credits at scale. These projects often involve multiple actors, including non-governmental organisations (NGOs), private companies, research institutions and farmer organisations. They provide training to farmers, help them adopt new practices, monitor changes in soil carbon and sell carbon credits on international markets.

Where does the money for setting up carbon farming projects come from?

Setting up carbon farming projects requires substantial upfront investments, while revenues from the sale of carbon credits only materialise years later. This raises a key question. Who provides the early-stage financing to bridge this gap, and under what conditions?

Kenya has become an important testing ground for such initiatives. The country hosts several carbon farming projects working with thousands of smallholder farmers across different regions. To better understand how these projects operate, our study analysed twelve carbon farming projects, examining their financial structures and governance arrangements. The aim was to identify the different ways projects are funded and assess how these funding models affect their profitability and benefits for participating farmers.

Four ways of financing carbon farming projects

The study identified four main funding models used by carbon farming projects in Kenya. Each model relies on different sources of capital and involves different arrangements between investors, project developers and farmers.

1. Donor-financed model

Early carbon farming projects were financed primarily through grants from international donors/organisations. These donor-funded initiatives play an important role in testing new approaches and demonstrating that carbon farming can work with smallholder farmers. Because they rely on grants rather than private investment, these projects can focus strongly on development goals. They may invest heavily in farmer training, community engagement, and environmental benefits. However, donor-funded projects face a major challenge: sustainability. Once external funding ends, projects may struggle to continue operating if carbon credit revenues are insufficient to cover ongoing costs. In some cases, this can lead to a dependence on continued donor support.

2. Investor-financed model

In recent years, the most common funding model in Kenya has involved private investors providing upfront financing to start the project. In return, investors receive a share – or sometimes all – of the future carbon credits generated by the project. These arrangements often take the form of forward purchase agreements, where investors agree to buy carbon credits before they are produced. This provides the project with the capital needed to train farmers, monitor carbon storage and manage certification processes. The model offers financial security in the early stages of a project. However, it can also limit future opportunities. If carbon credit prices increase over time, projects that have already committed their credits to investors may miss out on higher revenues. This can reduce the potential financial benefits available to farmers and project developers.

3. Private-sector-led model

In some cases, carbon farming projects are initiated and financed by private companies using a combination of funding sources, including equity investments. These private-sector-led models often allow project developers more flexibility. Instead of committing carbon credits in advance, they can decide when and where to sell them, potentially benefiting from favourable market conditions. However, this flexibility comes with greater financial risk. Without guaranteed buyers or investors, projects must continuously attract funding and manage market uncertainties. If carbon credit prices decline, the project developer bears the financial consequences.

4. Buyer-led model

A fourth model involves companies financing carbon farming projects directly to secure carbon credits for their own climate commitments. In this buyer-led approach, the company acts both as investor and final purchaser of the carbon credits. While this model can ensure stable demand for credits, it may also concentrate power in the hands of the buyer. Companies may prioritise securing credits at the lowest possible cost, which could limit the share of revenues reaching farmers. Although buyer-led models are usually expected to operate within company value chains, the example analysed in this study was implemented outside of a value chain, and only one such project was included, meaning that limited information is available on its broader applicability or long-term outcomes.

Lessons from Kenya’s carbon farming projects

By comparing projects categorised into different funding models across multiple dimensions, the study identified several important lessons for designing carbon farming initiatives that are both financially viable and socially inclusive.

Lesson 1: Investment creates potential, but the terms of investment shape reality

For carbon farming projects, securing investment is essential to start and run the project. However, the financing terms strongly influence how inclusive and beneficial the project will be for farmers. Forward purchase agreements can help projects obtain early funding, but they often require projects to sell carbon credits in advance, which limits their ability to benefit from higher future carbon credit prices. Therefore, it is important to find a balance between obtaining enough upfront funding and keeping a sufficient share of carbon credits within the project. This balance is especially important in buyer-led models, where the investor also buys the carbon credits. The financing terms determine how future revenues are shared even before the credits are generated. Projects that retain a larger share of credits have greater potential to benefit farmers. At the same time, investors need adequate returns to compensate for the risks and the long time before profits are realised. If this balance is not achieved, projects may struggle to attract private investment. In the end, negotiating fair financing terms is crucial to ensure that carbon farming projects generate sustainable economic benefits for all stakeholders involved.

Lesson 2: Scale projects quickly to shorten investment timelines and continuously to expand impact

Many carbon farming projects aim to reach large areas of around 30,000–45,000 hectares or more. In practice, however, reaching this scale often takes much longer than expected. Validation reports from several projects show that only a small share of the planned area or number of farmers is reached in the first years. Scale is crucial because it strongly influences how much revenue a project can generate from carbon credits. If projects do not expand quickly, their revenue potential remains limited. This challenge is even greater because carbon credits are only issued every three to five years, which means that revenues come slowly. When projects fail to grow early on, this can also delay repayments to investors. Providing the long-term capital needed to bridge this period may be possible, but it often comes at higher cost. To remain viable in the long run, projects need to reinvest part of their profits to continue expanding their activities and reach more farmers. Without this reinvestment, projects risk stopping their operations once the initial crediting period ends. For this reason, carbon farming projects should focus on scaling up quickly and continuously reinvesting revenues to support further growth.

Lesson 3: More transparency (disclose costs and revenues) as a prerequisite for fair benefit-sharing arrangements

Transparency about costs and revenues should be a key principle in carbon markets, especially as these markets generate significant and growing financial flows. However, many carbon farming projects provide limited information about their costs and how benefits are shared. Clear cost reporting is important to ensure accountability and fair negotiations. In many projects, benefit-sharing agreements are based on profits rather than total revenues, even though farmers usually have no control over project costs. Without transparent accounting, low returns can easily be explained by high expenses, and there is less incentive to keep project costs low. Benefit-sharing mechanisms should reflect the risks, roles and responsibilities of all participants. Increasing financial transparency would help ensure that benefits are distributed more fairly. Carbon standards could support this by requiring greater financial transparency in project reporting.

Lesson 4: Less reliance on international intermediaries through empowerment of local implementing partners

Bottom-up approaches are important for managing natural resources and empowering farmers. However, many carbon farming projects struggle to involve farmers meaningfully in decision-making. This weakens farmers’ sense of ownership, which is important for the long-term success of projects. Although carbon standards require consultation with local stakeholders, this process sometimes becomes a formal requirement rather than genuine participation. In some cases, farmer groups are mainly created to reduce project costs rather than to give farmers a real voice. For carbon farming projects to succeed, farmers should be actively involved in both planning and implementation. Farmer-based organisations can play an important role in representing farmers and strengthening their influence. Over time, these local organisations should take on responsibilities that are currently often handled by international organisations. Strengthening the capacity of local farmer organisations is therefore key. This can help build more transparent systems, reduce dependence on intermediaries and ensure that farmers have a stronger role in shaping and benefiting from carbon farming projects.

Policy changes and future opportunities

Carbon markets are evolving rapidly, and policy frameworks are beginning to adapt. Kenya recently introduced new regulations governing carbon markets, including requirements for benefit-sharing with local communities. Such policies could help address some of the challenges identified in the study by ensuring that carbon farming projects operate more transparently and distribute benefits more equitably. At international level, new mechanisms under the Paris Agreement may also create opportunities for carbon farming projects to access additional sources of finance. However, the success of these initiatives will depend on careful project design and strong governance structures.

Carbon farming holds significant promise for addressing multiple global challenges at once. By improving soil health, it can boost agricultural productivity and resilience. By storing carbon in soils, it can contribute to climate mitigation. And by linking farmers to carbon markets, it can potentially create new income opportunities. But realising this potential requires more than good agricultural practices. It also calls for financial models that work for both investors and farmers. Different funding models offer different advantages and challenges. Understanding these trade-offs is essential for designing carbon farming projects that are economically viable, environmentally effective and socially inclusive. As interest in carbon markets continues to grow, the lessons from Kenya may help guide future initiatives across Africa and beyond.

Friederike Schilling is a Senior Researcher at the Division of Economic and Technological Change (Econ) at ZEF University, Bonn/Germany.
Contact:  fschilling@uni-bonn.de

Full study: Funding models for scaling soil health: Assessing the economic viability and inclusiveness of carbon farming projects in Kenya - ScienceDirect

https://doi.org/10.1016/j.landusepol.2026.107996

Funding acknowledgement: This work was supported by the Program of Accompanying Research for Agricultural Innovation (PARI), which is funded by the German Federal Ministry of Economic Cooperation and Development (BMZ) (project number: 2014.0690.9). Fieldwork in Kenya was further supported by a grant from the Dr Hermann Eiselen Doctoral Programme of the Foundation fiat panis. Field research in Kenya was facilitated by the BioInnovate Africa Project at icipe – International Centre of Insect Physiology and Ecology, Nairobi, Kenya.