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What farmers need to know about carbon contracts

Knowing payment structure, how carbon is valued, and who owns data is key.

It may seem like a new carbon program hits the market every day, enticing farmers with promises to pay for new practices. Confusing contracts and growing pains of a new market have left many barriers in the way of advancing these programs. Here’s what farmers should consider before signing on the dotted line.

For what am I being paid?

Though practice changes may be necessary to enroll in a carbon program, payments often occur for carbon sequestered and not the practices themselves.

“Payments are typically going to be based on one of two things,” says Shelby Myers, an economist for American Farm Bureau Federation. “One is pay for practice, which is something that growers have been used to ever since we created Title II in the Farm Bill for conservation and upfront cost share to adopt certain conservation practices. Growers are used to that.”

The other payment structure trends toward quantifying outcomes on which payments are made for the environmental benefit that’s generated, Myers says.

This environmental benefit is measured through carbon credits.

“A carbon credit is a tradeable asset that gives the buyer the right to offset the emission of greenhouse gases into the atmosphere,” says Alejandro Plastina, an Iowa State University Extension economist. “Carbon credits are created when entities reduce their carbon emissions, or remove carbon from the atmosphere, compared with a set baseline. Typically, each credit represents 1 metric ton of carbon dioxide.”

If a contract pays for the actual carbon sequestered through credits, farmers should be prepared for more substantial data collection and verification.

How is the value of my carbon determined?

Companies interested in buying offsets look for additionality, permanence, realness, and leakage avoidance to ensure the quality of those offsets, Plastina says.

  • Additionality pertains to companies that want to pay for newly implemented practices.
  • Permanence represents carbon sequestered long term.
  • Realness refers to credits representing actual and quantifiable removal of greenhouse gases from the atmosphere.
  • Leakage avoidance means an industry that produces the credit also takes steps to prevent emissions in other aspects.

“The way quality is certified to verify claims on carbon credits is through a measuring, reporting, and verification (MRV) system,” Plastina says. “Having robust MRV systems is key to convincing buyers that the implemented changes in agricultural practices actually removed carbon from the atmosphere, avoiding carbon emissions. A robust MRV system is also a necessary condition for the development of a strong agricultural carbon market.”

There is no industry-wide standard for carbon credits or MRV systems, making it difficult to compare programs for both farmers and potential carbon credit buyers. Before signing a contract, farmers need to understand how a program verifies carbon credit quality.

“Understanding how verification will work in these contracts is huge,” says Kristine Tidgren, director of the Center for Agricultural Law and Taxation at ISU. “We’re hoping we’ll have some standards down the road that will assist with this. Right now, we really need to look at who’s required to verify and what standards are required to be met.”

Who owns the data?

The data collected to verify carbon sequestration is essential for any carbon program.

“Data is really the lifeblood of the carbon contract, because without it, we have nothing to sell,” Tidgren says. “Without it, we have nothing to show for ourselves, so we really have to review the contract provisions about creating, storing, and owning the data.”

Farmers should be diligent in understanding how long data will be collected and the privacy standards around their data. Ultimately, Tidgren recommends farmers work with trusted counsel to determine if a carbon program is right for their operation.

“As producers, we need to make sure that we’re consulting trusted legal counsel to ensure we understand what we’re entering into because all of these arrangements are just a little bit different,” Tidgren says.

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