Don’t be surprised if you or your attorney sees differences in the contracts being offered if you decide to get into the brave new world of selling carbon credits resulting from enhanced environmental practices on your farm.

After losing some of their luster following the recession that occurred during 2007 and 2008, carbon credit markets have been making a comeback as corporate giants such as Wal-Mart and Amazon have been trying to improve their environmental images.

“We’re seeing some very interesting examples of what I would almost call experimentation in the carbon credit contracts,” said David M. “Max” Williamson, lead attorney with Williamson Law & Policy in Washington, D.C. Williamson was a speaker during the virtual Mid-South Agricultural and Environmental Law Conference.

“This is a business proposition, of course. Somebody is approaching the farmer to either buy the carbon credits or act as a middleman. Sometimes you hear the term aggregator, and that just means someone who is in the business of developing these carbon projects and can develop them much more efficiently for 100 farmers than a single farmer can set up a project on his farm.”

The idea is to transfer the value of the carbon that buyers are willing to pay into a revenue stream to the farmer in a way that minimizes the transaction costs, according to Williamson, who has been working on carbon credit contracts since the early 2000s.

Considerations

If a farmer is approached by someone who is offering a contract or an attorney is advising someone who is approached, Williamson listed the following elements to consider:

-- Is the farmer being offered a standardized contract or is the sale negotiable with farm input?

-- Who are the contract parties? Is it the ultimate buyer or a middleman?

-- What practices are required?

-- What is the commitment period?

-- Are there transaction costs, such as verification and platform fees and who pays those?

-- And regarding payments, how is the price established; when paid; is there a clawback or discount: and is there a counterparty risk of payment?

“I think one of the most interesting things I’ve seen in the contracts is a provision for delayed payments,” he said. “When we talk about a carbon price per ton do you get that on day one, or a year from now or five years from now? There’s the time cost of money -- $15 is worth much more today than it is five years from now.

“What happens if the farmer decided to take the land out of no-till, for example? Do you have to give up your carbon credit or do you get partial credit? The answers to these questions have been very different depending on which players you’ve been dealing with.”

Another question is what happens if a flood or other natural disaster wipes out the carbon benefits on the land? Does the contract provide for insurance coverage or can the farmer set aside some of the credits as a buffer pool or type of self insurance?

“A lot of these questions haven’t been fully answered yet or they’re being answered differently depending on what carbon program you’re using,” he noted.

In closing, Williamson said he believes persons interested in carbon credits should pay attention to the U.S. Department of Agriculture when its leaders say they want to become more involved in carbon marketing.

“We need to ask is there a way to get the carbon market to work for farmers in the same way the commodity trading markets work. To me, that means having a marketplace where the buyers and sellers are all known and they are vetted before they can trade, and if one side of the market defaults the market platform will make sure the farmer doesn’t get left in the lurch.”