Tom Recker doesn't consider himself on the cutting edge. But this Alta Vista, IA, producer already has two years of experience in the emerging carbon credits market.
As he started exploring the carbon credits market, Recker also was moving his corn and soybean acreage to strictly no-till — one of the practices that can be used to obtain soil carbon credits. Today he has about 700 of his 1,000 acres enrolled in the program.
Regulatory markets for carbon credits exist in most developed countries other than the U.S., and a voluntary market is emerging in the U.S.
How the markets work
Carbon dioxide and other greenhouse gases in the atmosphere are thought to contribute to global warming. The carbon in soil organic matter comes from carbon dioxide removed from the atmosphere by plants. Switching from plowing to no-till increases soil organic matter and therefore the amount of carbon sequestered in the soil.
It sounds simple enough. However, producers need to be aware of the benefits, and drawbacks, that can come with selling carbon credits.
“One thing that producers must be aware of is that there is a lot of uncertainty in the market,” says Sian Mooney, associate professor of economics at Boise State University. “There is no federal legislation currently in place for the carbon credit market. It is strictly a voluntary market.”
In the United States, the most visible portion of the market is the Chicago Climate Exchange (CCX). In that exchange, there are buyers and sellers of carbon credits. Other carbon credit sales are facilitated by brokers or are deals between an individual buyer and an individual seller. Buyers can include companies that want to reduce their “carbon footprint” by purchasing carbon credits from sellers who, through several options, reduce the amount of greenhouse gases in the atmosphere. This can include manufacturers that reduce the amount of emissions through new technologies, to producers who capture carbon in the soil or who reduce the emissions from a manure lagoon by covering it and flaring off the methane gas.
Carbon credit prices can fluctuate on the market, and prices vary widely depending on how the credits are counted, who bears risks of project failure, and who benefits if credit prices rise. In the U.S. voluntary market, prices range from $1 to $10/credit. A credit is equal to 1 metric ton of carbon dioxide or equivalent greenhouse gas. Credit prices on the CCX reached a low of $1.85 in January and traded as high as $4.55 in February.
In Europe, the carbon credit market is mandatory. Carbon credits on that market have been trading in the $20 to $30 range.
But comparing the U.S. and the European market isn't simple because soil sequestration agricultural credits are not recognized on the European exchange.
The total amount of carbon that can be sequestered on an acre of cropland can vary, depending on the area of the country, but one buyer will give farms in the Midwest credit for 0.6 metric tons carbon dioxide sequestered per acre each year. And much like agricultural commodity exchanges, a broker, or aggregator, can facilitate the registration and sale of a producer's carbon credits.
Dave Miller, chief science officer with AgraGate Climate Credits Corporation, one such aggregator, says the company has signed up about 1.5 million acres and over the past three years has enrolled about 4 million credits. “Producers are gaining more knowledge about the program, and like anything some are seeing that carbon credits can fit in their operation,” he says. “Overall, producers are very interested in the topic.”
Most soil sequestration carbon credit contracts are written on no-till, strip-till, grass plantings or forestry land. Livestock producers also can qualify for carbon credits if they have reduced methane emissions through manure digesters or lagoon covers.
“For livestock, the destruction of a ton of methane earns the net equivalent of 18¼ tons of carbon dioxide reduction through the CCX protocol,” Miller says. “How much methane is recovered depends on the manure storage facility. Taking manure out of a deep pit with a cover, a mature dairy cow can generate the equivalent of 1½ carbon credits per year. With a covered anaerobic lagoon in place, up to 4½ carbon credits per mature cow per year can be generated.”
If carbon credits are trading at $4 each, that's $18 per cow per year of additional revenue.
Producers must determine if current, or future, production practices can fit under the carbon credit contract. And they must also understand that the contract is binding. For soil sequestration carbon credits, the contract is for five years.
“Producers need to make an assessment based on what they know and how carbon credits can fit into their operation,” Miller says.
There are also differences in how aggregators market the credits. Some aggregators may sell all the carbon credits over the life of the contract at one time, while others may sell incrementally. “I would be leery of signing with anyone who locks in a price over a long-term basis,” Miller says. “The carbon credit market probably does not have enough history behind it to determine if today's price is worth locking in for the long term.” Prices will also depend on whether — and how much — demand is created by future rules limiting greenhouse gas emissions and allowing carbon credits to be used to meet emission limits.
Carbon credits contracts are indeed binding, and producers need to read the fine print to ensure they know what they're getting into, says Gordon Smith, director of EcoLands Program of the Environmental Resource Trust. “Future carbon prices are very uncertain, and all the rules have yet to be written,” he says. “Some producers are willing to take the cash now, while others might think there is a future value and only want a relatively short contract. Most sales are on delivery, and a lot are favoring deals where they can get certain guaranteed payments and share if the price moves higher.
“As carbon sequestration and emission reduction projects are implemented and made public, everyone gets to see how credits are counted,” Smith continues. “Some counting methods are more reliable than others, and the market is sorting out when inexpensive indicators can be used to calculate amounts of carbon credits and when more expensive site-specific measurements are needed. For some aspects of carbon accounting, standard methods are becoming accepted. For other aspects, particularly setting project baselines, no consensus has emerged about what is the proper way to count.”