Carbon Credits: New Cash Crop for Farmers
Sustainable Farming Model Feeds Corporate Hunger for ‘Green’ Credibility
On the surface, a farmer in Kansas and an airline CEO in New York may not have much in common. But one has something the other one needs, and we’re not talking wheat.
Carbon credits, also known as carbon offsets, have become a new cash crop, enabling farmers who engage in sustainable farming methods to sell excess carbon capacity to large corporations through carbon registries.
Nationwide, “carbon farming” is catching on more quickly in the west and east, with midwestern farmers hanging back to see how it all plays out. But conversations are starting to happen in the Kansas and Arkansas agriculture industries.
Like Selling Air
It’s a little like selling air. The credits represent something that is not happening – participating farmers are not putting as much carbon into the air as in the past because they are running less diesel-powered equipment, or they are not using as much water as in the past because they are not tilling the soil to sow new seed. As a result, the savings in carbon emissions can be calculated, quantified and packaged as credits that corporations are hungry for.
Google, JetBlue, Salesforce, Microsoft and Disney are some of the household names buying carbon credits from agricultural producers. Whether an outgrowth of their business (commercial air travel) or their size (thousands of employees on giant campuses), these companies have massive carbon footprints.
They also have boards of directors, investors and consumers who are increasingly focused on environmental, sustainable and governance-related values, known as ESG in corporate-speak.
For these corporations, projecting that they will be “carbon neutral” by 2025 carries a lot of public relations value. But for many of them, it is an unreachable goal unless they are able to “offset” the carbon emissions their planes and giant campuses emit by pairing themselves – through the purchase of carbon credits – with other entities that truly are reducing their environmental footprints, such as farmers.
For farmers, selling carbon credits is a no brainer. In the first few years of practicing sustainable farming methods, a farmer can bring in $20 to $30 per credit annually, and the potential exists for earning more than one credit per acre.
Still, there are many questions around carbon credits and sustainable farming for which the answers are still evolving. It’s essential for farmers to understand both sides of the equation – the up-front investment and the downstream benefits – before making the leap.
The costs involved in transitioning to a more sustainable farming model discourage some farm owners from trying it, even with the promise of carbon credits. Moreover, government assistance for those who do make the transition is sometimes difficult to access and is not well funded. However, some programs exist to support specific types of sustainable practices.
Central to the decision to shift to more sustainable methods is the question of how many tons of carbon dioxide are produced in running your farm, and how many tons you can save by making the transition.
Among the many changes farmers can make to transition to a more sustainable model that produces carbon credits are:
- Shifting to no-till planting. Planting seed without tilling is catching on for several reasons. It’s faster , and you don’t have to expend the diesel to run a disk through the fields. It also promotes moisture retention, reducing the use of water. But no-till methods can be a struggle and may increase production risk for many farmers, and it does require on-going weed control.
- Using wind to power your irrigation system, rather than gas or electricity. Installing a wind turbine can cost $50,000 to $80,000, but that cost can be offset within a couple of years by selling carbon credits and it can reduce your carbon footprint considerably.
- Planting trees at the edge of your fields or on waste land that is not used for crops. This helps reduce soil erosion and absorbs carbon dioxide from the air, reducing your carbon footprint. Costs can easily range up to $200,000.
- Rotating cover crops, planting crops that reduce the carbon footprint by improving soil structure. This enables you to increase yield with fewer inputs.
The costs related to investing in sustainable farming methods can be significant. But many times, they are one-time costs and should be weighed against the multi-year income potential from carbon credits.
How is Value Determined?
Since engaging in sustainable farming and business practices is largely voluntary and there are no government regulations to satisfy, the question of how carbon credits are quantified and valued is important.
Third-party consulting companies work with farmers to identify buyers and sell credits at the highest possible market prices, as well as consult on credit verification, soil management, and crop production.
A typical consulting relationship might involve a multi-year contract and the following benchmarks:
- The farmer uploads data about crop boundaries and historical yield data and current season management data to a proprietary platform.
- With consulting support, the farmer would add new practices to increase soil carbon and reduce emissions. The consultants may test some soil samples.
- The consultant calculates the carbon credits and validates the findings independently, then submits the results to a carbon registry which issues carbon credits.
- The consultant sells your carbon credits through the registry and submits payment to you.
This is just an example, but every carbon credit program is different and farmers must ask the right questions before making a commitment.
There are more dollars behind carbon credits with certain crops than with others. Wheat farmers don’t generate a large carbon footprint, so the credits aren’t as valuable for them. Vegetable crops are far more environmentally intensive and bring higher credits.
One of the most environmentally intensive crops in Kansas is corn, with equally intensive financial characteristics. Input costs for corn have doubled in the past year, which may soon generate interest among corn farmers in making the sustainability investments necessary to enter the carbon credit market.
Interest in carbon credits is slightly higher among Arkansas farmers due to the large rice crop produced there. Rice requires high input costs.
As the effects of climate change and the challenges of feeding the world with less farmland become more severe, increasingly more farmers will likely consider the transition to a sustainable farming model. In the short term, the promise of revenue from the sale of carbon credits may encourage more farmers to get on board.
If you would like to have a conversation about your farm’s potential for generating income from carbon credits, contact your Adams Brown advisor.