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An Introduction to the Carbon Market

An Introduction to the Carbon Market

There has been quite a bit of discussion about the carbon market over the past year within the agricultural community. The concept of buying and selling carbon stored in soils is not new, but the increase in voluntary carbon emission reductions along with carbon reduction mandates—in places like California—have contributed to a renewed interest in agricultural carbon credits.

While agricultural CO(or equivalent) emissions were estimated at 502 million metric tons roughly a decade ago, this total represented only 6 percent of greenhouse gas emissions across all industries. Agricultural lands have become a focus for companies seeking to offset carbon emissions due to the large number of agricultural acres in the U.S. for which carbon sequestration methods can be employed as part of the management strategy.

How Do Carbon Credits Work?

 

Carbon offsets are typically traded as a carbon credit which is equal to one metric tonne of carbon or carbon equivalent stored in the soil. The amount of carbon sequestered in the soil is highly dependent upon soil properties as well as management practices on individual farms. The value of a carbon credit and what must be done to document a tradable credit is also highly variable and will most likely change as the market develops.

Currently, companies providing contracts to purchase grower credits are focused primarily on conservation practices that also enhance carbon storage in the soil. Depending on the company, practices such as utilizing cover crops and reduced tillage operations are recognized as practices that would qualify a grower for a payment. These payments may be based on actual measured carbon in the soil, modeling estimates for a particular farm, or strictly based on practice implementation. Some companies have also focused on practices that reduce nitrogen runoff and water use efficiency.

Regardless of qualifying practice, an important concept of additionality typically applies for growers. In this instance, additionality refers to carbon sequestered above the baseline for the farm. For example, a grower who has already implemented cover crops on-farm has set the carbon storage baseline above a grower not utilizing cover crops and may not qualify to sell credits unless adding additional management practices that further increase sequestration. Since this excludes a number of early conservation practice adopters, there has been discussion of methods to develop a means to offer credits to growers with currently established conservation practices. However, there is no standard across the industry on what this practice would look like for growers.

Current Markets

As with any emerging market, pricing and structure of payments can be difficult to pin down initially. This holds true with carbon credits in that value and even payment method can vary based on the company. The recent range of a reported $15 to $20 per acre, is a reasonable estimate on the current value of carbon credits. However, it is important to keep in mind that payments per acre would be dependent upon how much carbon could be sequestered in the soil for the specific farm. Payments may be made on an annual basis may be allowed to be priced at a later date in the future. In some cases, these payments may be made in the form of cryptocurrency. Cryptocurrency is a digital or virtual currency that is secured by coding, which makes it very difficult to counterfeit.

Because the carbon market is rapidly changing, there is no simple checklist for growers to reference should they be interested in pursuing carbon credit contracts. Growers should be aware that the federal government has proposed a bill, “The Growing Climate Solutions Act of 2021,” that would create an advisory council to oversee carbon credits as well as requiring third party verifiers to be certified. If the bill passes, it could provide some amount of standardization within the industry that may help growers determine the best options for their operation.

Source : aces.edu

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