{"id":10849,"date":"2022-01-24T08:17:40","date_gmt":"2022-01-24T14:17:40","guid":{"rendered":"https:\/\/agrilife.org\/texasaglaw\/?p=10849"},"modified":"2026-04-17T15:15:36","modified_gmt":"2026-04-17T20:15:36","slug":"understanding-evaluating-carbon-contracts","status":"publish","type":"post","link":"https:\/\/agrilife.org\/texasaglaw\/2022\/01\/24\/understanding-evaluating-carbon-contracts\/","title":{"rendered":"Understanding & Evaluating Carbon Contracts"},"content":{"rendered":"

Carbon contracts have been a popular topic of conversation for farmers and ranchers around the country.\u00a0 As with any agreement, several legal and economic issues arise and should be carefully considered by producers before entering into a carbon contract.\u00a0 A critical consideration is producers and landowners should never rely on verbal representations made by anyone related to a contract; assume only the written contractual terms will be enforceable.\u00a0 Remember, this is new territory and many unknowns still exist about the carbon market and these carbon agreements.\u00a0 \u00a0I highly recommend engaging an attorney to review any carbon contract prior to signing.<\/p>\n

For more information on carbon contracts, click here<\/a> for a podcast episode I did with Todd Janzen and Anson Howard, both practicing attorneys actively negotiating these agreements for their clients.\u00a0 To hear (or read) a short interview I did with Texas Standard, click here<\/a>.<\/p>\n

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Key Concepts\u00a0<\/strong><\/p>\n

When reviewing a carbon contract, producers and landowners may notice it seems to speak a different language than most agricultural contracts.\u00a0 Understanding some of the basic concepts related to carbon contracts is an important starting place.\u00a0 Importantly, each contract will likely have specific definitions of these terms.\u00a0 It is critical for landowners and producers to carefully review the definitions in any contract before signing.<\/p>\n

Additionality<\/em> \u2013 The concept of additionality refers to some companies only paying for new carbon-sequestering practices.\u00a0 If additionality is required, the farmer or rancher would have to undertake a new practice\u2014such as converting from conventional farming to no-till farming, for example, to qualify.\u00a0 A producer who has already adopted carbon-sequestering practices would need to seek a contract that pays for these previously adopted practices or allows a look-back period and does not have an additionality requirement.<\/p>\n

Carbon market<\/em> \u2013 Currently, most carbon markets are voluntary programs where brokers essentially serve as an intermediary between companies seeking carbon credits and farmers and ranchers willing to generate these credits.\u00a0 A producer agrees to undertake certain practices which sequester carbon or reduce carbon emissions, the company pays the producer, and then claims the carbon credit generated by the producer helps to offset the carbon footprint of the company.<\/p>\n

Carbon practices<\/em> \u2013 These are farming or ranching practices having the ability to reduce carbon emissions and\/or sequester carbon.\u00a0 The most common carbon practices include no-till farming, planting cover crops, crop rotation, planting buffer strips, and regenerative grazing.<\/p>\n

Carbon credit<\/em> \u2013 A carbon credit is a frequently used measurement unit to quantify carbon.\u00a0 Typically, one carbon credit is equal to one metric ton of carbon or carbon equivalent that is sequestered.<\/p>\n

Carbon emissions<\/em> \u2013 The release of carbon into the atmosphere.<\/p>\n

Carbon sequestration<\/em> \u2013 The process of capturing carbon from the atmosphere.<\/p>\n

Permanence<\/em> \u2013 The length of time a carbon reduction lasts.\u00a0 Some contracts may require a producer to abstain from certain activities for an extended period of time to ensure the continuation of storing carbon that has been sequestered.<\/p>\n

Stacking<\/em> \u2013 The concept of stacking refers to one producer enrolling the same land in more than one program or contract.\u00a0 Many contracts prohibit stacking, meaning the producer may enter into only one carbon contract for a specific piece of property.\u00a0 The breadth of a stacking prohibition can vary greatly by contract, with some prohibiting only other carbon contracts, while others may prohibit participation in any government programs as well.<\/p>\n

Verification<\/em> \u2013 The process of confirming carbon reduction or sequestration.<\/p>\n

Key Contract Terms to Consider\u00a0<\/strong><\/p>\n

Control of Land<\/strong> \u2013 Brokers or companies seeking carbon agreements will likely require some proof the party entering into the contract either owns or controls the land.\u00a0 This may include a copy of a written lease agreement, for example.\u00a0 Some companies or brokers may require both the tenant and the landowner to sign any contractual agreement. This is particularly true if the lease in place is for a shorter timeframe than the carbon contract will be.<\/p>\n

Data ownership<\/strong> \u2013 Data collection is a requirement for any carbon contract, and a carbon agreement should address issues related to the ownership and use of such data.\u00a0 Issues like who will be given access to the data, how the data may be used, and who has ownership rights in the data should all be addressed.<\/p>\n

Indemnification<\/strong> \u2013 Indemnification clauses essentially shift potential liability and costs from one party in the contract to another.\u00a0 These clauses are an agreement to reimburse another party for damages they sustained as a result of the indemnifying party\u2019s actions.\u00a0 It is critical to analyze the breadth of an indemnity clause. First, indemnification clauses should be mutual, meaning each party agrees to indemnify the other.\u00a0 Second, some provisions may be so broadly written as to require a landowner to indemnify the company for any damages or injury which are not a result of the developer\u2019s contract, including actions taken by third parties over whom the landowner has no control.<\/p>\n

Impact on energy production<\/strong> \u2013 Producers should carefully consider what impact a carbon contract may have on energy production on the land.\u00a0 Depending on the mineral ownership or the potential energy production activities, this may require identifying carve-out areas where oil or gas wells, or potentially even wind turbines or solar panels can be placed.<\/p>\n

Land title implications<\/strong> – Producers should be careful to determine if there are contractual provisions that may impact their ability to sell or otherwise transfer ownership of the land.\u00a0 For example, contracts may allow the purchaser to place a restrictive covenant or a lien on the property, or require the landowner to enter into a conservation easement for the term of the contract.\u00a0 Certainly, these types of limitations could impact the marketability and potential sales price for the land.<\/p>\n

Negotiation costs<\/strong> \u2013 Some companies and brokers are offering to pay a certain portion of a producer\u2019s legal fees associated with negotiating a carbon contract.\u00a0 This would likely be an agreement separate from the contract itself but might be worth producers requesting from the company or broker.\u00a0 Regardless, a producer should consider using an attorney to assist with reviewing or drafting any carbon contract.<\/p>\n

Other allowable uses<\/strong> \u2013 Producers may wish to make other uses of the property at issue in a carbon contract.\u00a0 Many farms and ranches have added various agritourism activities as ways to diversify income.\u00a0 For example, many producers may wish to reserve the right to hunt or fish on the land.\u00a0 The contract should address any desired allowable uses for the producer to ensure both parties are on the same page.<\/p>\n

Payment<\/strong> \u2013 The payment provisions of the contract are extremely important for the producer.\u00a0 There are several different potential payment methods that could be included in an agreement.\u00a0 There could be a per-acre payment for adopting certain carbon practices.\u00a0 There could be a payment per metric ton of carbon as measured and verified.\u00a0 Another option could be a payment based on the carbon market at an identified time.\u00a0 Producers should ensure the contract sets forth the exact details about how payment will be calculated. For any contracts based on actual carbon sequestered, producers should investigate the amount of carbon likely to be sequestered in their particular area.\u00a0 For example, agronomists report the amount of carbon likely to be sequestered in the Texas Panhandle and South Plains to be far less than the one ton of carbon per year it takes to create a carbon credit.\u00a0 Also important is to determine what costs or expenses may be deducted from the producer\u2019s payment.\u00a0 Ensure the provision also addresses when and how payments will be made.<\/p>\n

Parties<\/strong> \u2013 A producer should certainly do his or her homework to investigate any party with whom they will enter into a carbon agreement. Understand the party\u2019s position in the market. \u00a0 Many contracts are being offered by brokers or aggregators, but there are also ag retailers offering these types of contracts. Try to speak to other producers who have entered into contracts with the company to ask about their experience.<\/p>\n

Penalties<\/strong> \u2013 All contracts contain penalties if certain conditions are not met.\u00a0 It is important to understand these penalties and the risk associated with them.\u00a0 For example, if a party agrees to undertake a certain practice but there is an external reason such as weather preventing them from doing so for an amount of time, there could be a specific penalty for that.\u00a0 Some contracts may require a certain increase in the amount of carbon in the soil and include a\u00a0penalty if that amount is not realized or is released during the term of the contract. Carefully review the contract to understand under which circumstances a producer could potentially be liable if this occurs.\u00a0 Contracts will likely also contain early termination penalties if the producer is unable to comply with the contractual requirements for the term of the contract.<\/p>\n

Required practices<\/strong> \u2013 An agreement will set forth the required practices a producer agrees to undertake as part of the contract.\u00a0 Again, this differs by contract and must be carefully reviewed.\u00a0 Some contracts may list very specific requirements, while others may contain a more general description such as conservation practices.\u00a0 Producers should be careful to analyze the additional costs which may come with adopting a required practice as compared to the potential carbon contract payment they would receive. Finally, producers should pay attention to whether the required practices are set through the entire contract, or whether they may change from year to year.<\/p>\n

Stacking prohibition<\/strong> \u2013 Often, carbon contracts will include a prohibition on stacking\u2014meaning a producer may not enroll the same land in multiple carbon contracts or programs.\u00a0 It is important to carefully review any stacking prohibitions in a contract, as some may be worded broadly enough to prohibit participation in other government programs as well, such as EQIP or CRP, for example.<\/p>\n

Standard legal clauses<\/strong> \u2013 There are several standard legal clauses that are common in most contracts.<\/p>\n