Gaining an understanding of carbon market programs

Alejandro Plastina and Chad E. Hart
Iowa State University Extension and Outreach

A carbon credit is a tradable asset (similar to a certificate or permit) that represents the right to release or emit carbon into the atmosphere. Typically, each credit represents one metric ton (2,204 pounds) of carbon dioxide or an equivalent amount of another greenhouse gas. Carbon credits are created when entities (compared to a set baseline) reduce their carbon emissions or sequester carbon.

A growing number of private initiatives are offering farmers compensation for the generation of agriculture carbon credits as well as other ecosystem services, such as improvements in water quality. Agricultural producers can create carbon credits in a variety of ways: moving from conventional tillage to reduced or no tillage, reducing stocking rates on pastures, planting cover crops or trees, reducing fertilizer rates, or converting marginal cropland to grassland. The result of this is an emerging agriculture carbon credits market that is a mixture of coexisting programs, each with different rules, incentives and players.

The recently released Ag Decision Maker File A1-76, "How to Grow and Sell Carbon in US Agriculture" begins to navigate this market by comparing 11 voluntary carbon programs across two dozen characteristics, providing valuable details to help farmers distinguish between the programs and find where they could benefit.

While all programs require additionality to generate a credit, or for something “additional” to be occurring, not all programs require that farmers change their production practices. Additionality means that farmers must do something different to reduce carbon and increase ecosystem services. However, programs use a wide array of benchmarks to determine what is different. Some programs require a change of practices with respect to past practices on the same field, while some others require that practices in the field be different from common practices in the area (even if the same practices have been implemented for many years in the field under consideration).

A carbon offset is considered a top-quality token for one metric ton of carbon dioxide- equivalent greenhouse gases (CO2e) sequestered through practices that adhere to trusted protocols ensuring additionality and permanence, which are verified by an independent third party, certified, and registered with a unique serial number into a secure ledger called the "registry." The registry is typically linked to a network of registries that serve as a clearinghouse of information on carbon credits (issued, unsold, sold and retired) to avoid duplications and enhance transparency. When an owner of a carbon offset uses it to compensate for emissions of CO2e somewhere else, the serial number is retired from the registry (and the transaction is transparent to the clearinghouse).

A major difference between the traditional carbon offsets and the carbon credits generated in the newer, voluntary carbon programs resides in the potential gap in their perceived qualities. A carbon credit may or may not be perceived as being of comparable quality to a carbon offset. If carbon credits are perceived as being of lower quality than carbon offsets, then they would tend to attract lower market prices than offsets do. The perceived quality of carbon credits is expected to be higher when verification and issuance are external to the carbon project, and lower when those critical processes are internal to the carbon project.

For a visual guide on these programs, the newly released publication "How do Data and Payments Flow through Ag Carbon Programs?" illustrates with flowcharts, a traditional carbon offset generation (Figure 1) as well as nine voluntary carbon programs currently operating in the United States. The various actors under each program are shown with arrows pointing in the direction that data, payments, methods and carbon credits move within each carbon program. By illustrating whether verification and issuance are external or internal processes to the carbon program, the analysis provides some basis to anticipate differences in the perceived qualities and resulting prices for agriculture carbon credits issued by different programs.

A traditional carbon offset generation.

Contract specifics

Before considering a carbon contract, a few initial questions to ask may include: What practice changes does the contract cover? How is the carbon measured? How are the payments and the costs shared? Can your practice changes be used in this carbon opportunity and other government programs? What is the contract length, terms, and exit clauses? What management data and verification are you required to provide? Are you gaining anything by being in on the "ground floor?" Consult your own trusted, legal counsel to review. You don’t want any surprises.

Additional resources

Find publications, webinars, and further information on carbon markets on the Ag Decision Maker Carbon Information webpage at https://www.extension.iastate.edu/agdm/info/currentissues.html.

Alejandro Plastina, extension economist, 515-294-6160, plastina@iastate.edu.

Chad E. Hart, extension economist, 515-294-9911, chart@iastate.edu.