Climate Finance | February 17, 2021

Farmers harvest ‘soil carbon’ to meet rising corporate demand for emission offsets

David Bank and Amy Cortese
ImpactAlpha Editor

David Bank

ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Feb. 17 – Candidates in last year’s U.S. Senate race in Iowa were asked in a televised debate to cite the clearing prices for a bushel of corn and a bushel of soybeans (Sen. Joni Ernst muffed her answer). In the next election, they may well be asked the going price for a ton of carbon.

Farmers in Iowa, ranchers in Australia and stewards of the land around the world are getting up to $20 a ton for carbon they sequester in their soil with cover crops, no-till and other sustainable-agriculture techniques, and can fetch additional payments for water-quality credits. In Iowa, the new markets can mean payments to farmers of up to $50 an acre.

Strong corporate demand for carbon credits, along with a growing awareness of the true value of avoided emissions, is pushing prices even higher. More than 1,500 corporations have made ‘net-zero’ pledges to phase out greenhouse gas emissions by 2050 or sooner. IBM this week raised the stakes, committing to reach net-zero by 2030. 

That has set off a scramble by companies to lock in long-term carbon credits at current low prices to offset their greenhouse gas emissions as they try to green their own operations. 

“Just like a farmer goes to sell their corn or their beans to an intermediary or grain buyer, we want to create a market where they’re thinking about these environmental outcomes as commodities right alongside those more traditional crops and create new revenue streams in the very same way,” says Mark Lambert, CEO of ReHarvest Partners, which last year made such payments for 10,000 acres of Iowa farmland. 

ReHarvest, a for-profit spinoff of nonprofit Quantified Ventures, has secured offtake agreements for the credits from agricultural companies seeking to green their supply chains and provide incentives for their farmers. The anchor buyers for the Iowa farmers’ carbon credits in Cargill, the huge agricultural producer and distributor. Nutrien Ag Solutions, a major farm retailer, is expanding the purchasing program to farmers in Ohio, Illinois and the Chesapeake region.

Water quality credits are sold to municipalities like Des Moines that must meet federal clean water standards – reducing farm runoffs of nutrients like nitrogen and phosphorus can be more cost-effective than installing ion-exchange technology at wastewater plants.

“We’re providing new revenue opportunities and ecological and economic resiliency for the farmers that make up the base of the companies’ supply chains in an era of increasing volatility and risk with weather-related events and commodity prices,” Lambert says. Corporate buyers, he adds, see the payments as a way “to offer a new competitive advantage to the farmers who are selling them grain.”

Demand and supply

The long-term carbon offtake agreements are creating new cash flows for regenerative agriculture, wetlands restoration and other ecosystem services and creating opportunities for impact investors to finance such projects. ReHarvest, for example, has secured $10 million in financing to pay farmers from Iowa Finance Authority, a state revolving fund that backs water projects, and Reinvestment Fund’s Pay for Success Fund, which is backed by QBE Insurance, Living Cities, and the Opportunity Finance Network.

Indigo Ag claims a long list of corporate buyers for its agricultural carbon credits at $20 a ton, including Barclay’s, JPMorgan Chase and IBM. The carbon marketplace Nori in October sold its first 5,000 credits to Shopify for $15 per ton. General Mills, Nestlé and McDonald’s are founding members of the Ecosystem Services Market Consortium, which is provisioning its own credits.

Microsoft’s recent purchase of 1.3 million metric tons of carbon removal “opened the floodgates,” says Regen Network’s Gregory Landua. The software maker purchased the first carbon credits available on Regen’s blockchain-based public carbon registry, generated by four carbon-sequestering managed grazing projects in Australia. Microsoft selected the credits as part of a competitive evaluation late last year. Regen, which also and developed the grasslands monitoring and measuring methodology, plans to officially launch the registry next month.

“Corporations are assessing [carbon emissions] as an existential risk to their businesses, and therefore putting it as a liability on their balance sheets and therefore going out to buy these carbon credits,” says Landua. “That’s the real sea change that’s happened in the last eight to 10 months.”

The commercial market for offsets is expected to grow from less than a half-billion dollars last year to up to $25 billion a year by the end of the decade and perhaps $480 billion by 2050, according to Trove Research.

Some of that increase will be driven by higher prices for carbon. The “social cost of carbon” is at least $100 a ton, economists Nicholas Stern and Joseph Stiglitz argue in a new paper. The Biden administration is set to update federal government estimates that factor in environmental and social harm caused by CO2 emissions. Those social costs are set at $60 a ton today, based on Obama-era calculations; the Trump administration reduced estimates to close to zero.

One company that jumped on the trend is Tesla. The electric vehicle maker disclosed that it hauled in $1.58 billion last year selling carbon credits to help buyers such as Fiat Chrysler meet more stringent European emissions regulations. Tesla’s carbon credit sales, which pushed the company into the black, could reach $2 billion this year. Oil and gas producers such as Shell, which is now a buyer of carbon offsets, also are looking to become sellers as they green their operations. 

Better markets

Climate-smart agriculture practices are sufficiently mature to “materially increase carbon storage if widely deployed in the U.S. and globally,” according to “Transformative Investment in Climate-Smart Agriculture,” a new report from U.S. Farmers & Ranchers in Action, Croatan Institute and other groups that evaluated the potential for low- or no-till farming, composting, cover crops and integrated crop and livestock systems to improve soil health and sequester carbon. 

Widespread adoption of regenerative practices could cut greenhouse gas emissions from U.S. agriculture from around 10% of total U.S. greenhouse gas emissions to under 4% by 2025, the researchers say. With the right incentives driving investment, agriculture could become a carbon sink, soaking up 4% of total U.S. greenhouse gas emission by 2035. 

Technology such as sensors, AI, and satellite monitoring are helping to support climate-smart agriculture and provide more certainty around carbon claims. The report identifies more than 150 companies offering ag-tech tools for collecting, analyzing and sharing data about soil health, management and carbon sequestration. 

The growing corporate demand is outstripping the supply of carbon credits, taxing today’s creaky voluntary carbon markets (as opposed to mandatory compliance markets in California and elsewhere). Some credits today are generated by avoiding carbon, for example, paying landowners to not cut down trees. Those projects can be fraught with uncertainty, for example, would the forest have been protected without the payment? And will it lead to deforestation elsewhere?

More important in the fight against climate change: projects that can eliminate carbon from the air in a verifiable way. 

Regen’s Landua predicts the emergence of tiered pricing. High-quality carbon-removal credits could fetch more than $100 a ton, he says, while credits from carbon-avoidance projects will sell for less. “I think there’s a role for both of those,” he says. “The market just needs to be able to quickly and easily differentiate between them.”

A key design principle: carbon markets should benefit farmers and land stewards. Today’s markets are bureaucratic, with the intermediaries often capturing the lion’s share of the carbon credit payment. In contrast, more than 80% of the proceeds of the credits ReGen Networks sold to Microsoft via its public blockchain registry will go to the farmers. 

Red flags

A corollary of the long-term contracts by which corporations are locking in today’s artificially low prices is that early-adopter farmers may miss out on the boom in carbon that may be coming. Carbon credits are selling for an average of $15 or $20 today, but could shoot to $100 per ton within a few years, experts say.

“If they get in now and prices go up, it’s the traders and not the farmers that make the money,” says Croatan’s David LeZaks, an author of the new report. Any new system “will have to be equitable for farmers.”

And the World Resources Institute, which would have been expected to be a champion of the emergence of soil-carbon markets, recently cast doubts on the science behind the growing enthusiasm. While there are clear environmental benefits to regenerative agriculture, the science and accounting for carbon sequestration in soil is uncertain, the institute says.

For example, adding manure can increase soil carbon, but “The feasibility of scaling such practices over large areas to substantially increase soil carbon and mitigate climate change is much less clear,” World Resource Institute researchers concluded. Adding carbon to soil requires the application of nitrogen, the run-off of which can contribute to water pollution. More effective, according to WRI: restoring peatlands, reducing food waste and shifting diets.