What the Heck is a Carbon Credit?

The newsletter for professionals cautiously approaching the discussion about climate, but pretty sure they should.

Issue Number : 2

Recalling Issue One of Climate Conversations where I mentioned that we would ‘start at the beginning’ on the topic of climate, I realized maybe I haven’t done that so well. Accordingly, I’ve decided to answer a very (not so) basic question: What the heck is a carbon credit?

What is a “carbon credit”?

Carbon credits originate with the concept of reducing an amount of carbon dioxide (CO2) or its equivalent from the atmosphere which, when there is a market for this, can generate one carbon credit. The most common measurement for carbon credits is metric tons. (Most Americans wouldn’t know this, but one metric ton equals about 2,205 pounds–you’re welcome). The phrase CO2 “or its equivalent” denotes that by also or additionally reducing other greenhouse gas emissions (GHG) doing so may generate a carbon credit. “At a basic level, if a farmer can demonstrate a reduction in one metric ton of CO 2 or its equivalent on his or her farming operation, they should be able to create and sell a carbon credit,” says ag attorney Todd Janzen, of Janzen Ag Law, a firm specializing in environmental law for farmers.

So, to reduce the emission, the carbon must be ‘captured’. One common way to accomplish that is through increasing soil carbon–AKA keeping carbon in the soil. Many experts also believe that increasing soil carbon–whether with row crops or pastureland–directly benefits the health of the soil thus yielding advantages to agricultural practices. Most likely, increasing soil carbon, whether out of a desire to improve the soil quality or to potentially earn a carbon credit (that can be sold through a carbon contract) involves adding or changing, or implementing certain farming or grazing practices. Jenny Pluhar, writing for Progressive Cattle, cites the following ways to increase soil carbon:

● Vegetative ground cover
● Minimizing disturbance such as avoiding plowing or continuous grazing ● Increasing plant diversity
● Keeping plants with roots in the soil longer (such as between growing seasons if a row crop operation)
● Adding back regenerative grazing

According to Jason Weller, President of TruTerra, the sustainability business of Land O Lakes, farmers are uniquely positioned to potentially earn compensation from certain management practices. “Farmers use regenerative farming practices that improve soil health to boost crop biomass production and minimize soil disturbance. In turn, this helps soils absorb more organic matter and over time transform it into soil carbon. Farmers are compensated for the additional quantity of soil carbon they have sequestered in their fields’ soils,” he advises.

How carbon is measured (to earn a carbon credit)

Once farmers begin new practices to increase soil carbon, the next step to potentially earning a carbon credit payment is measurement. It’s important to note here that measurement varies widely as does verification of that measurement. Today no standard exists, and most carbon credit buyers have their own system. In the most basic terms, the company offering a carbon credit program will work with the farmer to take soil samples and use lab analysis to measure and quantify the amount of carbon in the soil. Most of these labs are third-party. Then, companies use a soil modeling technique (often proprietary) to estimate how much soil carbon is present. A variety of factors are considered, though this could vary, too, including soil type, the crop rotation used (or not used, tillage methods or no-till, and even available weather data for the location of the soil.

How a Carbon Credit is Created

To earn the credit, it all starts on the farm with practices incorporated by the grower including starting or stopping various activities such as incorporating no- till or perhaps moving marginal land into native grasses or forest regrowth. “It’s important to remember that carbon credits can be created by either a reduction in carbon or long-term storage (sequestration) of carbon,” says Janzen. A key fact to remember is that just adding the practice doesn’t generate the credit. The company that wishes to buy a credit will require a measurement and verification process. Carbon credit companies act as intermediaries connecting the farmer with the buyer but usually pay the farmer directly in the form of a contract and sell the subsequent credit to the ultimate buyer. It’s important to note that you don’t exactly hold a credit in the palm of your hand. “A carbon credit is not a tangible thing, but it is a commodity that can be created, sold,
traded, or bought, “Janzen explains.

Who Buys Carbon Credits?

Up until now, we’re really just been talking about farming practices, however, here is where climate-related topics come into play. Carbon credit buyers are typically those in industries that are large emitters of CO2 and they opt to purchase a carbon credit to offset or reduce their carbon footprint. Emitters such as technology and energy companies are common large buyers today, though any company may choose to buy carbon credits. Some companies do this for philosophical reasons, others to improve the appearance of being considered ‘green’ by shareholders, employees, or the public, and some companies enter the carbon market because they are mandated by law to reduce their carbon footprint and the purchase of carbon credits is an acceptable means of meeting these requirements.

There is a lot more to consider if you’re a landowner considering participating in the carbon market and we’ll work to cover that in our future newsletters. In the meantime, if you want to learn more, come to our 'Ag as the Solution' Summit! We’re hosting the first-ever Indiana Climate Summit on August 23rd in West Lafayette, Indiana. We’re expecting agribusiness and energy industry professionals to attend, and we even have special rates if you’re an ag producer!