Carbon Credits
In agriculture today we run global businesses locally. We feed the world yet, grow, enliven, and live in small rural communities. We tend to value legacy, family, God, and country. Most farmers would say that they work hard to build operations that can be ‘passed on’, that sustain. As agriculturalists, we uniquely understand sustainability from both land management and financial perspectives. Yet, the definition of that word, sustainability, is changing, and that change is coming quickly to our doorsteps.
We’re at an intersection now of topics relating to climate increasingly being discussed. And, no matter what your beliefs are on the term climate change, others that we interact with, be they stakeholders, investors, customers, or governments are asking us to step into this discussion. It can be a confusing and perhaps consternating topic. Yet, we’re resilient people and we’re always adopting new approaches and advancing in technological ways while we strive to maintain the way of life that we believe in.
One way to begin looking at this topic that can provide direct benefits to our businesses is through carbon credits. Yet what is a carbon credit and how does it work? In the following brief primer, we’ll uncover that as well as how your farm may want to participate.
What is a "carbon credit?"
First, we start with the idea of reducing an amount of carbon dioxide (CO2) or its equivalent from the atmosphere which, when there is a market for this, can generate one carbon credit. The most common measure for this is in metric tons; one metric ton equals about 2,205 pounds. The phrase CO2 “or its equivalent” denotes that reducing other greenhouse gas emissions (GHG) may also generate a carbon credit. “At a basic level, if a farmer can demonstrate a reduction in one metric ton of CO2 or its equivalent on his or her farming operation, they should be able to create and sell a carbon credit,” says ag attorney Todd Janzen, of Janzen Ag Law, a firm specializing in environmental law for farmers.
To capture that carbon, one way to do that is by increasing soil carbon. Many experts also believe that increasing soil carbon-whether with row crops or pastureland - also directly benefits the health of the soil yielding advantages to agricultural practices, as well. Most likely, increasing soil carbon, whether out of a desire to improve the soil quality or to potentially earn a carbon credit (that can be sold through a carbon contract) involves adding or changing practices. Jenny Pluhar, writing for Progressive Cattle, cites the following ways to increase soil carbon:
• Vegetative ground cover
• Minimizing disturbance such as avoiding plowing or continuous grazing
• Increasing plant diversity
• Keeping plants with roots in the soil longer (between growing season if a row crop operation)
• Adding back regenerative grazing
According to Jason Weller, President of Truterra, the sustainability business of Land O Lakes, says that once farmers begin adding practices compensation can result. “Farmers use regenerative farming practices that improve soil health to boost crop biomass production and minimize soil disturbance. In turn, this helps soils absorb more organic matter and over time transform it into soil carbon. Farmers are compensated for the additional quantity of soil carbon they have sequestered in their fields’ soils,” he advises.
How is carbon measured?
Once farmers begin new practices to increase soil carbon, the next step to potentially earning a carbon credit payment is measurement. It’s important to note here that measurement varies widely as does verification of that measurement. Today no standard exists and most carbon credit buyers have their own system. In the most basic terms, your carbon credit program will work with you to take soil samples to measure and quantify the amount of carbon in the soil and the samples are typically evaluated by an independent third-party lab. Then, companies use a soil modeling technique to estimate how much soil carbon is present. According to Weller, this occurs “through a process that takes into account different on-farm factors such as soil type, crop rotation, soil tillage, and weather data.” Common models include dividing your soil into zones.
How a carbon credit is created
To earn the credit, it all starts on the farm with practices incorporated by the grower including starting or stopping various activities such as incorporating no-till or perhaps moving marginal land into native grasses or forest regrowth. “It’s important to remember that carbon credits can be created by either a reduction in carbon or long-term storage (sequestration) of carbon,” says Janzen. Just adding the practice doesn’t generate the credit, however, it’s the measurement and verification mentioned above that creates a credit that a company may wish to buy from you as the landowner to re-sell to another corporation. These companies act as intermediaries connecting the farmer with the buyer, usually paying you directly in the form of a contract. It’s important to note that you don’t exactly hold credit in the palm of your hand. “A carbon credit is not a tangible thing, but it is a commodity that can be created, sold, traded, or bought, “ Janzen explains.
Buyers of carbon credits
Up until now, we’ve really just been talking about farming practices, however, here is where climate-related topics come into play. Carbon credit buyers are typically those in industries that are large emitters of CO2 and they opt to purchase a carbon credit to offset or reduce their carbon footprint. Emitters such as technology companies and energy companies are common large buyers today, though any company may choose to buy carbon credits. Some companies do this for philosophical reasons, others to improve their appearance of being considered ‘green’ by shareholders, employees, or the public, and some companies enter the carbon market because they are mandated by law to reduce their carbon footprint. Janzen believes these factors present an opportunity for land owners today. “There are simply some companies or persons who want to be carbon neutral. Regardless of the motivation, the farmer stands to benefit if he or she can take the steps to generate this new commodity on their farm,” he says.
Who is eligible?
It’s important to note that not all carbon credits are created equal and that it varies based on the type of land and what’s on that land to sequester carbon. The good news for land owners around the country is that there are currently opportunities for row crop producers, standing forest owners, timber growers, and owners of range and pastureland. The job is to do your research and investigate what companies are working in what markets.
Possible drawbacks to consider
Now that you’ve learned a bit about carbon contracts, you may be quite tempted to jump in and sign up. However, there are a variety of possible downsides that you should explore, as well. Here’s a brief look at four of those:
Long contracts: contracts with buyers for your carbon credits vary greatly in length from just annually to multiple years, possibly spanning a generation or more.
Money may be higher later, maybe: Today the U.S. average price of a carbon credit is around $16, and in the EU ( European Union) prices average about the equivalent of $40. Most buyers predict that the market price will steadily rise. So, comes the story of the chicken and the egg: do you get in now during the first wave, or do you potentially wait until prices rise with more acceptance?
Additionality: if you’ve spent any time studying this emerging market you will have heard the term ‘additionality’. This basically means that for MOST carbon contracts you must add or change an agricultural practice and that you won’t be paid for previous long-term sustainability practices you may have incorporated into the operation. Many growers find this frustrating!
Changing practices: As with number three, when you need to adjust, add, or change a production practice, there is a cost to doing so. As you consider this market opportunity, pencil out the costs of changing and consider how long you’re willing to make the move is it short-term or permanent? That may affect not only your desire to participate but also your eligibility in some cases.
Take your time but consider learning more
Like anything new, it pays to do your homework. Take your time, investigate, talk to other growers, and start asking questions to build your knowledge bank. This opportunity may be a fit for your operation now or the next generation.
Sarah Beth Aubrey grew up on a grain and livestock farm in East Central Illinois and has worked in the agriculture industry in agronomy, ag sales, and consulting since 1997. She operates Elevate Ag, a consultancy serving the agriculture supply chain, and most recently founded IN-CLIMATE, a network of professionals and growers in the agriculture and energy industries seeking to take their seat at the table to ensure a smart, practical dialog and policy around climate and sustainability topics.