Carbon Credit Contracts: Where Do You Start?
Article By: Cathy Asher, Relationship Manager
There has been a lot of buzz lately about carbon markets and the potential positive impact to farm cash flow. As consumer pressure continues to build on corporate America to reduce their carbon footprint, a new opportunity has emerged for farmers to reap the rewards of being good stewards of the land. There are several factors to consider prior to entering into a contract to market the carbon your farm has sequestered. Before determining if a carbon contract is right for you, take some time to review practical considerations, economic impacts, and legal clauses.
Carbon contracts have the potential to negatively impact land use and salability of the real estate. The contracts are attached the land itself and are typically 10 years at minimum. Most contracts do not provide the landowner with an option to buy out the contract if the land is sold. Unless the potential buyer is willing to abide by the terms of the contract, you may not be able to sell the real estate. This could negatively impact your ability as the landowner to modify the use of the land for development or housing as well as other green energy uses such as solar or wind power. Prior to entering into a contract, landowners need to have a frank discussion with all interested parties as to land use planning.
The economic impacts of the contracts are equally important to review. Considerations need to be made regarding payment terms, penalties for non-compliance, required practices, contract term and verification of credits. The contract should also spell out what the expectations are for all parties involved and who they are specifically. Some of the questions to ask should include what happens if payments are not made timely for the credits? Does the contract include a termination clause for non-payment? The contract should also specify what constitutes non-compliance as well as how the credits will be verified. It should detail how the cost of verification will be handled or paid. You should have a clear understanding of how the contract could financially impact your farming operation.
The final review of the contract pertains to legal clauses. If something goes wrong, who takes responsibility and how will it be paid for? Is there a provision to protect against acts of God? The contract should specify the venue and jurisdiction in the event of a dispute. It should also discuss how disputes will be resolved such as arbitration - which could be costly depending on how the language is written regarding attorney fees.
Prior to entering into a carbon credit contract, take some time to review the terms and enlist the expertise of an attorney familiar with these contracts. A small investment up front can save you thousands of dollars and frustration later on.
Cathy Asher, a relationship manager in SFB's Ag Lending Department, understands the challenges of the ag economy both personally and professionally and uses her diverse knowledge of the ag industry to help her clients succeed. For more information, contact Cathy at 715-672-2410.