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All of the contracts I’ve seen really vary in their requirements. It is so important for people to carefully read, analyze and understand every term in these contracts before signing. Generally speaking, the contract provides that payment will be made to a farmer for undertaking certain production practices that should increase the amount of carbon stored in the soil. Typically, the types of practices we see include cover crops, no-till or reduced till farming, buffer strips, and regenerative grazing.
One of the first questions to ask is whether the company offering the contract is willing to negotiate the terms. Some companies are, but some are not. That will allow a producer to know whether it is worth his or her time marking up a contract with edits. Some of the big issues that producers need to be aware of include: (1) understanding the amount of carbon that is likely able to be stored in your area and your soil type; (2) understand the payment structure of the contract—is it a payment for implementing the practice or is payment based on the actual measurement of soil carbon; (3) watch for any penalties of early termination of the contract; (4) look at the scope of the “stacking provision” which will prevent the same land from being entered into another carbon contract, but could be written broadly enough to also prevent enrolling in government programs as well.
The current market set up is interesting. There are many companies that have made certain pledges or promises to reduce their carbon footprint. Many of those companies seek to do so by buying carbon credits to offset their own carbon emissions. Some companies may be contracting directly with the farmer to purchase those carbon credits, but more common is for the farmer to deal with an aggregator. The aggregator essentially acts as a middle man who contracts to purchase carbon credits from the farmer and then, in turn, sells those credits to the company seeking to purchase the offset. So, a farmer could really be dealing directly with the company who will claim the offset or with an aggregator who will sell the credit.
Again, every contract is so different that it is hard to offer a general description. From a production standpoint, most contracts are requiring one or more of the following practices: cover crops, no-till or reduced till farming, buffer strips and regenerative grazing.
Some contracts mention measuring greenhouse gasses, which would appear to indicate that they could potentially be paying for storing more than just carbon, but I have personally not seen contracts specifically for other greenhouse gasses.
I really recommend hiring an attorney to help negotiate and draft these carbon contracts. This is a new area and spending the money to ensure there is a solid contract in place is a smart initial step. I’ve got a couple of resources I think could be useful for folks trying to get some background or who might want a checklist of things to consider when reviewing a contract.
I’ve got a blog post with a checklist here: agrilife.org/texasaglaw/2022/01/24/understanding-evaluating-carbon-contracts
I’ve got a podcast episode here: aglaw.libsyn.com/episode-117-anson-howard-todd-janzen-carbon-contracts
One of the most interesting terms (in a nerdy lawyer context) is a class action waiver whereby the farmer agrees not to participate in any class action lawsuit against the company related to the carbon contract. I think this is likely a result of the number of recent ag-related class actions and it is really interesting to me. On a more practical level, I think that the different payment terms can be interesting. Some pay for just adopting the practice while others will actually measure and pay on additional carbon stored. Some have a vesting provision where you are not entitled to the full payment for a number of years. On that note, one of the things I think is most misunderstood by producers is the way the payment is quoted. Most contracts that involve measurements will quote the price as $xx/ton of carbon equivalent. But, people will always say $xx/acre/year. However—for most producers, the two are not the same. Most producers cannot store a ton a year, therefore, the price per ton and the price per acre per year are likely not the same amount.
Again, differs by contract, but I think most are in the 10-year range.
Tiffany Dowell Lashmet is an Associate Professor and Extension Specialist in Agricultural Law. She is located in the Department of Agricultural Economics at Texas A&M University. Tiffany grew up on a family farm and ranch in Northeastern New Mexico where her family raised sheep, cattle, alfalfa, wheat and milo. Tiffany has a B.S. in Agribusiness Farm and Ranch Management (summa cum laude) from Oklahoma State University and a Juris Doctor (summa cum laude) from the University of New Mexico School of Law. Prior to going to Texas A&M, she was engaged in private practice, working at a complex litigation firm in Albuquerque, New Mexico.