Business of Farming

Carbon Credits

What Are They Worth?

Carbon sequestration, carbon offsets, carbon neutral, carbon credits – all fashionable buzzwords currently in the news cycle. Rewind 10 or 15 years and the same terms were being tossed around just as readily until the carbon market dried up and carbon talk fizzled out in the media. So why do we keep revisiting carbon sequestration? What does it really mean? And, ultimately, what could it potentially be worth to a landowner?

To understand carbon sequestration, we really need to explain the driving factor behind needing to capture carbon in the first place. Global warming, a term you have inevitably heard a multitude of times, is the reason we are again focused on trying to find ways to store carbon. A very abbreviated explanation goes like this: Greenhouse gases (i.e., carbon dioxide, methane, nitrous oxide, etc.) that can trap heat in the atmosphere are emitted from various activities like use of fossil fuels, manufacturing and agriculture. When emissions increase over time due to increased activities in these processes that produce said gases, atmospheric temperatures will also experience a slight uptick. Left unchecked, baked Alaska won’t just be a dessert anymore. Slight exaggeration, but that’s the gist of it.

The main player in all this potential for warming is carbon dioxide, the greenhouse gas by which all other gases are measured (literally, there’s a scale of warming potential by gases and CO2 is the baseline). Why? Because carbon dioxide hangs out in the atmosphere for a really, really long time. By EPA estimates, in 2019 there was approximately 6,577 million metric tons of carbon dioxide emitted by various sources. The figure shows how these rates have changed over time by sector and notice the small purple line that represents agriculture. This is a critical point to note in the carbon sequestration discussion. Yes, agriculture does produce some amount of greenhouse gas emission from tractors and cows, etc., but land use is also key to how we remove carbon dioxide from the atmosphere. And that’s how agriculture gets pulled into the carbon credit arena.

Although the biggest push has been for industries to adopt cleaner technologies to reduce emissions, and, to a large degree, they have, there has still been talk for the need to further offset emissions by increasing sequestration of carbon dioxide. This would mean using land management practices such as cover cropping, reduced tillage, certain timber management practices, etc. to promote storage of carbon dioxide. In 2019, the EPA roughly estimated 789 million metric tons of carbon dioxide was captured (sequestered) in the soil or plants like timber production. This means there is a lot of potential for land, particularly ag land, to store a lot of carbon dioxide. In fact, we can now measure or estimate a measurement of how much carbon is potentially stored by different practices.

Companies are now willing to pay to offset carbon dioxide emissions to those that are doing things to capture carbon like landowners and farmers.

So how does one derive an economic value from storing this carbon? Good question. In the past, and even now except in some other countries and a few states that have set goals for reduced emissions, there has been no mandate requiring industries to fall below a certain level of greenhouse gas emissions. This lack of mandates was the downfall of the carbon credit industry on the last go-round because there was essentially no demand for the credits. This time, however, voluntary interest by companies as well as the potential for future mandates have possibly made the carbon credit market a little more sustainable. Companies are now willing to pay to offset carbon dioxide emissions to those that are doing things to capture carbon like landowners and farmers. How much, however, is all over the board.

A carbon credit, which is essentially the storage of 1 metric ton of carbon, could be worth anywhere from $20 an acre to $100, or more or less, depending on who is buying. Most credits are bought and sold through an exchange rather than an individual company approaching a seller, but these exchanges have rules and requirements that vary just as much as the payment. Some require certification of carbon sequestering practices (which the landowner pays for), some require purchase of software or other products through them, some do not have purchase requirements but keep a percentage of the credit. Since there is no standard, it will come down to you as a landowner or grower to read any contract before selling credits and feel comfortable with what you sign.

Ultimately, the carbon credit industry, as with any “new” industry, will experience a lot of change before, if ever, it becomes standardized. So, before signing a contract, do your homework on the company, read the contract and feel free to give us a call at Extension.