How Much Money is a Carbon Contract Worth?
There are too many variables to provide a reliable range for the value of carbon credits. Additionally, the specifics of one contract may differ substantially from another. A landowner may find it helpful to seek out other property owners who have entered into carbon contracts to learn about income generated as well as other factors of this income-producing opportunity. The payment structure likely depends on whether the contract is one offering payment for practice, which typically offers a flat per-acre fee, or payment for outcome, which typically offers an amount per ton of carbon sequestered.
Carbon contracts have been a popular topic of conversation for farmers and ranchers around the country recently. Essentially, companies interested in lowering the impact of their carbon emissions pay landowners to take steps to store more carbon in the land.
As with any agreement, several legal and economic issues arise and should be carefully considered before entering into a carbon contract. A critical consideration is that landowners should never rely on verbal representations made by anyone related to a contract; assume only the written contractual terms will be enforceable. This is new territory, and many unknowns still exist about the carbon market and these carbon agreements. While this article outlines some features typical in carbon contracts, it is essential that any landowner considering entering into one engage an attorney to review the contract prior to signing.
What are Carbon Contracts?
Currently, most carbon markets are voluntary programs where carbon-market brokers negotiate agreements between companies seeking carbon credits and farmers and ranchers willing to generate these credits. A landowner agrees to undertake certain practices that sequester carbon or reduce carbon emissions, the company pays the landowner, and the company claims the carbon credit generated by the landowner. This helps to offset the carbon footprint of the company.
Several farming and ranching practices have the ability to reduce carbon emissions and/or sequester carbon. The most common carbon practices include no-till farming, planting cover crops, crop rotation, planting buffer strips, and regenerative grazing.
When reviewing a carbon contract, landowners may notice it seems to speak a different language than most agricultural contracts. Understanding the basic concepts is an important starting place. Importantly, each contract will likely have specific definitions of these terms. It is critical for landowners to carefully review the definitions in any contract before signing.
Additionality – Some companies only pay for new carbon-sequestering practices. If additionality is required, the farmer or rancher would have to undertake a new practice, such as converting from conventional farming to no-till farming, to qualify. A producer who has already adopted carbon-sequestering practices would need to seek a contract that pays for these previously adopted practices or allows a look-back period and does not have an additionality requirement.
Carbon credit – A frequently used measurement unit to quantify carbon. Typically, one carbon credit is equal to one metric ton of carbon or carbon equivalent that is sequestered.
Carbon emissions – The release of carbon into the atmosphere.
Carbon sequestration – The process of capturing carbon from the atmosphere.
Permanence – The length of time a carbon reduction lasts. Some contracts may require a producer to abstain from certain activities for an extended period of time to ensure the continuation of storing carbon that has been sequestered.
Stacking – This refers to one producer enrolling the same land in more than one program or contract. Many contracts prohibit stacking, meaning the producer may enter into only one carbon contract for a specific piece of property. The breadth of a stacking prohibition can vary greatly by contract, with some prohibiting only other carbon contracts, while others may prohibit participation in any government programs as well.
Verification – The process of confirming carbon reduction or sequestration.
Key Contract Terms for Landowners to Consider
Control of land
Brokers or companies seeking carbon agreements will likely require some proof the party entering into the contract either owns or controls the land. This may include a copy of a written lease agreement, for example. Some companies or brokers may require both the tenant and the landowner sign any contractual agreement. This is particularly true if the lease in place is for a shorter timeframe than the carbon contract will be.
Data collection is a requirement for any carbon contract, and a carbon agreement should address issues related to the ownership and use of such data. Issues like who will be given access to the data, how the data may be used, and who has ownership rights in the data should all be addressed.
Indemnification clauses essentially shift potential liability and costs from one party in the contract to another. These clauses are an agreement to reimburse another party for damages it sustained as a result of the indemnifying party’s actions.
Impact on energy production
Producers should carefully consider what impact a carbon contract may have on energy production on the land. Depending on the mineral ownership or the potential energy production activities, this may require identifying carve-out areas where oil or gas wells—or even wind turbines or solar panels—can be placed.
Land title implications
Landowners should determine if there are contractual provisions that may impact their ability to sell or otherwise transfer ownership of the land. For example, carbon contracts may allow the carbon-credit purchaser to place a restrictive covenant or a lien on the property, or require the landowner to enter into a conservation easement for the term of the contract. These types of limitations could impact the marketability and potential sales price for the land.
Some companies and brokers are offering to pay a certain portion of a landowner’s legal fees associated with negotiating a carbon contract. This would likely be an agreement separate from the contract itself but might be worth a landowner requesting from the company or broker. Regardless, a producer should use an attorney to assist with reviewing or drafting any carbon contract.
Other allowable uses
Landowners may wish to make other uses of the property at issue in a carbon contract. Many farms and ranches have added various agritourism activities as ways to diversify income. For example, a landowner may wish to reserve the right to hunt or fish on the land.
This is new territory, and many unknowns still exist about the carbon market and these agreements.
The payment provisions of the contract are extremely important for the landowner. There are several potential payment methods, including a per-acre payment for adopting certain carbon practices, a payment per metric ton of carbon as measured and verified, or a payment based on the carbon market at an identified time. Landowners should ensure the contract sets forth the exact details about how payment will be calculated. For any contracts based on actual carbon sequestered, a landowner should investigate the amount of carbon likely to be sequestered in their particular area. For example, agronomists report the amount of carbon likely to be sequestered in the Texas Panhandle and South Plains to be far less than the one ton of carbon per year it takes to create a carbon credit. Also important is to determine what costs or expenses may be deducted from the landowner’s payment and when and how payments will be made.
Landowners should investigate any party with whom they will enter into a carbon agreement to understand the party’s position in the market. Many contracts are being offered by brokers or aggregators, but there are also ag retailers offering these types of contracts. A landowner can try to speak to others who have entered into contracts with a company to ask about their experiences.
It is important to understand a contract’s penalties if certain conditions are not met. For example, there could be a penalty if an external factor such as weather prevents a party from undertaking an agreed-upon practice. Some contracts may require a certain increase in the amount of carbon in the soil and include a penalty if that amount is not realized or is released during the term of the contract. Contracts will likely also contain early termination penalties if the producer is unable to comply with the contractual requirements for the term of the contract.
An agreement will set forth the required practices a landowner agrees to undertake. Some contracts may list very specific requirements, while others may contain a more general description, such as conservation practices. Landowners should be careful to analyze the additional costs to adopt a required practice. Finally, landowners should pay attention to whether the required practices are set through the entire contract or whether they may change from year to year.
Often, carbon contracts will include a prohibition on stacking. Some may be worded broadly enough to prohibit participation in other government programs, such as the U.S. Department of Agriculture’s Environmental Quality Incentives Program or the Conservation Reserve Program.
There are several potential payment methods, including a per-acre payment for adopting certain carbon practices, a payment per metric ton of carbon as measured and verified, or a payment based on the carbon market at an identified time.
Provisions regarding measurement and verification are some of the most important in a carbon agreement. The contract should set forth exactly what is being included in the measurements. For example, will the verifier simply measure the carbon in the soil, or will the entire system be looked at, including the impacts of livestock on the property or the impacts of using nitrogen fertilizer? Next, parties should agree upon who will conduct any testing and verification, what methodology will be used, and when and where such data collection will occur. Some contracts may offer payments based on modeling, while others take actual measurements. Measurements may be done in a number of ways, including algorithmically, by taking physical soil samples, and by using satellites. The manner in which samples are taken can affect the results, and considerations related to the time of year (and even time of day), location in the field, and soil depth are all important to consider. A contract should spell out who will bear the costs of the data collection and verification. Typically, these costs fall to the purchaser. Finally, the landowner may want to include a provision allowing an audit of the data and payments to ensure requirements are being followed. The landowner may also benefit from a provision that specifies a process for how a landowner can challenge or appeal determinations they believe are inaccurate.
While a carbon contract may be an enticing way for a landowner to make money, this new development in agriculture and business requires careful consideration. Any property owner contemplating entering into an agreement would be well advised to consult an attorney.