June 27, 2022

Selling carbon credits: Questions farmers should ask

GENESEO, Ill. — Widespread enrollment in agricultural carbon markets hinges on several factors, including economics and uncertainty.

Sarah Sellers, University of Illinois doctoral candidate, farm management, profitability and production agriculture; and Gary Schnitkey, U of I farm management specialist, discussed carbon market economics and questions farmers should ask during a Wyffels Hybrids-hosted webinar.

“Some programs pay on a per-acre basis, and some pay on a per-credit basis. They estimate how many carbon credits are being sequestered and pay based on that. It can be measured in a variety of different ways. The main way used is through modeling, but they also will probably combine that with a soil test to measure the change in the soil,” Sellers said.

As an example, Bayer is paying $3 per acre for reduced tillage — strip-till or no-till; $6 per acre for cover crops; and $9 per acre for adopting both practices.

Corteva is currently paying around $15 per carbon credit and are projecting that to go up to $30 per credit, according to Sellers.

Indigo started at $10 per credit in 2020 and increased to $15 per credit in 2021.

Truterra was paying for credit and now has switched to giving farmers options. Farmers can either choose to be paid per credit or they can enroll for $2 per acre for eligible practice changes.

“Truterra estimates between 0.2 and 0.75 tons of carbon dioxide is sequestered per acre, depending on region, practices and soil types. So, you would multiply that by your carbon price to give you an idea what it would be per acre,” Sellers said.

“There is no formal market where carbon credits are actually traded yet. So, one challenge with that is there is no price discovery for these carbon credits. It’s difficult to put a value on it right now without that market and price discovery process. What’s driving these prices up over time is the competition between companies.”

Sellers; Schnitkey; Krista Swanson, U of I visiting research specialist; Nick Paulson, U of I ag economist; and Carl Zulauf, Ohio State University ag economist/policy, penned a farmdoc article addressing what questions farmers should ask about selling carbon credits. Here are highlights of those questions.

Why do companies require new practices implemented enrolled and not those who have been long-time users of minimal tillage and cover crops?

Sellers: There’s a principle with carbon credits called additionality. So, we have to be able to count that carbon credit as something other than business as usual for quite a few years for some of them. So, it’s hard to count them as a new change or to be able to quantify something that’s been happening for so many years.

What does a carbon credit need to be for a breakeven price for a farmer adopting a new practice?

Sellers: A paper published by International Finance Corporation in 2013 stated a farmer switching from reduced-till to no-till in corn would need $30 per carbon credit to break even from making the change. The assumption they’re making there is the emissions reduction potential — the amount of carbon being sequestered in the soil — is 0.42 metric ton of carbon dioxide equivalent per acre.

A farmer switching from conventional-till to no-till soybeans would need $32 per carbon credit to break even and it would sequester 0.13 metric ton of carbon dioxide equivalent per acre, according to the study.

We can also put it into per acre terms, as well. Carbon credit prices are currently between $10 and $20 per credit. The sequestration of carbon dioxide going from reduced-till to no-till corn was 0.42 metric tons per acre and the breakeven cost was $30 per credit. Using $20 per carbon credit price and multiply it by our emissions reduction that comes out to $8.40 per acre.

How does the use of cover crops impact carbon dioxide sequestration?

Sellers: One study estimates that cover crops can sequester up to 1.2 metric tons of carbon dioxide equivalent per acre, and they estimate on average that cover crops could sequester one-half metric ton of carbon dioxide equivalent per acre. That’s going to depend on the type cover crop that’s planted.

Another study estimates between 0.16 and 0.35 metric tons of carbon dioxide equivalent per acre. Also, another study mentions that at a carbon credit price of $10 per credit, a lot of the mitigation potential of cover crops could be met at that price.

In per-acre terms, if we get a price of $20 per carbon credit, and on average we’re sequestering one-half metric ton of carbon dioxide, that would be a payment of $10 per acre.

Who owns the farmer’s data, and what can the aggregator or data manager do with that data? Will they share the farmer’s data with anyone?

Sellers: It’s important to receive a clear answer from the marketplace who owns your data, what can be done with that data and how the individual or aggregate data can be used or sold.

What currency is the payment in?

Sellers: The payment could be in the form of cash, cryptocurrency, or credits toward purchases. Some programs pay upfront, other programs make the payment over time, or pay part of the money upfront and then take measurements and see what happens and pay based on that.

How much will it cost to sell carbon credits?

Sellers: Farmers will have to pay a fee for soil sampling or third-party verification, although some companies may cover these costs. There may be additional fees such as administrative, registration, insurance and/or transaction fees depending on the agreement. Some companies may withhold a percentage of carbon credits to cover carbon loss and administrative fees.

Who needs to be involved in the decision to sell carbon credits?

Sellers: Anyone with an ownership stake in the land will need to be involved in the process. Ownership of carbon credits can depend on the leasing agreement.

For rented land, farmers may need to provide an attestation of their right to market carbon on the property to the company. Because of the long-term nature of the contracts, it is important to understand what implications there are if the farmer stops renting the land in the contract.

What practices are companies paying for?

Sellers: Some typical practices companies are paying for include reduced tillage, changing nitrogen rate practices, planting cover crops and changing crop rotation.

How many years does the contract last?

Sellers: Typically we see it range somewhere between five and 20 years, depending on the company.

What happens if the land ownership changes hands?

Sellers: There could be penalties for the contract holder if the land is rented out or sold during the contract and the tenant or purchaser does not follow the agreed-upon sequestration practices.

Will I need to invest in new technologies or platforms?

Sellers: Some companies may require a technology investment from the farmer, such as requiring the farmer pay for a subscription to the company’s online platform.

Tom Doran

Tom Doran

Field Editor