Points to Ponder by Ag Producers for Carbon Credit Contracts
Intense interest is developing in agricultural carbon credits, kickstarted by the Senate’s passage of the Growing Climate Solutions Act. A variety of private companies are offering programs to pay farmers for capturing carbon on the farm. Although there are no “standard” approaches or contracts, the current trend for farmers involves associating with an aggregator, i.e., a company that compiles farm acreage to achieve volume and scale of carbon capture. The aggregator enters a contract with the farmer to provide a revenue stream for the implementation of carbon-capturing practices. Below are a handful of considerations concerning these sorts of contracts:
- What will you be required to do to generate the credit (practices, etc.) – most will require new or different farming practices, such as no-till, cover crops, and replacing traditional fertilizer with soil amendments or the like. Other possibilities include transitioning to perennial crops or re-forestation.
- How long will the contract last – these are likely to be long term, probably 10 years or much longer. The current marketplace is seeking long periods of carbon sequestration, some up to 100 years. The length of the contract will tie up the land’s use for significant periods, and likely impact sale and leasing opportunities. It may also impact transfers of the land through estate planning.
- How much will you get paid – this should be a function of how much carbon will be captured on the land. It is difficult to determine current prices for carbon credit prices, but some indicators suggest prices of $5 to $9/ per metric ton. It will be important to know how many acres will be required to capture one ton of carbon.
- When will you get paid – this is likely to be tied to the sale of the carbon credits by the aggregator and could be many months after the carbon-sequestering activities are completed. The practices required will probably incur some expense, or possibly a sacrifice in yield, so the payment will be used to counter the expense and hopefully result in profits. The landowner will also want to examine available options in the event of payment default.
- What are the consequences of getting out of the contract – it is likely to be quite difficult to exit the contract since these are typically viewed as long-term arrangements. One comparable example would be early termination of a CRP contract – there the landowner is required to repay all of the CRP payments, plus interest and a penalty.
- Will liens or restrictive covenants on placed on the land – the contract may allow the aggregator to place a lien or other restrictive covenant on the land to ensure compliance. This would greatly impact options for use and transfer of the encumbered acreage.
- Who owns and gets access to the data – data regarding the land and practices will be collected by the aggregator to verify carbon storage. The data will also be communicated in some fashion to the marketplace to authenticate the carbon credit. The farmer will want to understand what data will be released and how.
- How will the carbon be verified – the science of carbon verification is quite new, and its accuracy may be questionable. Current verification methods are time-consuming and expensive. This is likely to affect the value of the contract.
- Are other benefits available – For example, implementing carbon capture practices may provide tax credits, or a contract may allow the for-hire recreational activities (e.g., hunting). Practices that improve soil water retention may also be eligible for financial benefits.
Before signing a contract that could tie up your land for 10, 20, 40 years or longer, make sure you thoroughly understand the obligations. An online tool offered by Colorado State University – called COMET Farm – allows you to estimate carbon capture on your farm through various conservation practices.