So, what is a carbon market?
To boil it down, a farm business or forest owner that grows crops or owns trees that remove carbon dioxide from the atmosphere and return it to the soil can be paid by an electricity generator, manufacturing, or consumer product business that emits carbon dioxide into the atmosphere.
The transaction is a method of offsetting what we know of as “greenhouse gas emissions.” The International Energy Agency estimates energy-related carbon dioxide emissions in 2021 could reach 33 billion metric tons.
The carbon exchange unit is technically called an “ecosystem asset.” This is legit and is going to become quite common in the next few years, but before you order additional bank deposit slips, there are details to be resolved.
Ecosystem asset markets are not new. There have been private agreements between businesses and farms around the country for many years. Recently, legislation called the Growing Climate Solutions Act was introduced in Congress.
When it becomes law, it will create a USDA technical assistance and certification program that assists crop farms and forest owners seeking to participate in a voluntary ecosystem asset exchange market.
Before you ask how much money we are talking about, realize that credits are determined by carbon sequestered, or simply carbon removed from the sky and returned to the soil. Continuous grazed pasture and hayland will remove less carbon than corn followed by wheat or cover crop.
No-till crop production will have a different retention than land tilled before and after a corn crop, due to the carbon dioxide released back into the atmosphere by tillage.
Forest land will have a different value based on canopy density and dominant tree species. So in this example, all of these practices will create different amounts of credits on a per-acre basis, and additional research is required in developing a uniform standard to assign credits sequestered relative to the farming practice.
Needless to say, prepare for significant documentation and frequent spot checks if the decision is made to participate in this voluntary program. Once an ecosystem asset is quantified and verified, it can be made available for purchase via an exchange market.
Credit buyers, such as corporations looking to meet sustainability goals and compliance standards, can purchase those credits.
So how much is a credit worth? I don’t have information to provide regarding what the current value of a credit is. The price in the future will be based on supply and demand.
We expect the supply will be abundant. With nearly all growing crops, forage, and forest land having some level of carbon sequestration, the task will be getting everything that is eligible enrolled and verified. Likewise, asset demand will be derived by policy related to greenhouse gas emissions.
If a policy is implemented which imposes or increases a monetary assessment on a business that has greenhouse gas emissions, the demand to offset that allowance through the ecosystem asset purchase will increase and with it the price.
Eventually, as with any exchange-based market, the supply and demand will determine a fair market price. Don’t expect a windfall, but rather a bonus for implementing practices that remove carbon from the sky and retain it in the soil.
The hope is that these ecosystem assets have a value that makes participation worthwhile after fees for administration and verification are accounted for and discounted.
We are in a new era of government concern for global warming and corporate responsibility for the environment and people. Investors today are looking beyond stock price and deeper into a corporation’s dedication to sustainability.
No industry presents this message more clearly to local farms than the tobacco industry adoption of Good Agricultural Practices certification required of their leaf supplier farms.
Dr. David Kohl, Professor Emeritus at Virginia Tech, said the key to increasing consumer confidence in agriculture is revealing that we are not the cause of global warming, rather part of the solution to correct the problem.
The ecosystem asset market will be an opportunity to be rewarded for our contribution.