There has been a lot of buzz concerning the carbon credit market. In this article we’ll discuss the importance of carbon and carbon markets, what they can offer producers in the Upper Midwest and what questions you should consider when investigating carbon credits.
What is Carbon?
Carbon is the basic building block for all living things. It is present in the atmosphere as carbon dioxide (CO2), in living and nonliving organisms, as organic matter in soils, in fossil fuels, and in the oceans as shells, coral, and sedimentary rock. Carbon is all around us.
While carbon is essential for all life, there is a balance between where the carbon is located and stored within the earth, oceans, and atmosphere. In the past 60+ years, carbon, as carbon dioxide, has accumulated in the atmosphere. Carbon dioxide is one of several greenhouse gases causing global climate change. Climate change includes warmer temperatures in many locations, record-breaking hurricanes and storm events, wildfires, flooding, and droughts. Here in Minnesota, we’re expecting warmer temperatures and more frequent heavy rains.
To counter these effects, many US and global companies that emit carbon dioxide are willing to pay for practices that move carbon from the atmosphere into different pools, like soil. Paying for practices is known as carbon “crediting”. Carbon credits can be generated from many different sources. For the purpose of this article, we will concentrate on credit opportunities related to crop production, which incentivizes practices that boost carbon or organic matter in soils. (Soil organic matter is ~50% carbon.)
Farmers using these practices to boost organic matter can realize many other benefits. Organic matter provides nutrients, especially N, to growing crops. Organic matter improves the water infiltration of our soil. This means our soils can absorb large, intense rainfalls in a shorter time period so less water ponds or runs off the field, and there is more water retained in our soils to feed the crop during dry times. Organic matter builds a resilient soil, a soil that can better handle the extreme weather changes while securing our crop yields.
How Does the Carbon Market Operate?
If a company wants to lower their carbon footprint, they contract with a broker to find carbon credits that can be bought and sold on the open market. The broker lines up and verifies on the ground that each carbon credit is legitimate. One carbon credit is equal to one metric ton of carbon dioxide and is currently worth $14-18 per credit.
Carbon can be built on farmland by reducing tillage aggressiveness, switching to no-till, or adding a cover crop. Almost all markets are looking for farmland implementing a new practice, as these acres are easier to verify, so you may not qualify if you have implemented these practices long ago. However, some companies will consider practices recently adopted (~2 years). This means most C markets are a better fit for farmers looking to experiment with something new, rather than those who have a long history of carbon-building conservation practices.
The amount of carbon a farmer can realistically draw down is based on their climate, crop grown, and other factors. Below, is an example from a carbon broker (Indigo Ag) of approximate ranges of carbon credit potential associated with practice changes in three Minnesota counties. In some cases practices can be combined to increase the payment. If a farmer lives in south central Blue Earth county, and reduces their tillage to no-till and adds a grass cover crop like cereal rye, their carbon credit potential could be 0.88 credit. If a farmer in Polk county in the Red River Valley implements the same practices, their carbon credit potential is estimated to be 0.55 credit. If a carbon credit is worth $15 then the southern counties might earn $13.20/ac/year while the northern counties could earn $8.25/ac/year. Note that payment values may change if the value of a carbon credit goes up or down in the market, and payments may be spread over a number of years (5 years, in the case of Indigo), so these values represent an average return.
What Questions Should I Ask?
Understanding what you are required to do to maintain your payments is key. Each company has a slightly different set of requirements and conditions so ask these important questions:
- What management changes does the company pay for?
- How do they measure carbon stored? Will they collect the initial and follow-up soil samples or do you? What is their fee to collect the samples?
- Understand the payments and the costs. Do they pay by acre or by carbon credit? What is the payment schedule? Some companies use holdbacks or a percent taken off of the top to cover their role in the process. What are their fees? Are they in line with other companies?
- Can you stack carbon market payments with cost-share payments from local or federal governments?
- What is the contract length, terms, and exit clauses? If you rent the farmland, is your landowner required to consent? If your rental contract ends, the landlord may assume responsibility for the contract.
- What management data and verification are you required to provide? Most programs will require annual documentation of practices in a web-based portal. Some may be able to incorporate data collected by other software. Make sure you’re prepared to provide data at an appropriate level of detail, on the timeline required by the contract.
- What happens if you are not able to implement the new practice due to the weather? Due to other circumstances? What happens if soil carbon doesn’t increase even when you do implement the new practices?
- Does the company sell other services or products? Are any of these services/products required to be purchased in order to participate?
- Are any other ecosystem services brokered by the company, such as water quality credits?
Whether or not carbon credits will help your bottom line will vary farm by farm and maybe field by field. Carbon credit payments are unlikely to entirely cover the cost of a new practice. They may simply reduce the risk of trying something new. However, there is no debate that building carbon in your soil has a long list of benefits for you and the next generation of farmers.