The following information is provided for educational purposes only; it isn’t a substitute for legal advice. Contact an attorney for legal questions regarding entering into a contract to sell carbon credits.
The following checklist features items farmers or ranchers and their attorneys should consider in evaluating a carbon contract with an aggregator – a company contracting with many farmers or ranchers for carbon credits. While the checklist can’t identify every possible issue that may arise regarding a carbon contract, it provides a starting point.
There’s currently no “standard” U.S. carbon contract. One must review the contract line by line with an attorney for an understanding of the entire contract.
1. How much will you be paid? Some producers have reported receiving offers of $10 per acre to $15 per acre or more to sign a carbon-credit contract. That probably represents a signing bonus rather than an indication of what a long-term price for carbon credits might be.
One metric ton of carbon sequestered in soil equals one carbon credit – the standard carbon-credit trading unit. While current carbon-credit prices are difficult to establish conclusively – without paying costly subscription fees – $5 per ton would be a representative current price for cropland carbon credits.
For a ballpark estimate, it could take as many as 5 acres to 10 or more acres of cropland to generate one additional ton of sequestered carbon annually. If the aggregator took 33 percent of the gross-sale proceeds, the farmer might receive $3.35 per ton sold, or between 33.5 cents to 67 cents per acre in the carbon contract. That’s probably not enough money to justify implementing the carbon-sequestration practices.
If one searches online for carbon prices, one can find prognosticators predicting carbon prices could increase to as much as $170 per ton or more in the next several years. But that possibility isn’t anything one could take to the bank today.
Some carbon-credit aggregators may be willing to pay a substantial bonus to encourage producers to sign with their program. That’s likely to be happening for one of two reasons.
- They need farmers to populate their carbon-credit pilot program and are willing to pay a premium to sign them.
- They’re speculators who expect carbon prices to escalate in the future and want to have relatively inexpensive carbon credits stored to sell later at greater prices should they materialize. Most carbon-contract prices likely will be based on the current market price for agricultural-carbon credits, which today isn’t very much.
2. What might make carbon credits increase in price? One possibility would be if the United States required power plants and industry to reduce greenhouse-gas emissions fairly rapidly to bring U.S. greenhouse-gas emissions to net zero by 2050. One policy to accomplish that is being considered by the Biden administration – the Clean Electricity Standard. That policy would provide power plants an option to buy and sell zero-emission electricity credits to comply with the standard each year. If the power plants were able to meet part of their clean-energy requirements by purchasing agricultural-carbon credits, demand would increase. But the likelihood of Congress’ enacting such a program in 2021 currently seems less than 50 percent. In the absence of such a policy, it’s difficult to see anything else that could significantly change carbon-credit market conditions, at least in the near term.
3. When will you be paid? If payments are based on the sale of carbon credits by the aggregator, there will be a process for quantifying the additional carbon storage each year, selling the carbon credits on the carbon market, deducting the seller’s costs and fees plus any hold-back or insurance coverage for future carbon-credit production defaults.
After all of that the farmer will receive his or her share of the carbon-credit sale proceeds. The process might involve anywhere from several months to more than a year. The contract should explain that.
4. What happens if you aren’t paid? You and your attorney will need to analyze what your rights are in the contract if the aggregator can’t pay for your carbon credits. If that happens the aggregator would likely be liquidated in bankruptcy. Then the aggregator’s unpaid lender likely would be paid before unpaid farmers or ranchers. There could be a costly bankruptcy fight about who gets what if there was anything to recover.
5. What practices might be needed to be implemented? Possibilities include tillage practices, fertilizer practices and land retirement. Tillage practices could involve converting from conventional tillage to reduced- or no-till for corn or soybeans. Contracts could involve reducing fertilizer applications or using a nitrogen inhibitor. Land-retirement practices could involve retiring marginal lands to permanent grassland.
Pay careful attention to practices you would need to implement in the contract and whether the expected payments would justify incurring associated costs. For an online tool to estimate how much additional carbon you might be able to sequester with different conservation practices, see COMET Farm.
6. How long might the contract be in effect? That remains to be seen. Regular agricultural-carbon contracts might be between 10 years and 20 years. Most non-agricultural carbon contracts are for 40 years to 100 years. Shorter-term contracts usually receive somewhat lower prices. Because a carbon contract is fairly likely to be long-term, evaluate the options carefully.
7. Will I be able to terminate a contract? That is something an attorney can address. There currently isn’t a standard agricultural-carbon contract so contracts from different companies are likely to vary considerably. Spend time with an attorney to ensure you understand all the terms of the contract, which is likely to be fairly complex.
8. Does the aggregator have the right to file against my land in a carbon contract? A lawyer needs to analyze that. It’s possible a carbon contract could include the right to file a lien on the land covered by the contract as security for your contract performance, and to secure payment of any penalties for contract nonperformance. Also look for contract clauses restricting the sale or rental of the land before the end of the carbon-credit contract.
9. What about data privacy? Any data needed by the buyer to evaluate each season’s additional carbon storage will likely be kept by the aggregator to have necessary records to participate in the relevant carbon market. You and your attorney will need to analyze the contract to determine how much of your farming data won’t remain private in the contract, whether the data may be sold and so on.
10. How will carbon sequestration be verified? That’s an important and complicated question. Conventional soil analysis is expensive, although companies are experimenting with geographic-information-system mapping and agricultural-production data to estimate carbon storage in farm fields. Some contracts may require the farmer to pay for the soil analysis while others may cover those costs from the sale of carbon credits. Make sure you understand the costs and how they’ll affect your payment.
11. Can tenants sell carbon credits? This is a complicated issue that’s nowhere near being resolved. The tenant would likely, as a minimum, need a 10-year to 20-year written contract to match the term of the carbon-credit contract. The aggregator may need the landlord to be part of the contract as well. There are too many legal issues regarding contract continuity that make purchasing carbon credits from non-landowners risky for most aggregators except perhaps for short-term contracts.
Will there soon be more clarity about carbon markets for farmers and ranchers? The proposed “Growing Climate Solutions Act of 2021” could possibly make it easier for farmers and ranchers to participate in carbon markets. It would make those markets more transparent. The proposal would create a U.S. Department of Agriculture standard for certifying carbon sequestration in farmland, ranch land and forests. In the proposal USDA would maintain an online platform where farmers and ranchers could obtain information regarding agricultural-carbon markets. The proposal has bipartisan support. Its enactment would help make carbon markets more farmer- and rancher-friendly.
Visit cap.unl.edu/carbon and digitalcommons.unl.edu and search for “The Biden Climate Plan” and comet-farm.com for more information.
