What agricultural lenders need to know about emerging carbon market opportunities

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.

As trusted advisors to farmers, here’s what lenders need to know to navigate these conversations.

The lure of carbon revenue

Scientists estimate that agricultural soils could remove 4-6% of annual U.S. greenhouse gas emissions by sequestering carbon. This presents significant untapped potential for agriculture to be part of the climate solution.

Private companies are offering farmers contracts to sequester carbon, and many transactions have already occurred. It is an appealing proposition for farmers to get paid to sequester carbon through climate-smart practices such as no-till or cover crops. These practices have multiple other benefits on the farm and for our environment.

Agricultural lenders are paying attention — and, in at least one case, planning to start their own carbon bank. They are also increasingly fielding questions from their farmer clients about the opportunities and the risks of selling carbon credits.

Frequently asked questions

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.

There are also questions about which 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, may always impact the extent to which farmers are able to sequester soil carbon. Other differences, such as farm size, should be considered and addressed in the design of carbon market opportunities.

Farmers who have been utilizing climate-smart practices for years are also concerned that their efforts will not meet credit standards for “additional” mitigation action, thereby not qualifying for credits.

These are excellent questions that many in the industry — from USDA staff to ag tech companies to environmental organizations like mine — are trying to answer.

Bringing clarity to a confusing credit marketplace

Banks understand the need for accurate accounting. In the case of soil carbon crediting programs, there are still serious gaps in comparability and consistency, which creates uncertainty and makes it riskier for farmers to participate.

A recent analysis by Environmental Defense Fund and the Woodwell Climate Research Center reviewed the 12 published protocols used to generate soil carbon credits through carbon sequestration in croplands and found that the protocols take different approaches to measuring, reporting and verifying net climate impacts, and to managing the vital issues of additionality, reversal and permanence.

The result is a confusing credit marketplace where it is difficult to compare credits or guarantee that climate benefits have been achieved. Ultimately, the full potential of agricultural carbon credits will not be realized until clear guidelines ensure robust and consistent accounting.

Congressional passage of the Growing Climate Solutions Act 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’t come soon enough, as companies, investors and some farmers are already making big bets on future carbon market success.

Where farmers and lenders should focus

The main takeaway for farmers is that carbon market potential is there, but it still needs time to ripen. Carbon credits should be viewed like any other new crop — not all farmers will have equal market opportunities, and results and revenue will not be the same on every farm.

In the meantime, farmers can take a more holistic strategy to maintain their financial stability and environmental stewardship in the face of a changing climate by prioritizing practices that reduce costs and improve crop yield resilience.

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? Banking on carbon credits as all that’s needed to mitigate climate impacts and prepare borrowers for the future.

Instead, agricultural lenders should include both assessment of the climate-related risks to their portfolios and the development of new programs or products that support farmer borrowers in improving climate resilience over the long term.

At the end of the day, the opportunities for agriculture to contribute to climate solutions are immense, and carbon credits are just one tool in a portfolio of financial solutions that farmers and lenders should explore.