Q&A: Agricultural Carbon Markets Agricultural carbon markets present opportunities for farmers to be paid for practices that sequester carbon. Before agreeing to any carbon program contract, you should make sure you understand all the program requirements, have all your questions answered regarding these developing markets and discuss the program terms with your trusted advisors. You should start your decision-making process by asking these fundamental questions:
1. W hat practices are covered under the agricultural carbon market program? Most programs include reduced till, no-till, cover crops and nutrient use practices. 2. W hat are the program’s additionality requirements? Programs typically only allow growers implementing a new practice or expanding an existing one to additional acres for the first time to enroll for the sake of complying with the “additionality” requirements sought by registries or offset end-users. Programs paying farmers for a practice they adopted in prior years are rare. 3. C an the carbon program be stacked with other programs? Private voluntary carbon offset programs do not allow the same acres to be enrolled in multiple carbon offset programs. However, some programs do allow farmers to enroll the same acres in other cost-share initiatives that are not directly related to carbon offsets (e.g., a water-quality program). 4. A re there requirements for land ownership or control? Some programs require ownership of contracted land or some other way of ensuring the land cannot easily change renters for the length of the contract.
TWO TYPES OF CARBON MARKETS In practice-based programs, farmers are paid for implementing specific practices across their acres. These programs come with less risk to the farmer, but also less upside potential. In outcomes-based programs, farmers are paid based on the amount of carbon sequestered. These programs offer more upside potential for farmers, but also more risk.
Financial Considerations of Ag Carbon Markets WILL THE CARBON PAYMENTS COVER IMPLEMENTATION COSTS? A carbon program’s capacity to cover all or most of the costs associated with practice implementation is important when it comes to enrolling in or deciding between carbon programs. Some farmers may be willing to participate even if the payments fall short of the cost to implement the practice knowing the practice will likely bring benefits beyond the carbon payment (e.g., improved soil health). Revenue from a carbon contract can fluctuate widely depending on the program and how many acres are enrolled. Because the cost of implementing new practices and corresponding carbon payments varies by farm, this question can only be answered at the individual level.
These typically have fixed guaranteed rates that differ among buyers. Make sure to ask about the payment structure when comparing programs. HOW ARE PRICES AND PAYMENTS ESTABLISHED IN OUTCOME-BASED PROGRAMS? Carbon offsets should be priced based on market fundamentals. Because the market is relatively new, trade volume is thinner, and the offsets being traded are not of uniform quality or value. This is not an established market like the Chicago Mercantile Exchange.
WHAT ADDITIONAL COSTS, FEES OR PENALTIES ARE INVOLVED? Make sure you’re aware of all potential costs that might come with a carbon program. In some cases, the credit price advertised doesn’t account for those added costs. Added expenses include:
WHEN IT COMES TO OFFSET PRICES, WHAT IS THE PROGRAM’S AVERAGE, RANGE AND FLOOR? It’s important to have a good understanding of a specific program’s average offset prices. Knowing the range of historical prices can also help you to understand the upside potential and downside risk. To mitigate that risk, some programs guarantee a price floor per offset to limit a producer’s risk.
- Cost of verification. - Transaction costs associated with selling credits. - Early termination penalties meant to deter farmers from stopping the practice.
WHEN IT COMES TO OFFSETS GENERATED PER ACRE, WHAT IS THE PROGRAM’S RANGE AND AVERAGE?
- Payback of previous compensation if carbon sequestration does not meet the contract requirements.
Most estimates suggest one acre of agriculture land sequesters between 0.2 and 1.0 metric tons of carbon dioxide (CO2) each year, but that number varies widely depending on soil type, management practices, environmental conditions and measurement methodologies. Knowing what other producers have been able to generate per acre within that program and how those results have varied by geography, practice, etc. can give a farmer a realistic understanding of its revenue parameters. Understanding how the program calculates offsets is also beneficial.
HOW AND WHEN WILL FARMERS BE PAID FOR PARTICIPATING? Some carbon programs pay a percentage upfront, with the remaining payment made at contract’s end. Others offer annual payments. Still others offer lump sums that cover a year’s worth of payment for multiyear contracts. In outcome-based programs, extra payments may be made beyond the lump sum depending on the amount of carbon sequestered. In some cases, if carbon sequestered does not meet contract requirements, a portion of the lump sum may need to be returned.
OWNERSHIP, SALE AND BANKING – WHO’S IN CONTROL OF THE OFFSET? Some programs take ownership of the offset and decide when to sell them, paying farmers a certain percentage of the sale price. In other programs, the farmer decides when to sell the credits. Banking the credits for future sales may also be an option.
BRING IN YOUR SUPPORT TEAM
WHAT IS THE BUSINESS MODEL OF THE CARBON PROGRAM? Carbon programs have similarities and differences in how they operate, whether they are practice or outcome based and their payment structure. Growers should understand the carbon program contracting company’s revenue stream, financial strength and backing, longevity, and payment structure/ schedule before deciding whether to participate.
WHAT WILL THE AGREEMENT PAY PER PRACTICE IN PRACTICE-BASED PROGRAMS?
CARBON REGISTRIES
VERIFIERS
T ra c k th e pro du c tio n , o wn e rsh ip a n d re tire m ent of c a rbo n c re dits th ro u gh o u t th e ir life c yc l e
E MI S S I O N RED U C T I O N P U R C H A S E A G R E E ME N T S ( E R PA s )
Ind ep end ent, thi r d - p ar ty ver i fi cati on or g ani zati ons that i nsp ect a car b on offset p r og r am and ensur es i t m eets i ts stand ar d s
Consult an attorney and/or trusted advisor to review an agricultural carbon market contract BEFORE signing an agreement to ensure you are aware of your rights, obligations, programstacking options and any indemnity provisions.
PROJ ECT DEVELOPERS
I nvesto r-ba c ke d me th o d o f fin a n c in g c a rbo n c re dit pro je c ts
D evel op p r otocol s for car b on p r og r am s to g ener ate car b on offsets
FARMERS Met h o d s
D at a
Figure 1. How Data and Payments Flow Through Agriculture Carbon Programs (Plastina, 2022)
Pa y m e nts
Ca rbon Cre dits
I mplement carbon s eques t ering agronomic pract ices
HOW IS CARBON MEASURED? Several major models are used to measure carbon sequestration. Some companies use their own proprietary models. Make sure to ask what farm information will be used to measure carbon sequestration and generate the corresponding payment. WHAT ARE THE PROGRAM’S DATA REQUIREMENTS AND POLICIES? Most programs require some level of historical data on past practices and farm performance, including yield and soil test results. Find out what historical and real-time data companies will need, how they’ll use it, and how much time and effort will be required to provide it. Also make sure you understand and are comfortable with the company’s data transparency and security policies. Companies should be clear about if/how farmer data will be used and shared. SHOULD A GROWER PARTICIPATE IN AN AG CARBON PROGRAM? Ultimately, this decision is a very personal one that hinges on the operation and its goals. Talking to other farmers who are enrolled in carbon programs can also help you understand the pros and cons of participating.
JOINING
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For more information or the full Agricultural Carbon Market Report, contact: Iowa Corn • 5505 Northwest 88th Street • Johnston, Iowa 50131 • 515-225-9242 • corninfo@iowacorn.org This grower guide is produced by the Iowa Corn Promotion Board (ICPB) to help inform Iowa corn farmers about agricultural carbon markets. This grower guide is neither an endorsement nor a rejection of any ag carbon program. Rather it is meant to inform growers of the opportunities and risks of participation so they can make the best choice for their operations. The ICPB uses checkoff funds to develop and defend markets, fund research and provide information about corn production.
December 2023