Agricultural Carbon Markets: The Basics

Agricultural Carbon Markets: The Basics Farmers are uniquely positioned to provide a solution to the many companies, countries and organizations focused on decarbonization — and earn revenue doing so. Carbon markets are poised for dramatic growth, so it’s important that farmers understand this developing market opportunity and be aware of potential positives and watchouts.

The Carbon Cycle

ATM O SPHER I C C O 2

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Carbon, a building block to life, circulates through the land, ocean, atmosphere and living organisms in what’s known as the carbon cycle.

Carbon is essential for soil function and microbiome activity. Agricultural practices can greatly influence the amount and structure of soil organic carbon and overall health of the soil.

With their management of large tracts of land, farmers can positively impact the carbon cycle. The corn and other crops farmers grow extract carbon from the air and incorporate it into biomass. Crop residue breaks down and decomposes into the soil, eventually converting into soil organic matter.

Soil organic matter is in a constant state of flux. Every year some organic matter is added, while a portion of existing organic matter is mineralized by soil microorganisms, returning the captured carbon to the atmosphere as carbon dioxide.

CARBON PAYMENT S TO FARMER

CARBON CREDI T S F ROM FARMER

HEALTHIER SOILS HELP CROPS: Use fewer inputs.

KEY CARBON TERMS

Farmers can amplify the positive impacts of the carbon cycle by planting cover crops, reducing tillage and optimizing fertilizer use.

Carbon markets provide a financial nudge for doing so.

These and other conservation practices help retain carbon in the soil and minimize its escape into the atmosphere.

A credit an entity can buy to decrease its carbon footprint. When the number of carbon offset credits obtained is equal to an entity’s carbon footprint, it is deemed carbon neutral.

PHO TO SYNTHESI S

Businesses, in turn, can buy carbon credits produced by farmers to show they are reducing their environmental impact, albeit indirectly, by balancing these credits against their emissions.

CURRENT RATE O F DECAY

S OI L OR GA N I C MAT T E R

SLO WER DECAY

Figure 1. Agricultural carbon cycle and flow of carbon credits.

Source: Iowa State University

Carbon Storage in Plant Biomass and Soil Organic Carbon

CONVENTIONAL TILLAGE leaves bare soil that is prone to erosion from wind and rain as well as nutrient and moisture loss.

Soil respiration returns carbon to the atmosphere through oxidation as a result of erosion and loss of plant cover

Figure 2. Comparisons of tillage and cover crops in sequestering carbon.

Source: Minnesota Board of Water and Soil Resources 2023

NO TILL

NO TILL + COVER CROP

protects soil from erosion from wind and rain as well as nutrient and moisture loss. Uses less carbon-producing energy

builds soil fertility as nutrient-rich organic matter is incorporated into soil. Protects soil from erosion from wind and rain as well as nutrient and moisture loss.

Uses less carbon-producing energy.

Crops fix atmospheric carbon through photosynthesis

Tolerate stress.

Produce higher yields.

CARBON OFFSET

CARBON INSETTING Implementing methods to decrease emissions internally by reducing emissions within an entity’s own value chain or business operations.

CARBON CREDIT A unit of exchange that entities use to offset their greenhouse gas (GHG) emissions. One carbon credit, or offset, in the voluntary carbon market is equal to one metric ton of GHG reduced or avoided from entering the atmosphere.

ADDITIONALITY

Conservation Tilling + Cover Crops Carbon Sequestration: PERKS GO BEYOND CARBON PAYMENTS

A Market Built Around Carbon

Soil organic carbon eroded by wind

Improve water infiltration, storage and quality.

Soil organic carbon leached by surface water flow

Carbon is stored in crop residue and becomes more stable over time as it is consumed by decomposers

ABOVE-GROUND CARBON: FOLIAGE

Constant root mass encourages soil ecology growth. This improves soil quality and allows roots to grow deeper, sequestering more carbon

SOIL ORGANIC CARBON: LITTER, ROOTS, SOIL MACRO-ORGANISMS, FUNGI, BACTERIA

The concept that GHG mitigation would not have occurred without compensation from the sale of carbon credits.

Most programs require that carbon credits be generated through new or “additional” changes in ag practices. For the farmer, that might mean fields that have already adopted no-till practices would not qualify to generate carbon credits from no-till.

A New Frontier The number of ag carbon markets in the U.S. has expanded over the past several years. Growth is expected to accelerate amid mounting pressure from consumers and shareholders demanding companies reduce their emissions and carbon footprint.

At this point, all U.S. agricultural carbon markets are voluntary. That means participation is driven by the terms of the program and the value they offer. It also means regulation and oversight are limited.

While it’s generally accepted that practices like strip or no till, nitrogen management and cover crop usage sequester carbon, the extent of their impact (and how to measure it) is still being debated.

THE TAKEAWAY? Farmers should thoroughly vet any

carbon program and review its terms with an attorney or trusted advisor BEFORE signing a carbon market contract.

DRAMATIC GROWTH EXPECTED FOR GLOBAL CARBON MARKETS* 2022:

$2 billion 2030 PROJECTION:

$100 billion 2050 PROJECTION:

$250 billion *Agricultural carbon markets are a small but meaningful portion of global carbon markets.

Source: Morgan Stanley (April 2023)

TWO TYPES OF CARBON MARKETS PRACTICE-BASED PROGRAMS

OUTCOMES-BASED PROGRAMS

• Farmers are paid for implementing specific practices across their acres.

• Farmers are paid based on the amount of carbon sequestered. How that’s measured varies from program to program.

• Carbon-buying companies take all the risk associated with carbon offsets, paying a fixed rate per acre and expecting the offsets generated from the project to cover the costs.

• Farmers have less risk with these programs, but also less upside potential.

• Usually limited to new acres of a practice.

• Farmer compensation is also based on the amount the carbon offset eventually sells for in the market. In some cases, the farmer determines the sale price; in others, the company administering the program decides.

• Farmers have more upside potential with these programs, but also more risk.

• Usually limited to new acres of a practice.

JOINING

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For more information or the full Agricultural Carbon Market Report, contact: Iowa Corn • 5505 Northwest 88th Street • Johnston, Iowa 50131 • 515-225-9242 • corninfo@iowacorn.org This grower guide is produced by the Iowa Corn Promotion Board (ICPB) to help inform Iowa corn farmers about agricultural carbon markets. This grower guide is neither an endorsement nor a rejection of any ag carbon program. Rather it is meant to inform growers of the opportunities and risks of participation so they can make the best choice for their operations.

The ICPB uses checkoff funds to develop and defend markets, fund research and provide information about corn production.

December 2023