“Fast is fine, but accuracy is everything” is a quote attributed to Wyatt Earp, the famed gunfighter who used this quote to speak to his ability to win gunfights in the Wild West. Accuracy is a necessity in a single-shot, old west gunfight, but the uncertainty around nascent carbon credit markets creates a feeling that a birdshot approach might be more appropriate. The emerging marketplace of carbon credits is reminiscent of the Wild West in this way – aim that direction, but be prepared for the target to move, and move quickly. In fact, this space is evolving so quickly that it’s difficult to keep track of the players and evolving opportunity. Let’s consider a multiple choice question to illustrate this point.
What is the future for carbon credits as they relate to agricultural production?
- Carbon credits for crop production practices could be a future additional revenue source for farmers.
- Only a small percentage of carbon credit payments currently are going to the farm level, therefore limiting current participation, but showing the opportunity for growth potential.
- Without a structured, regulated marketplace exchange or program, there’s lots of variability and uncertainty, like “using your crystal ball”.
- Carbon credits could be another political football as government funding is hotly contested and overtly politicized.
At this point, the answer to this question could be any or all of the above. So, let’s take a look into what’s driving the interest in this topic, as well as those questions surrounding it. Ag Secretary Tom Vilsack has listed income from carbon markets as one of three potential revenue streams for mitigating global warming. While the two others include the conversion of agricultural wastes into products ranging from chemicals to fabrics and capturing methane from manure for use as a renewable fuel, it’s the emerging carbon credit market that has been widely considered the game changer.
We pose the following questions to assist in sorting out the opportunities and challenges:
Why is there a need for a carbon credit market?
Much of climate change research focuses on multiple greenhouse gases (GHG) as the cause of increasing climate change. The National Oceanic and Atmospheric Administration (NOAA) credits carbon dioxide (CO2) as the largest single contributor by far to the increasing GHG, and accounts for roughly 66% of the total all on its own.1 Carbon dioxide is also the most rapidly increasing root cause while remaining GHG seem to be fairly constant. Carbon in and of itself is not bad. In fact human beings, animals, plants, etc. all have carbon within us at a molecular level. The increased CO2 concentration within the atmosphere is attributed with causing change from its characteristics to retain heat.
NOAA research further shows that carbon dioxide in the atmosphere and CO2 emissions), while on an upward trend previously, have grown exponentially faster from about the end of WWII, and support the claim of higher carbon dioxide levels.
One process being used, and gaining interest, is matching up companies that need to obtain carbon offsets with those that have sequestration capabilities such as growers. Growers sequester carbon within the soils from plants through naturally occurring photosynthesis. Grower practices such as planting cover crops (additional plant life) and reduced tillage (not releasing stored carbon in the soil) sequester more carbon to offset companies such as industrial manufacturers.
How would the credits be measured and verified?
Much of the variability and uncertainty, falls into this category as, understandably, buyers want to be confident in their purchase and the practices used to meet verification. However, to achieve the level of desired verification through primarily data-driven solutions, such as through the data systems similar to GPS currently used within agriculture, the economic benefit from producing the credits may or may not outweigh the associated costs, or may not provide a high enough return to incentivize potential producers.
Current issues being discussed also include how, or if, operations that have already implemented some of the desired practices should, or will, be able to generate credits for compensation for current practices or only for any further practices implemented. Consequently, some operators have also contemplated lowering their current practices to set a lower bar if there is no incentive or minimal incentive in expectation of higher future incentives.
What or who will act as the centralized “bank” to facilitate these transactions?
Currently there is no centralized “bank” or exchange such as the Chicago Board of Trade or New York Stock Exchange where buyers and sellers can conduct business independently from one another due to massive amounts of buyers and sellers. Though the marketplace has shown the potential to grow, especially with the heightened environmental awareness. Many of the current arrangements are on two-party, bilateral, contractual agreements with one another (see below), although there is hope within the industry that the USDA will facilitate or possibly build a program with the leftover $30B as a start or down-payment.
The USDA currently has access to $30B in leftover funds in the Commodity Credit Corporation (CCC)2 from the government programs and trade issues previously experienced, and these might possibly be used to facilitate a marketplace. In addition, individual firms such as Bayer, Farmer’s Business Network, Microsoft and others have already been willing to purchase verifiable carbon credits or pay growers on a per-acre (A) basis.3
Are there any carbon credit programs in place now? If so, how are they funded and how much money goes to the grower?
Payment rates of $15 – $20 per ac have commonly been mentioned for each ton of carbon dioxide sequestered or reserved through reduced emissions. The carbon credits created when carbon is sequestered are then sold to those who are trying to reduce their own carbon emissions, such as manufacturers or airlines. Growers who adopt practices such as cover crops or minimum tillage can remove 0.2 – 1.5 tons of carbon per acre per year.
Several bilateral carbon credit programs exist currently, such as:
What are some potential pitfalls to the Bilateral Carbon Exchange Markets for growers?
- Requirement for a long-term commitment
- Cover crops or practices implemented may cost more than the payments that are received
- May only pay for new practices, so no-till growers or those already using cover crops may not be eligible to be paid on these established practices
- How is the contracting entity measuring carbon?
- Reversal risk – most contracts have a mechanism if you fail to sequester carbon
How likely is it for producers to sign up and participate?
Purdue University found between 30% and 40% of those surveyed are aware of opportunities to get paid for sequestering carbon, but just 7% have engaged in discussions, and only 1% have signed a contract.4In conclusion, just as Wyatt Earp emphasized accuracy back in the Wild West, accuracy paired with knowledge will be the key for the future of carbon trade. And navigation of the uncertainties of this emerging market will require the fortitude stereotypical of the western tradition. Presently, there is no “silver bullet” to answer all of the questions, and while ‘fast may be fine’ for the Wild West, we advocate for educated action that considers the many options for individual players. This industry is going to evolve quickly, and it will likely provide a boom for some and a challenge for others