Ten Considerations Before Signing a Carbon Contract on Your Ranch
Ten Considerations Before Signing a Carbon Contract on Your Ranch
Whether it be an added bonus for management practices already implemented on a ranch or funding to help create infrastructure to improve range utilization, there is potential to add a “carbon” revenue stream to many of today’s ranch operations. However, this emerging market has yet to be perfected, so there are many important factors to consider before signing the dotted line.
1. It is a complex and evolving market.
“When you’re trying to package a partially imaginary exchange value, the packaging gets very complicated,” Peter Donovan, founder of the Soil Carbon Coalition, said, largely summing up the complexity of the carbon market.
As the carbon market continues to develop, a multitude of factors lend to its complexity including payment rates and calculations, verification of credits, measurement accuracy, the ethics behind offsets, and early contract terms and designs to name just a few. These intricacies weigh heavy on the minds of many ranchers entertaining the idea of partaking in the carbon market and should be carefully considered prior to making a final decision.
2. Working with an attorney early on is critical.
Given the complexity of the market, carbon contracts can be equally perplexing. Consensus among the panelists speaking during the Good Grazing Makes Cent$ event was that including an attorney early in the contract process is one of the most important steps.
Scott Warner, attorney at Yturri Rose and land broker at Bentz Warner Ranchland, noted that the exchange of promises dictated in a contract must be clearly understood between both parties in order to meet contractual obligations and, conversely, realize when either party has fallen short. He also said its critical to learn carbon contract terms, which are summarized in a publication by Texas AgriLife Extension titled Understanding & Evaluating Carbon Contracts.
Finally, one of the initial considerations from a legal standpoint beyond the real “value” of the contract is the real estate valuation – if the land the contract is attached to sells, depending on whether the buyer finds value in a carbon contract, transferring or terminating the deal may become critical.
Warner also suggested visiting with an accountant to fully realize the tax implications associated with carbon credit payments.
3. It’s important to understand the concept of additionality.
Brekke Munks, Agoro Carbon Alliance carbon cropping agronomist, said additionality is required by Verra (the administrative organization behind the Verified Carbon Standard) as well as many buyers of carbon credits.
“The concept of additionality refers to some companies only paying for new carbon-sequestering practices. If additionality is required, the farmer or rancher would have to undertake a new practice,” the Texas Agriculture Law publication explained.
This concept raises the question about payments for progressive operations already implementing holistic management practices, for example.
“… it’s going to depend on what you have to do,” Jenny Pluhar, Texas Grazing Lands Coalition Executive Director, began. “If you’ve just installed the infrastructure – fences and water – to really upgrade your grazing system, you’re probably in a really good place.”
However, if an intensive rotational grazing system is already being utilized, Pluhar explained, the management changes would need to be much more significant.
“You would need to install a lot more infrastructure to change your surface management positively,” she said. “The numbers will be different because you’re not going to get paid with additionality for what you’re already doing every day.”
Chris Mehus, project coordinator for the Western Sustainabilty Exchange, suggested there is always room for improvement on ranching operations. For example, he worked with a particular ranch to improve water recharge and delivery with the installation of a 2 inch water pipe system and consequently shortened grazing rotations from three to seven days to daily rotations.
Understanding additionality, what practices are required, and who holds the risk if those practices don’t result in the expected soil carbon additionality target is crucial in the early stages of considering a contract.
4. Verification and creditability are legitimate concerns.
Creating trust for market participants, both buyers and sellers, is paramount in the long term success of the carbon market, so science based verification standards are important.
The Chicago Climate Exchange was one of the initial attempts at carbon trading in the early 2000s and failed, largely due to a lack of trust thanks to a lack of metrics, Open Range Consulting President Greg Simonds said.
“When real money changes hands, there has to be trust and there has to be known value,” he said. “One of the people that I have lived by, a famous management consultant Peter Drucker, said ‘how well you measure will determine how well you can manage and how well you can market.’ You have to be able to measure to make markets and in our soil sampling, thousands of them, the thing you learn is that if you just do soil sampling, the samples will be incredibly variable from your left foot where you’re standing to your right foot almost literally.”
Simonds suggested that there are plenty of willing buyers, but solid metrics will be critical for a successful market.
Mehus agreed that the science behind the market needs to be accurate and verified but noted that the momentum and opportunity is prime right now, and the current programs are verified.
“My responsibility is working on the ground with the ranchers themselves,” Mehus said. “Scientist will always argue about the number of samples, the depth we need to sample at, what laboratory method is best… and that’s good, scientists need to argue, that’s what makes the model stronger. The question becomes, when is it good enough to start something? I think the science is what builds the trust between the consumer and the producer so that part needs to be there, but how many people need to check the ‘yes’ box to say it’s good enough for us to have a system that trades and takes money from companies and puts it on the ground? I’m not a very patient person and I know this money needs to be invested on the range now.”
5. Not all carbon contracts are alike.
Agoro Carbon Alliance and Native Energy were just two aggregators represented on the GGMC panel and even their contracts have many differences. Beyond contracts simply paying for sequestered carbon, there are optoins like Native’s Help Build program which offers upfront funding to invest in infrastructure to improve grazing and hopefully result in additionality. Contracts can vary in payment rates, commitment length, management requirements, and much more. Most aggregators provide consultations with on-farm experts, so meet with multiple before pursuing one particular path.
6. Ethical considerations should be weighed.
Conni French, a holistic rancher from Malta, Montana, said they chose to forego a carbon contract for several reasons, one being the ethics behind it.
“Do we want to sell our carbon offsets to companies that are not doing a good job?” French questioned. “Do we want to just put a Band-Aid over something, or do we want those companies to be out there trying to do the right thing as well?”
Mehus said many of the ranchers he has worked with share in that concern as well. He said to combat that, Native Energy works strictly with offset purchasers who have carefully evaluated their carbon footprints and are working to implement other practices to reduce emissions.
7. Time management is a factor for ranchers in other programs.
Another factor French mentioned was the time and energy to successfully partake in a carbon program, particularly on a ranch already participating in other conservation projects.
“We knew this was just one more program we were going to have to spend a lot of time at to do it right, so rather than messing it up and getting into a bad situation, we just backed off,” French said.
Jesse Braatz, Humboldt Ranch Manager and founding partner of Squaw Valley LLC, agreed.
“From the ranching standpoint, it’s hard to be involved in everything. If you open your doors to agency folks and help and markets, if you open them too wide, you get such a wave of help that it’s too much to manage,” Braatz said. “So, prioritizing what you have, what’s going to be the biggest bang, the least risk for the rancher… we really have to prioritize which markets and which programs we’re going to get into just so we can do a good job with what we have.”
8. The demand is there for an opportunistic market.
The emerging carbon market is backed by a large population of consumers all concerned about climate change.
“If we can take advantage of this company money that’s really being driven by consumers demanding companies do something and there are ways to get that money on the ground to improve soil health, then I want to be a part of that,” Mehus said.
9. Compensation greatly varies.
With so many factors for ranchers to consider, the compensation may even become an afterthought. Rates agreed upon in contracts vary, as do the terms for which payment rates are locked in at a specific price. Payments can be based off additionality, percent increases in soil carbon, or even infrastructure updates. Researching contracts and aggregators includes a careful look at compensation calculations. It’s also important to understand any potential hidden fees.
“Native covers all verification, validation, soil sampling, and registry costs so the price you see is what you get,” Colin Mitchell, Native’s NGP Grazing Carbon Program Manager, said. “We pay all ranchers the same rate per ton. You’ll see some projects advertising $30 a ton, but you have to pay for verification and validation so there’s a bunch of hidden feeds and costs and that is not the case with Native. We also adjust the price every three years.”
A cost benefit analysis could be beneficial when weighing the potential of a carbon contract. Munks said Agoro Carbon Alliance assists producers considering a contract by quickly calculating the payment upon potential carbon storage of an implemented practice. Producers can use this figure to further crunch the numbers when making their decision.
10. Exercising caution and asking questions will inform decisions.
As evidenced in the panel discussion, cohosted by Good Grazing Makes Cent$ and Ranchers Stewardship Alliance at the Society for Range Management Annual Meeting in Boise, many questions surround the concept of carbon markets and how they can be applied to ranch operations. Soil Carbon 101 is a helpful publication with some initial questions to consider exploring. Viewing the full panel discussion on the Good Grazing Makes Cent$ YouTube channel also provides further context and may spark more questions to explore before making the right decision for your operation.
More information about Carbon Markets, and many other range management topics, will be covered in upcoming editions of Good Grazing Makes Cent$. Program members receive access to monthly e-newsletters, an interactive Facebook group for range community conversation, a list of range experts on call to answer questions, membership to the Society for Range Management, monthly videos with professionals on the range, and more. Learn more and become a member at goodgrazing.org.
ABOUT GOOD GRAZING MAKES CENT$: Good Grazing Makes Cent$, a program of the Society for Range Management, aims to provide practical, applicable, and economically feasible range management solutions which can ultimately improve productivity of the land and the bottom dollar of the ranch through conversation and collaboration between range scientists and ranchers.