Farm Carbon Markets 2.0
The discussion is hot again, but will the market finally take off?
On March 15, 2021, the USDA announced a 45-day public comment period to gather input on its climate smart agriculture and forestry strategy. This is in response to a recent Executive Order which mentioned that farmers, ranchers, and forest landowners could play an important role in reducing greenhouse gas emissions through carbon sequestration and other sustainable practices such as producing biproducts and biofuels. The USDA hopes to achieve this by creating voluntary carbon markets. With the new program gathering input from the public, the idea of direct cash incentives could be a mechanism for encouraging greater participation in the climate smart agriculture and forestry strategy.
Carbon Markets 1.0 - So what happened with the first go round and why did it fail?
The first interest in a carbon market or “cap and trade” began in 2008 when President Obama proposed addressing climate change by reducing carbon emissions 80 percent by 2050, with 10-year goals along the way (Broder, 2008). The Waxman-Markey bill which would have created a national cap-and-trade program was dead on arrival as it never reached the Senate floor for a vote. Even though the bill failed a group of Northeastern States formed the Regional Greenhouse Initiative (RGGI) which was the first mandatory cap-and-trade program in the United States. California also implemented a cap-and-trade program in 2013, becoming the first state to do so.
Who were the intended players in the market?
The intended sellers for the cap-and-trade program were agricultural and renewable energy producers. The focus for farmers and ranchers to participate in the market included measures such as reducing carbon dioxide emissions or through conservation practices such as no or reduced till which sequesters carbon in the soil. The buyers for the market at the time were the largest carbon dioxide emitters such as coal power plants and other industries heavily reliant on petroleum-based feedstocks.
Where were carbon credits traded?
The Chicago Climate Exchange (CCX) was established as a voluntary market launched in 2003. Initially, it was extremely difficult for farmers to participate as the minimum required to enter the market was set at 10,000 tonnes of carbon dioxide emission offsets annually along with contracts of five years (Ribera & Zenteno, 2009). For a farmer wishing to sell carbon credits the amount of farmland required to meet this minimum was 25,000 acres (Ribera & Zenteno, 2009). Due to the large number of acres required for a farmer to participate, authorized aggregators that were registered with the CCX were created and served as the trading representatives for farmers.
What happened to the market?
The carbon cap-and-trade market however was short lived with peak prices of $7.40 per ton in May 2008 and quickly plummeting to $0.10 per ton in August 2010 (Griesinger, 2010). As a result of a failing market, the CCX was terminated on December 31, 2010. The RGGI and California mandatory cap-and-trade policies are still in operation with allowances auctioned quarterly. On March 5, 2021, the RGGI posted a clearing price of $7.60 per carbon dioxide allowance which is equal to one short ton of carbon dioxide. The latest auction settlement price posted on February 24, 2021 for the California cap-and-trade market was $17.80 per metric ton. These cap-and-trade programs have continued to operate as they are mandatory versus the voluntary CCX market created in 2003.
Carbon Markets 2.0
The new buzz word however when talking about carbon markets is “regenerative agriculture”. The definition from the USDA National Agricultural Library however is vague and describes the term coined by Robert Rodale as “enhanced regeneration of renewable resources is essential to the achievement of a sustainable form of agriculture and would be relevant to many economic sectors and social concerns” (Gold, 2007, Regenerative Agriculture). Most of the trending carbon market companies describe regenerative agriculture practices as planting cover crops, engaging in no till, strip till, or reduced till, nutrient management programs, crop rotation plans, rotational grazing, and utilizing soil and conservation science. The concept of regenerative agriculture however is very similar to conservation practices that many farmers have been actively engaged in to prevent soil erosion and build up soil health.
With several companies developing their own methodology to calculate carbon credits, will this create uncertainty in the market for buyers?
There are many trading platforms such as CIBO, Gradable Carbon, TruCarbon, and the Regen Network that are buying and selling carbon credits. It is interesting that CIBO for example is offering carbon credits for buyers at $20.00 per ton whereas Gradable Carbon is offering the same dollars to farmers who want to sell credits. As this market matures each company is developing their own in-house methodology and monitoring systems to calculate and trade credits. Buyers such as Microsoft have already purchased credits from TruCarbon and the Regen Network.
It is also interesting that most of these companies expect the price of carbon credits to increase over the years because of more farmers signing up and credits being sold to eager buyers such as corporations looking to offset their carbon footprint. Current research shows that the market “could capture 250 million tons of greenhouse gases annually – around 5% of 2019 domestic emissions – estimates the National Academy of Sciences” (Toplensky, 2021, para. 9). Although the volume of emissions that could be captured through sequestration represents a small percentage, an opportunity may exist for those farmers already incorporating regenerative agriculture on the farm to participate in carbon markets.
How will carbon be measured over time?
An issue may arise as to how to establish a baseline for farmers who are already practicing regenerative agricultural practices. How do you measure a buildup of carbon in the soil without having a current baseline of soil carbon to measure changes in practices which might increase organic matter in the soil? This is an important consideration to address as it may be a barrier for farmers to participate in the market.
So, what role will farmers and ranchers have in carbon markets 2.0?
A good starting point to answering this question is to look at an older USDA document published the last time carbon markets were trending. The economic brief looked at who would most likely participate in carbon markets and some key findings are provided below:
Farmers that rent land may be less interested than landowners in the long-term productivity of the soil and, therefore, less willing than owners to adopt practices that sequester carbon and preserve long-term productivity (e.g., long term no till or grass cover), especially if such practices might reduce current returns to the farm (Claassen, 2009, p. 1).
Their findings also point out that even if a landowner and tenant were interested in applying management practices that support carbon sequestration “the complexity of the associated lease agreements and negotiation challenges will continue to act as a deterrent “(Claassen, 2009, p. 1).
“Farm operators who own their land will have greater incentives to engage in long-term conservation and will face fewer barriers to signing long-term contracts to generate carbon offsets” (Claassen, 2009, p. 1).
The findings from this economic brief make sense in that a farm operator who owned the land would have more of an interest in participating in carbon sequestration markets versus an operator renting land with a short-term lease. Operators who own the land have a long-term investment interest and are more likely to practice conservation measures such as strip or reduced till, nutrient management practices, and crop rotations. As previously mentioned, previous attempts at establishing carbon markets required the farmer or landowner to have a five-year contract in place to sell carbon credits. However, most farm lease agreements are short term and one year in length.
What is the current breakdown of farm operators, operator landlords, and non-operator landlords?
According to the latest USDA land tenure survey data analyzed in 2014, approximately 39 percent of the 911 million acres of farmland in the US was rented. The amount of cropland rented is 54 percent whereas the amount of pastureland rented is 28 percent. The chart below shows that 31% of land in farms is owned by non-operator landlords and is further broken down by type, with 21% classified as individuals and 10% as corporations, trust, or other ownership. (USDA ERS, 2020). There is a greater proportion of pastureland that is not rented at 72 percent versus cropland at 46 percent and farms classified as pastureland will most likely be the earlier adopters to implement rotational grazing or other conservation measures to quickly enter the market and reap the benefits of selling carbon credits.
If carbon markets take off, would it encourage more landowners to work with their tenants on incorporating regenerative agricultural practices and longer lease terms to allow for crop rotations and planting cover crops?
Would the operator renting land have an interest in participating in such a program? How would both parties be compensated?
One recent article from Farm Progress explains how a particular landowner and tenant shared soil health costs (Betts, 2021). The interest in soil health for both parties was based more on a conservation ethic rather than pursuing carbon markets. Both parties understood the value of crop rotations and practicing no till but at the time the operator was practicing conventional farming and incorporating these practices would not have happened overnight.
They agreed to ease into no-till and the operator worked on a plan to purchase a no-till drill. Both understood that making this switch would result in lower yields short term but eventually the productivity and profitability from building up the soil would pay off. Current research suggests that achieving organic matter percentages at 5% provides benefits of increased water holding capacity in the soil and increased yields through better soil health.
Such an arrangement is feasible if both sides have an interest and the added cost to implement conservation practices are shared between the landlord and tenant. This could be implemented via reduced rent for the initial years when starting no till practices and sharing the costs for planting cover crops and soil test sampling. Additional income from participating in carbon markets could also help to offset some of the costs associated when incorporating regenerative agricultural practices.
Will carbon markets work this time around?
First agricultural sector carbon market participants may likely be landowners who are operators that have already incorporated conservation practices on their farm. There are many eager buyers looking to purchase credits to offset their own carbon emission generation with the goal of becoming carbon neutral or meeting other sustainability goals. It will be interesting to see whether buyers are interested in purchasing carbon credits as no uniform standard or auditing process exists at the time. This may create uncertainty in the market.
The real pending question is whether there is enough incentive for farmers and ranchers to participate in carbon markets. This may depend heavily on the costs associated with regenerative agricultural practices. Widespread participation will likely rely on whether the price of carbon versus the cost to a farmer’s operation.
Another consideration is whether an operator renting farmland or ranchland participating in carbon markets has the right to be compensated for the credits. Future litigation may occur to determine who should be legally compensated, the operator or the landowner, possibly coming down to whether carbon buildup should be treated as property, or will the market instead pay only for the practice performed by an operator without measuring actual carbon buildup.
Photo credit: Jason Johnson, NRCS-Iowa
References
Alles, K. (2021, March 11). Maintaining Optionality with Carbon Credits. Gradable. https://www.gradable.com/post/maintaining-optionality-with-carbon-credits?utm_source=linkedin&utm_medium=social&utm_campaign=gradable-launch
Betts, L. (2021, February 5). Landowner, tenants share soil health costs. Farm Progress. https://www.farmprogress.com/soil-health/landowner-tenants-share-soil-health-costs
Broder, J. M. (2008, November 18). Obama Affirms Climate Change Goals. The New York Times. https://www.nytimes.com/2008/11/19/us/politics/19climate.html
CIBO. (n.d.). Carbon Market. CIBO Technologies. Retrieved March 17, 2021, from https://www.cibotechnologies.com/carbon-market/
Claassen, R. C., & Morehart, M. M. (2009, September). Agricultural Land Tenure and Carbon Offsets. USDA Economic Research Service. https://www.ers.usda.gov/publications/pub-details/?pubid=42840
Goodwin, S. (2021, January 29). Microsoft buys carbon credits from NSW cattle operation. The Land. https://www.theland.com.au/story/7106034/microsoft-buys-carbon-credits-from-nsw-cattle-operation/?cs=4941
Griesinger, W. (2010, November 18). Death to the Chicago Climate Exchange ($7.40 to a nickel per CO2 ton, the market has spoken). Master Resource. https://www.masterresource.org/chicago-climate-exchange/death-chicago-climate-exchange/
Gunderson, D. (2021, February 7). A “carbon bank” could mean extra cash for Midwest farmers. MPR News. https://www.mprnews.org/story/2021/02/07/a-carbon-bank-could-mean-extra-cash-for-midwest-farmers
Mary Gold, M. V. G. (2007, August). Sustainable Agriculture: Definitions and Terms. Related Terms | Alternative Farming Systems Information Center| NAL | USDA. USDA National Agricultural Library. https://www.nal.usda.gov/afsic/sustainable-agriculture-definitions-and-terms-related-terms#term26
Ribera, L. R., & Zenteno, J. Z. (2009, July 21). Carbon Markets: A Potential Source of Income for Farmers and Ranchers. Texas A&M University Libraries. https://oaktrust.library.tamu.edu/handle/1969.1/87568?show=full
Sonnemaker, T. S. (2021, January 22). Elon Musk says he will give $100 million to whoever creates the best carbon-capture technology. Business Insider. https://www.businessinsider.com/elon-musk-100-million-prize-carbon-capture-technology-contest-2021-1?international=true&r=US&IR=T
The Soil Health Institute. (2021, February 4). Soil Health Institute to Collaborate With Truterra on TruCarbon<sup>TM Metrics and Soil Sampling Protocols</i>. 3BL Media. https://www.3blmedia.com/News/Soil-Health-Institute-Collaborate-Truterra-TruCarbontm-Metrics-and-Soil-Sampling-Protocols
Toplensky, R. (2021, March 17). Carbon Capture Is Key to Companies’ Net Zero Pledges. WSJ. https://www.wsj.com/articles/carbon-capture-is-key-to-companies-net-zero-pledges-11615975780
USDA ERS - Farmland Ownership and Tenure. (2020, November 17). USDA Economic Research Service. https://www.ers.usda.gov/topics/farm-economy/land-use-land-value-tenure/farmland-ownership-and-tenure/
Wincele, R. (2019, December 17). Cap-and-Trade ambition renewed in 2019 after a decade of decline. Climate-XChange. https://climate-xchange.org/2019/12/12/cap-and-trade-ambition-renewed-in-2019-after-a-decade-of-decline/