Carbon markets have captured the attention of the agriculture sector, and agricultural lenders are no exception. I recently heard from a lender that their number one question from their farmer borrowers is about carbon credit opportunities.<\/p>\n
As trusted advisors to farmers, here\u2019s what lenders need to know to navigate these\u00a0conversations.<\/p>\n
The lure of carbon\u00a0revenue<\/b><\/p>\n
Scientists estimate that agricultural soils could remove 4-6% of annual U.S.\u00a0greenhouse gas\u00a0emissions\u00a0by sequestering carbon. This presents\u00a0significant\u00a0untapped potential for agriculture to be part of the climate\u00a0solution.<\/p>\n
Private companies\u00a0are offering\u00a0farmers contracts to\u00a0sequester carbon, and\u00a0many\u00a0transactions\u00a0have\u00a0already\u00a0occurred.\u00a0It is an appealing proposition for farmers to get paid to sequester carbon through climate-smart practices such as no-till\u00a0or\u00a0cover crops. These\u00a0practices have multiple other\u00a0benefits on the farm and for our environment.<\/p>\n
Agricultural lenders are paying attention\u00a0\u2014\u00a0and,\u00a0in at least one case, planning to start their own\u00a0carbon bank<\/a>.\u00a0They are also increasingly fielding questions from their farmer clients about the opportunities and the risks of\u00a0selling carbon\u00a0credits.<\/p>\n Frequently asked questions<\/b><\/p>\n One of the most common lines of questioning from farmers is about the terms included in contracts for carbon credits, which require access to farmer data for verification and have other stipulations about when farmers will receive payment. Some contract terms are annual, while others span many years into the future.<\/p>\nAgricultural lenders are increasingly fielding questions from their farmer clients about the opportunities and risks of selling carbon credits. Here's what they need to know. <\/a><\/span>Share on X<\/a><\/span>\n There are also questions about\u00a0which types of farms will be best suited to participate in carbon markets, and the equity implications of those differences. Some differences between farms, such as soil types,\u00a0may always impact the extent to which farmers are able to sequester soil carbon. Other differences, such as farm size,\u00a0should be considered and\u00a0addressed\u00a0in the design of carbon market opportunities.<\/p>\n Farmers\u00a0who have been utilizing climate-smart practices for years are also concerned that their efforts will not\u00a0meet credit\u00a0standards for\u00a0\u201cadditional\u201d\u00a0mitigation\u00a0action, thereby\u00a0not qualifying\u00a0for credits.<\/p>\n These are excellent questions that many in the industry \u2014 from USDA staff to ag tech companies to\u00a0environmental\u00a0organizations like mine\u00a0\u2014 are trying to answer.<\/p>\n Bringing clarity to a confusing credit marketplace<\/b><\/b><\/p>\n Banks understand the need for accurate accounting. In the case of\u00a0soil carbon\u00a0crediting programs,\u00a0there are still serious gaps in\u00a0comparability and consistency, which creates uncertainty and makes it riskier for farmers to participate.<\/p>\n A\u00a0recent analysis<\/a>\u00a0by\u00a0Environmental Defense Fund and the\u00a0Woodwell\u00a0Climate Research Center reviewed the 12 published protocols used to generate soil carbon credits through carbon sequestration in croplands\u00a0and found that the\u00a0protocols take different approaches to measuring, reporting and verifying net climate impacts, and to managing the vital issues of\u00a0additionality, reversal and permanence.<\/p>\n The result is a confusing credit marketplace where it is difficult to compare credits or guarantee\u00a0that\u00a0climate benefits have been achieved.\u00a0Ultimately, the full potential of\u00a0agricultural carbon credits\u00a0will not be realized until clear guidelines ensure robust and consistent accounting.<\/p>\n Congressional passage of the Growing Climate Solutions Act<\/a> is an important legislative step to create a third-party verification program, allowing USDA to identify and highlight common standards and consistent approaches to measuring, reporting and verifying high-quality carbon credits sold in voluntary carbon markets. This guidance can\u2019t come soon enough, as companies, investors and some farmers are already making big bets on future carbon market success.<\/p>\n Where farmers and lenders should focus<\/b><\/p>\n The\u00a0main\u00a0takeaway\u00a0for farmers is that carbon\u00a0market potential is there, but it still needs time to ripen.\u00a0Carbon credits should be viewed like any other new crop\u00a0\u2014\u00a0not\u00a0all farmers will have equal\u00a0market\u00a0opportunities, and results\u00a0and revenue\u00a0will not be the same on every farm.<\/p>\n In the meantime, farmers\u00a0can take\u00a0a more holistic strategy to maintain their\u00a0financial stability\u00a0and\u00a0environmental stewardship in the face of a changing climate\u00a0by prioritizing\u00a0practices that\u00a0reduce costs and improve crop yield resilience<\/a>.<\/p>\n The same goes for lenders. The biggest mistake lenders could make is to ignore the impacts of climate change on their portfolios. The second biggest?\u00a0Banking on\u00a0carbon\u00a0credits\u00a0as\u00a0all that\u2019s needed\u00a0to\u00a0mitigate climate impacts and prepare borrowers for the future.<\/p>\n Instead,\u00a0agricultural lenders should include both\u00a0assessment of the climate-related risks to their portfolios and the development of\u00a0new programs or products that support farmer borrowers in improving climate resilience over the long term.<\/p>\n