Carbon Credits: Cash in Hand or Castles in the Air?
Will the future of the ag industry be subsidized by ‘carbon credit’ payments to farmers and ranchers? How near is that future? What do cattlemen need to know?
“It’s becoming a bigger deal every day,” said Dr. David Ripplinger, Bioproducts and Bioenergy Economist and Assistant Professor with the North Dakota State University Department of Agribusiness and Applied Economics.
Environmental/Social/Governance (ESG) Carbon Credit investing is growing—and seems to be growing fast. Where will that money go?
Farmers who employ conservation tillage practices such as no-till or reduced tillage, and ranchers who manage grasslands may be in line for a lot of cash but at this point it is a bit uncertain just who and how much they will be paying, how the fledgling industry will be regulated, and how accurate testing methods to determine just how much carbon is in fact stored by the plants on a given farm/ranch may be.
“Corporations are finding it difficult to get financing if they are not buying carbon credits to offset their carbon footprint,” Dr. Ripplinger said. “Right now this is an industry that involves tens of millions of dollars, and it is projected to grow to tens of billions of dollars in the next twenty years.”
Currently, this is not something coming from any government agency, but it is a third party independent industry bringing together corporations wishing to show investors that they are environmentally conscious and that they care about climate change with those in the ag industry who can potentially capture carbon and store it long term in the roots of plants.
“The market is young at this point and most of the actors buying carbon credits are known entities and longstanding businesses,” Dr. Ripplinger said. “The biggest thing cattlemen and farmers can do at this point is to keep themselves educated. Make sure you understand basic contract law and understand the terms if someone shows up and wants you to sign a contract. If you don’t understand the documents, find somebody who does to help you interpret it before you consider signing.”
Dr. Ripplinger said that in North and South Dakota so far these third party ‘middle men’ are initially seeking out farmers. Ranchers and livestock producers may be the next target for carbon credit investors, though. In January, 2022, six Texas ranchers were paid a total of $200,000 by Grassroots Carbon, with the amount of money each rancher received determined by how many metric tons of carbon testing found to be sequestered in the ground under their pastures. These were the first payments of their kind, with Grassroots Carbon being the middleman between the ranchers and corporations such as Midwest Oil and Shopify, according to an article written by Emily McCully for Texas Monthly. Testing was conducted by a group called BCarbon, based out of Rice University.
Why the big deal? Why would corporations pay, and pay a lot, to offset their business’ carbon emissions? Some businesses, such as McDonalds or Cargill, say they are interested in actual partnerships with farms and ranches. They want the families who are actually raising the food they sell to be a part of the story they tell to their customers about where their food is coming from and how it’s being produced. Others maybe don’t really care where their carbon offset comes from, they just want to get it from the cheapest place possible. Either way, Dr. Ripplinger said, ag producers know that they can and do capture carbon in the soil and that it can be stored there for a long time.
All plants take in carbon from the atmosphere and store it. Eventually, this carbon is released back into the atmosphere, and then cycled back into storage by plants. Plants use photosynthesis to absorb the carbon, turning it into carbohydrates so that they can grow. When herbivores eat plants, some of the carbon is transferred into their bodies. When animals and plants die, carbon is slowly released through the process of decay. Carbon atoms are continually traveling from the atmosphere to the earth and then returning to the atmosphere in this cycle.
“Farmers and ranchers are in the biology business,” Dr. Ripplinger said. “Carbon is life; we need carbon to live. ‘Carbon’ also gets used as a general term to include all greenhouse gasses, including CO2, methane, ozone, nitrous oxide and others. Significant amounts of nitrous oxide can be emitted when applying certain fertilizers on fields. The cattle industry is a part of the methane cycle, but methane degrades pretty quickly in the atmosphere. Methane emissions are likely decreasing the more large framed cattle we have in the industry as well, since that means more meat produced per animal. Each of these is a part of a natural cycle, and all are included when ‘carbon credits’ or greenhouse gasses are discussed.”
Farmers and ranchers are in the biology business, but will they be key players in the carbon credit industry?
There are still so many unknowns about carbon credit investing that it is difficult to formulate an opinion on the industry. One South Dakota rancher who preferred to comment anonymously said that while in theory, he would accept a carbon credit payment if it were offered him, he would have a lot of questions about where they money was actually coming from and what the stipulations of such a contract would be before he would sign a contract.
Chet Anderson, Shadehill, SD, and Max Loughlin, Bison SD, were also cautiously optimistic about carbon sequestration payments.
“If it is something that can encourage more people to adopt regenerative agricultural practices that would be great,” Chet said.
“We all need to be more aware of what sustainability looks like and not stay stuck in just doing things the way ‘they have always been done,’” Max said.
Farmers and ranchers who do participate in a carbon sequestration payment program will have to prove that they are actually storing carbon in their land.
“It is likely that money will be offered for new practices,” Dr. Ripplinger said. “Contracts, particularly longer term contracts, will likely stipulate that third party entities will have the right to come out and test to see if the actual carbon storage lines up with the projections and expectations. For obvious reasons, everybody wants the system to work and to have integrity. Neither the payee nor the recipient wants there to be less carbon than expected. This brings the question: how much do we know about our testing practices and how accurate they are? There is a lot that we don’t know yet and new testing practices and equipment are being developed. There is a lot of interest in developing new technology and more accurate testing methods.”
“The main thing for folks in ag production is to pay attention and get educated so that as the industry grows they will be ready,” Dr. Ripplinger said. “We in extension have a lot of educating to do. The payments are still relatively small, anywhere from $3-$20/acre. Right now the numbers are still low but it could be a fifty billion dollar industry in twenty years. We have a lot of time to learn.”