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Carbon Credits: Three Key Areas to Consider

Category: General, Farm Business Planning | No Comments

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Carbon credits is the new hot topic in agriculture, and it seems like we can’t go a day without a new company throwing their name into the hat for carbon credits. With more and more horses entering the race, how do you know which company to work with? The biggest issue is that they are not all the same, and each has a different opinion and different processes related to carbon credits. This creates even more confusion in this new, Wild West arena. The most important thing you can do to protect yourself is to learn what you need to know to determine what is best for your operation. Here are three key categories to explore in order to understand the different companies and the best options for your farm business.

What do you need to generate carbon credits?

  • Patience: This will not result in a quick payday. It will take time to go through the process, and it could be a year and a half before you see any financial return.
  • Flexibility: This is a new arena, and many companies are creating pilot programs. Everyone is learning, so thoughts and processes may have to change over time.
  • Data: How easily can you provide data to verify the practices you have been implementing and their potential to sequester carbon? You may have to go back five years or more in your records.
  • Effort: This is not an easy process. It will take some time and effort for you to work through.
  • Knowledge: Don’t be afraid to ask questions to help you make educated decisions that protect yourself and your operation and allow you to gain maximum benefit.

Why are companies offering carbon credits?

There could be several reasons for a company to dive into the carbon market and want to work with you, such as the following:

  • They want a piece of the pie and will take a certain percentage of the sale of the carbon credit.
  • They have a product to offer. This can be either a product to help increase carbon sequestering or a service they want you to purchase.
  • Is it for their internal benefit? More and more corporations are going public and love to mention they are carbon neutral.
  • Jumping on the bandwagon with everyone else could be a new marketing tool for them.

What questions should I ask?

It’s important to ask questions not only to protect your operation but also to gain insight about how a buyer of carbon credits may view a company’s concepts and practices. In general, these buyers want to make sure what they are buying is verifiable and created from changes in practice on the farm that make it more sustainable into the future. Just as when you purchase a truck, you want to make sure you understand what you are buying and that it will be there for your use years into the future.

  • How is carbon calculated (using what methodology)? Is the company utilizing a computer model to determine carbon credits such as the USDA COMET-Farm, soil tests, or by some other method? Does this follow the protocols set up by CAR or VERRA methodologies?
  • How is the baseline determined to set what changes in farming practice are taking place and how carbon credits are created?
  • What data do you need to provide on behalf of your farming operation?
  • Who owns the carbon credit? Is it the farmer or the landowner? Generally, buyers will view the owner of the land as the owner of the carbon credit. If so, what contracts will be needed, and how will the carbon credit be shared with the landowner?
  • What is the verification process? As stated above, buyers want to make sure what they are buying is a true carbon credit and not just an idea.
  • What costs are involved? Who pays for testing and verification processes? Is there a product or service to be purchased, or does the company take a certain percentage from the sale of the carbon credit?
  • Who are the buyers of the carbon credits? This is a big question to ask; make sure the company you are working with has buyers waiting to purchase the carbon credits that are being created.
  • How is the pricing of carbon credits determined? This is an open market, and the value of carbon credits can vary. A lot of different numbers are being advertised.
  • How and when will you get paid?
  • What if there is no buyer for your carbon credit? This can happened when buyers do not believe the views and concepts behind the creation of a carbon credit.
  • Can you take the carbon credit at the end of the process and sell to whomever you want? This is a good question to ask the company you are working with: Will they let you sell it on an open market, or are they wanting to keep it to achieve carbon neutrality for their own company in the future.
  • What are the contract terms and flexibility of the contract? Protect yourself by seeking legal advice before signing any contract.
  • What is the benefit to the company? This is discussed above, but it’s a critical question. Does the company have a product or service to sell, or does it have internal future standards to meet?

There are a lot of different concepts and thought processes in the carbon credit arena, and it takes time to research each company to determine what opportunity it’s offering your operation. You may decide that you want to work with a couple different companies, depending on the details of the acres you wish to enroll. The key is to take the time to consider all the different scenarios, and then work with the company or companies that best fit your farm and how you like to operate. It can also be valuable to talk with your peers about the different options and learn from each other. Earning carbon credits requires a long-term commitment to a slow process, but it could provide great financial returns into the future.

For more tips on keeping your family farm going strong into the future, subscribe to the Family Farms Group blog.

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