As the carbon credit conversation expands, April Pearson, who provides legal counsel to Grow West^®, shares a synopsis of where this market is today in the United States and where it may go in the future based on current offerings and policies.

Will Carbon Credits Offer a New Income Stream for Farmers?

The answer is maybe. The concept is relatively new to agriculture and the contractual structure is developing. However, much like ‘cap and trade’ in the industrial pollution markets, this idea could gain steam over the next decade.

But, First, What Is a Carbon Credit?

The concept attempts to quantify carbon sequestration in the soil and creates a tradeable right to emit one metric ton of carbon dioxide (CO₂) or the equivalent amount of another greenhouse gas.  A metric ton is 2,205 lbs.; to add perspective, this is the weight of two 5’ x 5’ round bales of hay. The credit is not a tangible item, rather it is an environmental cryptocurrency (similar to Bitcoin) managed by a third party. Carbon credits would allow farmers and ranchers to be part of the climate solution, provided they can commit to a long-term set aside of land.

USDA’s Natural Resources Conservation Service suggests that carbon sequestration also benefits the grower with enhanced soil fertility from microbial activity based on old plant material and water holding capacity. NRCS offers a free, online tool “to quantify atmospheric outputs (emissions) and carbon benefits (sequestration) based on site-specific soils, crops, and management practices.”

How Does a Landowner Create Carbon Credits?

Most often the farmer or rancher agrees to stop certain activities. No-till farming is the most common method.  Since tractors burn fossil fuel, they emit CO₂ with each pass across a field. Fewer passes or more fuel-efficient equipment can reduce the CO₂ generated per bushel of a crop. The other avenue is to return farmland to range, prairie or forest which sequesters carbon in the ground and, in turn, generates credits. Dairy farmers may use manure treatments to limit emissions of methane to meet goals of large food producers such as General Mills, McDonald’s and Cargill. Those companies founded the Ecosystem Services Market Consortium (ESMC) “to open a broad-based private carbon market in 2022, paying farmers for a full menu of emission reducing practices.” Several other private credit markets or carbon payment programs are already in the works or in operation. The caution here is that growers who already implement no-till or who plant cover crops as a conservation farming measure, may not qualify for credits because no new carbon is removed.

Who Buys Carbon Sequestration Offsets?

Some buyers are industrial facilities that emit large amounts of CO₂ and who are required to offset their emissions.  Other buyers are motivated by public demand to reduce their carbon footprint and a few buyers simply want to be carbon neutral. Some larger organizations are developing ways for growers to participate in the credit market. In the future, state or federal governments may enter the market, either buying up credits or brokering offsets, and that level of regulation may consolidate the rules and ease the ability for a farmer or rancher to participate.

How are Carbon Credits Monitored?

The process of verifying carbon credits is complex. Several farm management digital platforms can capture much of the data required for a carbon credit. For instance, Land O’Lakes has adopted a pilot project with the carbon marketing firm Nori to capture existing farm data to calculate the impact of conservation practices and determine potential carbon credits. Trimble is likewise helping growers document offsets for the Canadian Nitrogen Oxide Emission Reduction Protocol (NERP).

What’s in a Carbon Offset Contract?

The adage that the devil is in the detail is true in this arena. There is no standard contract to guide the participants.  Growers will be required to keep conservation practices in place for 5, 10 or even 20 years. This may be problematic for rented farmland where the grower can’t commit to the long contract term or if the landlord claims the carbon credits rather than allowing them to belong to the grower. Weather conditions could force the need for tilling or discing, thus contravene a contract. In some geographic markets, carbon credits only have value if a new conservation practice is implemented which could negate the use of cover crops, for example. Next, carbon sequestration must be measured with soil sampling, or verified by a third party, and both may incur costs. Ownership of the individual and the aggregated data are also important contract terms. It is critical to verify the currency used for payment. Sometimes carbon offsets are paid with cryptocurrency, not cash.

Are There Any Examples of the Carbon Offset Market?

In 2019 the Schwarzenegger Institute at the University of Southern California offset about 29 tons of carbon emissions with the purchase of carbon removal certificates in partnership with the Nori CO₂ removal marketplace.  Nori had purchased credits for $16.50 per ton, which charged $1.50 per ton as overhead and funded sustainable farming practices at Harborview Farms (Maryland) with the remaining $15.

How Prevalent are Carbon Contracts for Farming?

Earlier this year, Purdue University surveyed growers about sequestering carbon and 30-40% of the growers were aware of the concept but only 7% had discussed carbon offset contracts. A mere 1% had signed a contract. The researcher concluded that the financial incentives to growers were lacking and that the payments were too small to encourage a grower to change practices.

What Does the Future Hold?

On the national stage, earlier this year the American Farm Bureau, along with other trade associations and environmental groups, formed the Food and Agriculture Climate Alliance to advocate for more carbon trading and for carbon tax credits while respecting the role that agriculture plays in the U.S. economy. Recently, Governor Newsom’s 2021-2022 budget proposal has earmarked $926 million of investments in agriculture spent over the next two years. According to the CDFA, $532 million is set aside to “advance climate smart agriculture, improve drought resiliency, fund alternatives to agricultural burning, increase pollinator habitat on working lands and support conservation planning to build resilience.”

The Growing Climate Solutions Act has advanced out of the U.S. Senate and is before the House of Representatives with a strong likelihood that it will become law before the end of 2021. The bill has “broad, bipartisan support from 43 Senators and over 70 agricultural and environmental organizations.” As evidence of the overwhelming support by all groups, the Environmental Defense Fund is optimistic that the bipartisan bill will bring farmers, ranchers and foresters into the scope of climate solution. The bill places authority in the USDA to identify practices that sequester carbon, establish a certification process for credits, net greenhouse gas and create a farmer advisory board to the USDA to ensure that growers benefit from the carbon markets.

Grow West, as a member of the American Ag Retailers Association, will play a “pivotal role in the development and implementation of climate-smart ag practices and conservation methods as part of broader on-farm management plans their farmer customers utilize in their day-to-day operations.”