How Agriculture Can Capture the Carbon Market Opportunity
As the trend toward carbon emissions reduction continues to become more and more prevalent over time, American farmers are being presented with a new opportunity. By embracing and adopting certain climate-smart agriculture practices, farmers can not only help protect the environment and reduce operating costs, but also create a new income stream by selling carbon offset credits on a carbon market.
What is a carbon market? Simply put, when a company avoids, reduces or captures more carbon than it creates, that company creates carbon offsets. Those offsets are valuable to other companies that are unable to reach carbon neutrality. A carbon market facilitates the sale of carbon offsets by those who have them to those who need them.
Some industries are well-positioned to create carbon offsets. Agriculture is one of them, particularly when it comes to crop farming.
“Through photosynthesis, plants produce oxygen and consume carbon dioxide,” said Ben Smith, Principal Advisor – Business Development & Market Validation at Kubota North America. “Finding ways to harness the power of the plant is a real opportunity.”
There is already real opportunity for American farmers to participate in carbon markets.
One example is Carbon by Indigo. As of mid-September 2022, this program had more than 2,000 farmers and 5 million acres enrolled, helping generate roughly 20,000 carbon credits at a minimum of $20 per credit. Program data shows that, on average, farmers are estimated to generate 0.1 to 0.4 credits per acre in the first year, with increased credit production over time.
Another is a carbon market administered by Truterra, a Land O’Lakes subsidiary. According to the company, its program paid $4 million to farmers for 200,000 metric tons of carbon in 2021. Payments ranged from an average of $20,000 to as high as $100,000.
Trimble has been helping farmers navigate carbon markets in Canada for roughly 15 years. “This type of thing is still very new in the U.S., though,” said Darryl Matthews, the company’s senior vice president of natural resources.
Trimble works with agriculture protocols that help farmers reduce their carbon footprint. Through a carbon exchange component in its software, Trimble gathers the necessary data to certify that a farmer has followed a protocol correctly, creating a certain number of carbon credits based on acreage and other factors. Trimble aggregates those credits and sells them on a carbon exchange, ultimately creating an income stream that Trimble pays back to the farmer. To date, Trimble has paid out more than $50 million to farmers.
CARBON SEQUESTRATION
According to Smith, generally a farmer must adopt at least one farming practice change in order to participate in a carbon market.
“A commonly recommended practice is the shift to no-till,” he continued. “A lot of that has to do with the fact that when you till soil, you start to release methane from the plants that are breaking down beneath the soil.”
While no-till is arguably the most recommended practice, Smith is among those who do not envision wholesale adoption throughout the industry. It all hinges on the soil. “Certain soil structures are conducive to no-till farming while others are not,” Smith added.
A more unique, somewhat experimental practice has its roots in regenerative agriculture. Rather than plant a single crop across long spans of field, work is being done on planting multiple species. For example, would it be advantageous to plant wide-row corn with soybeans in between?
“It comes down to maximization of solar radiation, coupled with the objective of being healthy to the soil,” Smith explained. “We’ve already moved from a monoculture approach to where we understand the healthy balance of a crop rotation. The objective is to allow that soil to regenerate. If you can get to a point where you can manage multiple species at the same time, you’re accelerating the benefits of a typical crop rotation.”
While the agronomic benefits of something like that are compelling, Smith adds that the practice would also be quite disruptive and, thus, is a bit ahead of its time. In the near term, there are already numerous climate-smart practices that can help reduce a farmer’s carbon footprint.
“Look to the approved conservation practices authorized by the USDA’s Natural Resources Conservation Service (NRCS),” said Nate Birt, Vice President of Farm Journal’s Trust In Food Division.
Examples of approved practices include:
- No-till and reduced-till.
- Conservation cover.
- Crop rotation.
- Grazing land management.
- Anaerobic digesters in livestock management.
- Nutrient management.
BALANCING RISK WITH REWARD
According to Birt, any decision to make any climate-smart practice change is a complex one. Farmers must understand the potential risks and rewards, as well as the requirements of individual carbon markets.
“Because these carbon markets are so new, farmers are telling us they’re taking a step back to do their due diligence before taking a step forward,” Birt said. “There is a ton of opportunity and enthusiasm, but it can also be difficult to determine what the first step should be. That’s why a farmer should surround him or herself with trusted advisors. Together they can determine which practices make the most sense for their operation.”
Smith said that, above all else, a farmer needs to think about any potential yield drag that could result from a farming practice change. Take no-till, for instance. There will be a cost savings from not having to make all of those field passes. How might those savings compare to any anticipated yield drag over the first year or two?
Howie said any carbon credit-generating ag practice has to be good for not only the environment, but also the soil and farmer’s bottom line. When those three factors are working harmoniously, climate-friendly ag practices and technologies should see a surge in adoption.
“You will never find carbon credits incentivizing a practice that isn’t already profitable for a farm,” he continued. There isn’t enough money in carbon credits to allow them to stand on their own as a profitable income stream. In other words, the farmer has to embrace a practice because it is good agronomics and economics.
Good data helps farmers make good decisions. Easily accessible data helps farmers begin taking a look at carbon market participation.
“Farmers will participate in carbon markets, but it has to be seamless,” Matthews said. “The biggest concern is the amount of paperwork and intensity of the audit process. It all comes back to data, and the data has to be made easier for the farmer to generate and access.”
According to Smith, voluntary carbon markets represent the ideal scenario for American farmers, as opposed to forced participation through regulation. Then, when and if a given farmer decides to opt into a program, that farmer is going to need some guidance in order to capitalize.
“It’s really a matter of time and timing,” Smith said. “It’s often easier for a farmer to rely on experiential knowledge than data. The easier this is for a farmer to participate in, the easier it is to adopt. The early adopters will take the time to gather the years’ worth of data required to participate. But for the majority of the market, it’s going to have to be really easy. I think you’ll see a number of companies working hard to make it easier. There will also need to be some breakthroughs with sensors, as well as additional work to make carbon markets easier to participate in.”
According to Birt, AEM members are in an excellent position to serve their farmer customers as trusted advisors.
“Farmers will be adding new equipment and technology in the future to become as efficient and sustainable as possible,” he added. “AEM members can help farmers understand the spectrum of options that exist — options that will help farmers maintain relevance in the marketplace by being more efficient, capturing data, and connecting with companies that want to buy carbon credits.”
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