The carbon markets are maturing. While some may remember early attempts, it has been since the Paris Agreement in 2015 that demand for carbon credits has really strengthened. There have been dynamic shifts over the past five years, in particular. Companies have come and gone, those seeking quick and easy money have failed, sampling and monitoring technology has improved, and buyers have become more discerning, leading to more rigorous changes in the verification processes. While many have been skeptical over the years, it is fair to say that carbon markets are here to stay. Some companies have been around for several years, and some semblance of stability now exists.
Large corporations have made goals to become carbon-neutral. To reach those goals, companies must lessen their emissions, purchase offsets or a combination of the two. In many countries across the globe, these goals – along with governmental carbon-neutral goals – have led to cap-and-trade markets where companies are only allowed to emit a certain amount of carbon, or carbon-equivalent, gases. High-emission industries purchase offsets from others who have decreased atmospheric carbon to lower their overall emissions. The United States has not implemented federal restrictions thus far. This has led to a voluntary market for carbon credits where carbon, verified as sequestered, can be sold to companies who have carbon-neutral goals. This provides opportunity for agricultural producers to capture/sequester carbon in the soil and then sell verified carbon credits.
Soil carbon sequestration is the process of implementing new practices, or shifting old practices, to capture atmospheric carbon and put it into the soil. This is done by leveraging the existing natural carbon cycle and minimizing the release of carbon from the soil. This change is referred to as “additionality” in the carbon industry. Additionality exists when changes are made, or practices and policies are implemented, specifically to reduce emissions or to sequester carbon. For example, if a forest preserve was established in 2015, it cannot be enrolled in a carbon project now. Those trees were already protected, and no change was made from status quo.
For livestock producers, generally accepted practice changes fall in line with regenerative grazing principles. Intensive grazing, consistent ground cover both standing and litter, and adequate rest are key components to carbon sequestration. The intensity to which these changes are designed and implemented depends on the context of the operation. However, to prove additionality, some changes must be made. It is important to keep in mind that better management and more aggressive practice changes often pay dividends in higher rates of carbon sequestration – especially early on.
Many practice changes require either new infrastructure or additional costs such as electric fencing for grazing management or cover crop seeding. Some companies offer to share costs or allow prepayment options to help with implementation. Other companies provide helpful equipment. It may be necessary for ranchers to start simple and then increase management over time. For example, a producer may implement a grazing management plan that considers the long-term carrying capacity of their ranch and adjust stocking rate accordingly. They may also implement a forage monitoring system that enables dynamic pasture management practices that shift with actual forage growth. Some companies are more rigid than others and have prescribed changes that must be implemented.
In addition to potentially expensive infrastructure challenges, most producers do not have the necessary capital to implement the measuring, monitoring, reporting and verification process (MMRV) and to develop their own carbon credits. This process is necessary to verify sequestration and generate marketable carbon credits. Costs associated with these steps vary depending on techniques used but can easily be around $10 per acre. Finding buyers for generated credits can also be challenging. This paves the way for an industry of carbon-oriented companies that act as middlemen between sellers and buyers. These companies develop carbon projects that are registered with third party auditors and verifiers to ensure quality and cover all costs associated. They also do the footwork and paperwork necessary to certify credits and find buyers. These project developers are willing to pay upfront costs as an investment in future potential carbon revenues.
To sell credits, ranchers enter into long-term contracts with project developers. Carbon sequestration takes time. Measurement intervals are three to five years apart because discernible increases in soil carbon take that long to develop. In addition, natural influences such as drought or fires can impact sequestration rates. Minimum contract lengths are usually 10 years long. Many companies encourage longer-term involvement in the project by offering renewal periods where an initial 10-year agreement becomes a 20-, then 30-, then 40-year agreement through regular renewal. Longer producer participation helps establish permanence. Permanence is the confidence that increased carbon levels in the soil are well established and will persist with proper management.
Once credits are sold, some companies offer a split of net revenues (after all costs) with producers. Others offer a direct per-credit payout which has already taken into consideration overhead expenses. Some offer a split of all revenues after direct costs associated with MMRV are subtracted. Revenue direct to producers can vary significantly with ranges seen from $8 per credit to $18. While an important part of the marketplace, the significant differences among companies make the carbon market confusing and somewhat complicated to consider.
As the carbon industry has grown and matured, many farmers and ranchers have not had the time to research ways to leverage carbon markets or the best companies offering those services. Even in the past year, noticeable shifts have happened in the American voluntary carbon markets. While it can be confusing and seem daunting, those who choose to ignore potential revenues from carbon sequestration and the sale of carbon credits might be leaving money on the table.
