Before signing a carbon contract and entering a market that has many unknowns, farmers, ranchers and landowners – along with their attorneys – will want to ask a lot of questions. The University of Nebraska-Lincoln’s new Center for Agricultural Profitability has developed several resources for producers considering selling carbon credits. Among the resources is a carbon-credit contract checklist.
Farmers, ranchers and landowners are typically the sellers and are paid for using management practices that sequester carbon, creating carbon credits. That could involve tillage practices, fertilizer practices and land retirement, among others. Aggregators representing collective groups of firms then purchase the credits to offset their own carbon emissions.
Carbon contracts between producers and aggregators are still very new and have little to no standardization, according to Dave Aiken, professor and agricultural-law specialist in the department of agricultural economics at Nebraska.
“It’s like the Wild West out there, and every company is going to have a different contract,” he said. “These can be quite complicated so it’s going to be a bit of a challenge to figure it out.”
The new checklist, authored by Aiken, offers 11 questions covering topics such as payment considerations, contract length, carbon-sequestration practices and more. It defines the standard carbon-credit trading unit as one metric ton of carbon sequestered in soil. Aiken estimates that to be valued about $5 per ton. Some estimates predict an increase to as much as $170 per ton in the next several years. But he describes that as a “slim possibility,” which is indicative of the uncertainties and interest currently surrounding carbon markets.
“Some carbon-credit aggregators may be willing to pay a substantial bonus to have producers sign up with their program, creating the mirage of a carbon-credit bonanza,” Aiken said.
The checklist highlights the importance of involving a lawyer before signing a contract because of the likely long-term period of the agreement, the potentially complicated fine print about terminating a contract, and the specific rights that the aggregator will have on the land. Other unknown factors that should be considered include the verification process for carbon sequestration and the ability of tenants to sell carbon credits.
While there seems to be a lack of clarity and uniformity surrounding carbon markets, a group of senators in April reintroduced the Growing Climate Solutions Act. It seeks to reduce barriers to participation and create standards for carbon markets in U.S. agriculture. The bill would have the U.S. Department of Agriculture do a few important things to create transparency for the emerging market.
“One thing is to set standards for determining how to tell how much carbon has been stored each year,” Aiken said. “Another would be to maintain a list of all the groups that are buying carbon contracts so if farmers want to learn about them, they can see the different groups on the list, what they’re offering, and maybe find one that can work for them.
“If somebody offers you a carbon contract, read through it. If there’s anything you don’t understand or you’re not clear about, take it to a lawyer. The lawyer will be able to help you understand your options and what could happen with the contract, if things go good or bad.”
See the accompanying checklist written by Dave Aiken.
