Carbon offset credit market has potential, but most farmers aren't ready to commit to contracts
Multinational companies, including Microsoft, are purchasing carbon offset credits from companies, which have purchased them from farmers.
Carbon offset credits create a potential new market for farmers, but they should enter into it knowing that the contracts they sign typically will require a long-term commitment, and that the economic returns, at least for now, likely won’t be substantial, say agricultural experts.
“Is there an opportunity? The answer is ‘yes.’ Is it cost effective to do that today? The answer is ‘maybe,’" said Kyle Jore, University of Minnesota economist and economist for Watts and Associates in Billings, Montana.
Carbon offset credits are so named because companies voluntarily pay another business to buy them. Multinational companies, including Microsoft, are purchasing carbon offset credits from other companies, which have purchased them from farmers.
“All these multinationals are interested in the environment. They’re interested in reducing emissions,” said David Ripplinger, North Dakota Extension, bio-products and bio-energy economics specialist.
“Corporate social values are growing,” Jore said. Corporations are tying bonuses to employees' development of environmentally friendly practices, including reducing carbon emission. As a result, the corporations are pushing for carbon offset credit purchases.
An undeveloped market
Carbon offsets are measured in metric tons of carbon dioxide equivalent. One metric ton — 2,200 pounds — of carbon offset represents the reduction or removal of one metric ton of carbon or the equivalent of other greenhouse gasses.
The carbon offset prices farmers are receiving increased slightly in 2021, but the market is not well-developed or transparent, Ripplinger said.
Carbon offsets, like most agricultural supply chains, have a “middleman,” which means that there can be a major price difference between what buyers are being paid and what farmers receive, Ripplinger said. The middlemen can take as much as 80 to 95% of the price buyers are paying, he said.
Farmers also have the option to document and enter into carbon offset contracts directly with buyers, using a variety of registries, Ripplinger noted. However, a benefit of the offset third parties are that they reduce the transaction costs that are associated with registering.
Carbon offset credit contracts are offering farmers prices varying from $3 to $20 per acre, he said.
The carbon offsets use a project or activity in another part of the economy, such as agriculture, to reduce the emissions. Agriculture, though receiving a lot of attention, is one of the smaller markets, Ripplinger said. For example, California’s carbon credit market, which supports biofuels use, is about a hundred times larger.
Though awareness of carbon offsets has increased recently, there were markets for them about 15 years ago, Ripplinger said. Those efforts into the market failed because there was not enough demand.
This time around the carbon offset market appears to be more stable, and companies aggressively are pursuing purchases, Ripplinger said.
“It’s got more momentum and it’s widespread,” he said. ”The last go-around, it was similar, but there weren't as many folks interested on the demand side.
”Even though it may wane a little bit, it’s not going to disappear,” Ripplinger said.
Conferences like the Glasgow Climate Change Conference, held in late 2021, are evidence that there’s a growing interest in the environment, not just in the United States, but also on a global scale.
No-till and cover crops
The two main agricultural practices for which the start-up and established companies are providing incentives are strip and no-till soil management systems and cover crops.
Generally, farmers sign agreements with businesses who register the project with carbon registries, entities which have defined standards for carbon offsets.
About a dozen companies, both existing and start-ups, are contracting with farmers for carbon offset credits. The main states in which the companies are approaching farmers with contracts are in the Midwest where corn and soybeans are grown.
“They probably started with the biggest, homogeneous market they could,” Ripplinger said. “The reason they’re looking at no-till is that it’s a tremendous way to attract carbon."
That, he said, is likely because biomass in the soybean and soybean plants’ roots offer “a fantastic way,” to capture carbon offset credits.
However, the challenge for the companies that are purchasing the carbon offset credits is that no-till is an alternative farming system that may be a hard sell for Midwest corn and soybean farmers who have grown the crops using conventional tillage systems for centuries.
Less than 15% of land in the heart of the upper Mississippi River watershed, which is the heart of the Corn Belt, is farmed using no-till, according to a Feb. 18, 2021, article in Yale Environment 360, which is published by the Yale School of the Environment.
Farmers in the Corn Belt likely would be more interested in carbon offset credit contracts for cover crop acres than for no-till, Ripplinger said.
“We are seeing a rapid expansion of acres that have cover crops,” he said. “Cover crops make a lot of sense in a lot of places. We’re seeing that spread here.”
In western North Dakota during the past few years, companies, including Indigo Ag and Nori, have approached farmers with carbon offset credit contracts, said Clair Keene, NDSU Extension agronomist.
A few farmers Keene knows signed carbon offset contracts for the cover crop incentives, but most are waiting for more information, she said.
One of the reasons farmers are hesitating to sign the carbon offset contracts is that most of them are for at least five years Ripplinger said. The companies, in an effort to have farmers develop consistent practices, require farmers to commit for several years, but many farmers aren’t willing to make long-term changes to their operations.
Meanwhile, another concern that farmers have is that some contract terms are not clear.
For example, companies that are offering carbon offset credit contracts typically require farmers to provide recent data, and those who already are soil testing their fields are unsure about whether they will have to pay for new testing or if they can give the companies the results of tests already taken, Keene said.
Those are just some of the questions that remain about carbon offset credits, and farmers should carefully weigh the decisions about whether to adopt cover crops or alternative tillage practices because both require a long-term commitment and major change to farming systems, Ripplinger said.
A drawback for some western North Dakota farmers is that it appears that the alternative tillage practices have to be new to qualify for carbon offset credits, which means that companies wouldn’t provide incentives to farmers who already are doing strip till or no-till, Ripplinger noted.
So far, judging from the informational sessions Ripplinger has presented once or twice a week across North Dakota, it appears that while farmers are interested in learning more about carbon offset credit opportunities, most of them aren't ready to sign the dotted line.
“The skeptical farmer should hold off and the progressive farmers should dabble in it,” said Jore. “I think it’s something everyone should keep their eyes on and stay on top of it.”
Before farmers sign up for carbon offsets, whether contracts involve making major changes or testing the waters, they should read the fine print.
“I think it’s in a stage where farmers should ask a lot of questions, do their homework and ask if it’s going to be financially feasible,” Keene said.