In the modern world of social media, incessant news feeds and self-proclaimed experts, it is more important than ever that agricultural producers control the narrative being told about them. While recently climate change camps have attempted to vilify farmers and ranchers, agriculture is a key player in natural carbon sequestration, which is an important part of the story.
Soil carbon sequestration is the process of implementing new practices, or shifting old practices, to capture atmospheric carbon and put it into the soil. This is done by leveraging the existing natural carbon cycle and minimizing the release of carbon from the soil. This carbon can be measured and monetized. Many large corporations have made goals to become carbon neutral. To reach those goals, companies must lessen their emissions, purchase offsets or a combination of the two. This has led to a voluntary market for carbon credits in the U.S. where carbon, verified as sequestered, can be sold, thus providing opportunities for agricultural producers.
The cost of measuring and verifying carbon sequestration is prohibitive for most producers. Finding buyers for generated credits can also be challenging. This paves the way for an industry of carbon-oriented companies that act as middlemen between sellers and buyers. These companies cover measurement costs. They also do the footwork and paperwork necessary to certify credits and find buyers. In return, they split revenue with the farmer. While an important part of the marketplace, different companies have different practice change requirements, contract lengths, pay schedules and even prices per credit. This makes the carbon market confusing and somewhat daunting to consider. As the carbon industry has grown and matured, many farmers and ranchers have not had the time to research ways to leverage carbon markets or the best companies offering those services.
There are two ways that agricultural producers can leverage the carbon markets: offsets and insets. Offsets are verified carbon credits sold to greenhouse gas emitters that can be used to offset their own emissions. The monetization of these credits is straightforward. Payment is received for a commodity.
Insetting is when carbon credits follow a product up the supply chain like barley sold to distilleries or wheat sold to mills. These credits are accounted for as avoided emissions within the system. They can be harder to directly monetize as the financial benefits often come through premiums paid versus direct payments per credit. Insetting programs exist across most agricultural sectors, although they can be tricky to find and require participation in particular supply chains.
Once producers choose which avenue they want to use to capitalize on carbon markets, there are several things to consider. The following are five main concerns, mostly focused on offsetting, that should be evaluated when entering the carbon marketplace/selecting a carbon market company.
1. Contract considerations
It is important to read each contract and consider if the parameters are acceptable. Contract lengths vary from 10 years up to 30 or 40. In addition, identify clauses about repayment if the producer chooses to exit the program or fails to sequester carbon. These contracts will also identify expected practice changes.
2. Practice changes
While most companies have practice changes such as cover cropping, no-till or more intensive grazing management, they have other varying options as well. For example, some companies only allow no-till, others allow minimal till. Similar is true for grazing management with varied approaches to implementation. In addition, companies will have practice changes that are different from each other. It is important for producers to evaluate if the identified changes fit into their system or what changes may be necessary to facilitate those changes.
3. Infrastructure needs
Many practice changes require either new infrastructure or additional costs such as electric fencing for grazing management or cover-crop seeding. Farmers and ranchers should take this into account when evaluating which company to choose. Some companies offer to share costs or allow prepayment options to help with implementation. Other companies provide helpful equipment. The cost associated with implementation of practice changes, combined with revenue per credit, will influence financial success in the carbon markets.
4. Price per credit
While this seems like it should be straightforward, it can be quite nuanced. A direct comparison of price paid per credit is not necessarily fair. One company may offer a lower price per credit but provide equipment for practice change implementation or other cost-share payments, while another who offers more per credit provides no financial assistance. Another important factor is the rate at which a company reevaluates the amount paid. Most agree that price per credit will increase moving forward.
5. Potential return on investment
It may be better to consider this as a return on effort. The implementation of practice changes may not require significant expense. Rather, they may require effort, improved planning or time. It is also important to consider less obvious effects on the bottom line. While implementation of cover crops may have an increase in cost, does it provide additional revenues by grazing cattle? Moving to no-till may decrease yield initially, but will the lower equipment and fuel costs make up for the short-term declines? Will the implementation of rotational grazing improve grasslands and increase potential carrying capacity over time?
While the carbon markets can be tricky to navigate, the dynamics of the market also provide opportunities to capitalize on agricultural carbon in ways that fit different producers and operations. To meet the needs and goals of the individual, specific needs and goals need to be identified. By looking at the reason for being interested in carbon markets, farmers and ranchers can better identify whether offsetting or insetting programs would be most beneficial, and which companies can best support their operations as they move forward in the carbon world.
