Written by: Shashank Pandey and Tanya Verma

The Uttar Pradesh government has initiated payment in the first phase of benefits for farmers under its Carbon Credit Finance Scheme. This initiative incentivises farmers to plant trees on their agricultural land. The scheme can be broadly classified as an agoforestry carbon credits mechanism. The carbon credits are priced at $6 per credit, and according to official statements, approximately 4.3 million credits have been generated, for which payment will happen every 5 years. As per the initial projections of the UP government, it has underlined that farmers will receive a total of ₹202 Cr between 2024 and 2026.

At its core, the carbon credit mechanism is a financial translation of environmental services. One credit represents the reduction or removal of one metric ton of carbon dioxide or its equivalent in greenhouse gas emissions. For highly polluting industries, credits offer a way to offset emissions that cannot yet be eliminated. For farmers, they create the possibility of new income streams through voluntary carbon markets, which encourage activities such as tree planting. The Uttar Pradesh initiative, like similar agroforestry-based schemes under consideration in other states, places agriculture at the centre of this voluntary mechanism. But it is precisely here that both the promise and peril of the system lie.

At its core, the carbon credit mechanism is a financial translation of environmental services.

Alignment with the climate finance taxonomy objective

The government’s draft Climate Finance Taxonomy, released earlier this year, reflects this tension. The taxonomy places agriculture squarely in the domain of adaptation and resilience, with little recognition of its mitigation potential. Agroforestry-based carbon credits challenge this framing. By sequestering carbon through tree plantations on farmland, they create measurable mitigation outcomes while also providing adaptation benefits such as soil regeneration, water conservation, and increased climate resilience for farmers. This dual function places agroforestry at the intersection of mitigation and adaptation, an intersection that the taxonomy has so far underemphasized. Integrating agroforestry into the taxonomy would therefore broaden the scope of India’s climate finance framework, attracting private investment while grounding it in rural livelihoods.

However, the caution is warranted.  The most immediate danger lies in the risk of mindless tree planting, where the pursuit of credits overtakes ecological considerations. Large-scale monocultures, often promoted under carbon schemes, may increase short-term sequestration but reduce biodiversity, strain water resources, and displace food crops. If farmers are incentivised to replace diverse cropping systems with fast-growing, non-native tree species purely for credit generation, the outcome could undermine food security and ecological health. This is not a theoretical risk. Past afforestation drives in India have already shown how the prioritisation of commercial species can erode soil quality and reduce habitat diversity. A carbon credit system must avoid repeating these mistakes.

Preserving interests of farmers

The economic viability of carbon credits for small and marginal farmers is another concern. With credits currently valued at around six dollars (subject to revisions in future), the income generated, though attractive in aggregate projections, may not be transformative when distributed across individual farmers over a five-year cycle. Transaction costs, monitoring requirements, and the role of intermediaries could further erode farmers’ share of the benefits. There is also the danger that large landholders or corporate entities may capture a disproportionate share of benefits, leaving small farmers with little more than token gains. Without robust safeguards, the system could deepen existing inequalities in rural India.

Lessons from international operationalisation

Global voluntary carbon credit markets were valued at approximately USD 4.04 billion in 2024, and are projected to grow to USD 23.99 billion by 2030, expanding at a compound annual growth rate (CAGR) of 35.% from 2025 to 2030. Countries like Brazil and Kenya have experimented with agriculture-based carbon projects, often with mixed outcomes. Kenya’s Agricultural Carbon Project, for example, sought to train farmers to transition from subsistence to agribusiness while promoting soil and tree carbon sequestration. While innovative, it also revealed the difficulty of ensuring equitable benefit-sharing in projects tied to international markets. Similarly, in the United States, the Department of Agriculture’s “Climate-Smart Commodities” program has begun investing billions in agricultural carbon solutions, but questions of long-term viability and equity remain unresolved.

Global voluntary carbon credit markets were valued at approximately USD 4.04 billion in 2024, and are projected to grow to USD 23.99 billion by 2030, expanding at a compound annual growth rate (CAGR) of 35.% from 2025 to 2030

Not a panacea for agricultural evils

For India, the lesson is that agroforestry-based carbon credits cannot be treated as a silver bullet. They must be embedded within a larger framework that balances environmental integrity, farmer welfare, and market credibility. Transparency in monitoring, independent verification of credits, and strict ecological guidelines on species choice and planting models will be critical. Just as importantly, the system must be farmer-centric. If designed well, carbon credits can reward smallholders for practices they already undertake to protect soil and biodiversity. If designed poorly, they could become yet another mechanism where farmers bear the ecological risk while intermediaries and corporations pocket the financial rewards.

The expansion of agroforestry activities does align with India’s long-term goals. The Vision 2050 for agroforestry, as outlined by CAFRI, seeks to expand land under agroforestry from 28.4 million hectares to 53 million hectares, potentially doubling carbon sequestration while increasing resilience. Uttar Pradesh itself has set ambitious targets of raising its green cover from 9.23 % to 15 % by 2027 through the planting of 1.75 billion trees. These targets are laudable, but their pursuit through carbon markets must be tempered by realism about the incentives, the distribution of benefits, and the ecological trade-offs involved.

The challenge for India’s policymakers is not whether to embrace agroforestry-based carbon credits, but how to design them in a way that resists these pitfalls.

Ultimately, the agroforestry carbon credit system embodies the paradox of climate finance in developing economies. It is both an opportunity and a threat. The opportunity lies in unlocking new streams of climate finance, rewarding rural communities, and embedding mitigation into agricultural landscapes. The threat lies in the possibility of ecological simplification, inequitable outcomes, and the entrenchment of offsets as substitutes for real emissions reductions elsewhere. The challenge for India’s policymakers is not whether to embrace agroforestry-based carbon credits, but how to design them in a way that resists these pitfalls.

ABOUT THE AUTHORS:
Shashank Pandey is a lawyer and Researcher in Environmental and Climate Change Law. He is the curator of the Climate Finance Watch Blog.
Tanya Verma is the 5th year law student of the Dr Ram Manohar Lohia National Law University