How to decipher carbon market buzzwords

Headlines about a multimillion-dollar company promising to reach carbon neutrality are no surprise these days. Consumer and investor preferences alike have driven this shift, opening opportunities for carbon markets to flourish.

"The logic behind those pledges is corporations understand that is what consumers want," says Alejandro Plastina, an Iowa State University associate professor of economics. "We are seeing more interest from investors in tracking the environmental performances of these companies and corporations."

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Carbon offsets are a practical and effective way to address climate change and encourage the growth of renewable energy. These offsets can come from a variety of industries, including agriculture and forestry, and offer a simpler solution than upgrading technologies or changing production practices.

"Until environmentally friendly technology becomes available at a reasonable cost, most corporations will have to use carbon credits to offset their emissions and remain cost-effective," Plastina says.

The need for valuable carbon offsets can lead to confusing contracts, filled with complex terms and industry buzzwords. Understanding these contracts is the first step to lucrative carbon farming.

Additionality requirements ensure that the carbon stored comes from new production practices.

"This term just means you're doing a new practice, something that is not a standard for your region and would not have been done if not for the market incentivizing it," says Lisa Becker, a sustainability manager at Pinion, a global food and agriculture consulting firm.

Carbon credits backed by a new carbon reduction or carbon removal practice, including implementing cover crops or reducing tillage, are more favorable for buyers.

"As the buyer, you only want to pay for carbon credit certificates that generate a practice change," Plastina says. "A buyer probably doesn't have much interest in paying for practices that have already been implemented on the farm for some time."

Additionality can mean different things in different programs, so it's important to carefully read through contract requirements before making any commitments, Plastina says.

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Another key term, permanence, revolves around the continued storage of carbon removals and the need to prevent reversals, or the ability of stored carbon to reenter the atmosphere.

"To prevent reversals, we want to make sure that the practice continues for the carbon credit," Becker says. "If there isn't ongoing monitoring, then technically the credit is not valid and cannot be counted towards offsetting greenhouse gas emissions."

Permanence requirements usually involve the length of time a practice must be in place to ensure a reversal does not occur. While term limits are variable, several company contracts ask for up to 10 years of commitment.

"Farmers should enter any contract knowing what they control," says Sam Schiller, ag industry adviser for The Context Network and CEO and founder of Carbon Yield. "If you lease all your land on handshake agreements, you probably should take a deep look at the penalties for exiting land from a project. If you own your land outright, that may be less of a concern.".

Editor's Note: The Context Network is a global agribusiness consulting firm that helps organizations achieve results through strategic management insights and a network of ag industry professionals, creating business solutions that deliver actionable outcomes. Learn more at contextnet.com.