As potential carbon market opportunities are presented to producers, Texas A&M Extension Agriculture Law Specialist Tiffany Lashmet says before signing a contract, it’s imperative producers read and understand the terms.

“They’re all very different, depending on the company that you're looking at, so it’s crucial to take the time and investigate the potential contract and look into information about the company,” Lashmet told attendees at the Texas Plant Protection Conference in Bryan. “See if they’re willing to negotiate on the contract terms.”

Lashmet defines a carbon contract as a voluntary, private contract between two parties, “not a mandatory cap-and-trade program. We’re not talking about government programs.”

Texas A&M AgriLife Extension Agriculture Law Specialist Tiffany Lashmet (Photo by Shelley E. Huguley)

Companies looking to purchase carbon credits are often corporations such as United Airlines or Amazon, who have pledged or promised to become “carbon neutral by 2040,” or to have a “net-zero carbon footprint by 2050.”

For example, United Airlines depends on jet fuel to do its job, which necessarily involves emitting C02, Lashmet says. “So, what can they do? They could partner with somebody who could undertake a practice to sequester carbon in the soil and then they could pay them to do that, thereby purchasing that carbon credit to offset their carbon footprint.”

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The “middlemen” are known as aggregators. They gather groups of farmers willing to sign carbon contracts and then sell the carbon credits on the market to companies such as United Airlines or Amazon.

While the carbon market could serve as supplemental income for producers, Lashmet urges producers to consider the following before signing a contract:

Read the fine print

Unlike oil and gas contracts, Lashmet warns carbon contracts are not one-size-fits-all. “I’m imploring people, just because your brother or cousin or neighbor’s contract said ‘X,’ that may not be the contract that’s sitting in front of you. So, really pay attention.”

Before reading the contract, question the aggregator about the negotiability of the contract terms. “If the answer is no, then it’s simple. You read the contract and if there are things you can't agree to, you walk away.

“Some companies have drawn a hard line and said, ‘No, this is the contract we’re offering.’ Others have been willing to negotiate. Know your deal breakers.”

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Lashmet also encourages producers to hire a lawyer. “I promise I’m not here on behalf of the ‘Lawyer Union,’ but I do recommend using an attorney to review these contracts before you sign them, given that these contracts are new and novel.”

Practices

Next, determine which practices are being agreed upon. “Some contracts will state, ‘I agree to undertake conservation practices.’ Well, what does that mean? I better be really clear on what I'm agreeing to do before I sign that contract,” she says.

What if a producer has already adopted practices such as strip-till or cover crops? Will they get paid for those carbon credits? “Additionality is a huge issue in some parts of the country,” says Lashmet, adding that payment is dependent on the contract.

“Some companies say you have to newly adopt the practice in order to get any payments. So, if you've already adopted this, if you've been doing no-till forever, you're out of luck. Other contracts have a look-back period. Sometimes those are one year, sometimes they're five years.” She adds that early adopters may still have potential buyers, just fewer of them.

Payment structure

Next, consider the payment structure. “Don’t just look at the number, look at the details around the number.

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“Right now, if I was going to give you a going rate on payment by outcome contracts, I would tell you the going rates are around $20 per metric ton of CO2 equivalent. When I ask a farmer what the contract says, you know what they’re telling me, $20 per acre. Turns out those may not be the same thing because when I think on a yearly basis, $20 an acre sounds pretty good. But if the contract is written as $20 per metric ton of carbon stored, guess what? I get $20 if I store a metric ton of carbon. That's not feasible in most places.”

Lashmet breaks contracts into two categories: payment for outcome or payment for practice. The latter is “very straightforward. If you adopt the practice, you'll get a payment.”

Most contracts are payment for outcome. “That's where they're going to come out and pay you based on the additional carbon stored in the soil or the reduction in the emission from your operation. And they're going to make those payments based on either measurements, modeling or some combination of the two.”

Lashmet notes the importance to decipher the difference between the two. “Maybe I adopt the cover crop, but when they come and measure or model, they tell me I didn't store any additional carbon, then I don't get paid because it's based on that actual outcome of the practices.

“If you're going to take one thing away from this, people have to understand the potential for sequestration in their particular field. That $20 payment's great if you can store a metric ton of carbon.

“Does anybody know what the nationwide average storage potential for farmland is? .6. Point six tons of carbon is the nationwide average. In my part of the world, in the Texas Panhandle, Dr. Katie Lewis (soil scientist) has done a lot of work on this, and she tells me our number is more like 0.1. So, if I store .1 tons of carbon in my soil every year and I get paid $20 per metric ton of carbon sold, that’s $2 an acre.”

Before changing practices on the farm or ranch, calculate the cost of those changes, and ask, “At $2 per acre, am I going to be in the red or the black?”

Stacking provisions

Also understand the scope of the stacking provision. “All the contracts I’ve seen have a stacking provision. At a base level, what that says is you can't take Farm A and sign it up with carbon company No. 1 and then take that same field, Farm A, and also sign it up with carbon company No. 2. You can't double sell the same carbon credits. That’s fine. That seems fair.

“But some of these are written really broadly and could also prohibit you from entering into government programs related to carbon to the extent those are developed. We don't know what kind of money those are going to be offering. Could it be more than $2 an acre? Based on our numbers earlier, probably.”

Carbon contracts may also disqualify producers from government payments. “Things like ARC/PLC or EQIP, even crop insurance, could potentially be implicated, so watch the terms of the particular contract,” she says.

Next? Read Part 2, “Carbon contracts: Understanding your legal obligations.”