Carbon Markets Landscape (Pt. 1), with Tom Daniel and Sally Flis

Doing the right thing is its own reward, especially when it comes to sustainability practices.

But when you can get compensated for doing that right thing? That's even sweeter.

And that's basically the concept behind carbon markets--creating an economic incentive for growers to help in the fight against global climate change.

So in this episode of The Future. Faster. Tom and Sally field some of the questions they hear most often from growers who are curious about getting into the carbon markets and entering into a carbon contract.

Plus, they define some of the key terms with which growers should be familiar if they're interested in getting involved, highlight some important industry issues that need to be addressed, and lay out the case for why farmers should strongly consider trading in carbon credits.

Episode Transcript

Tom Daniel:

When you talk about the sustainability cake and the icing that goes on it, sustainability for the most part is the cake itself. The icing is kind of that extra payment that you get, right? The carbon is just one flavor of icing.

Dusty Weis:

The future isn't just written by the past. It's written by the right now. And right now, Nutrien Ag Solutions is focused on what's next.

Dusty Weis:

Hello, I'm Dusty Weis, and welcome to The Future, Faster, a sustainable agriculture podcast by Nutrien Ag Solutions, where you can learn about the next horizon in sustainable agriculture for growers, for partners, for the planet. To us, it's not about changing what's always worked. It's about continuing to do the little things that make a big impact.

Dusty Weis:

On this week's episode, we're going to dig in a little bit deeper on the topics of sustainability and carbon with hosts Tom Daniel and Sally Flis. We've really set the stage with a basic understanding of these topics in the past three episodes, but Tom and Sally have their own expertise that they can bring to bear, so we're going to take this opportunity to really pick their brains a little bit. But if you haven't yet, make sure that you're subscribed to this podcast in your favorite app. Also make sure you follow Nutrien Ag Solutions on Facebook and Instagram.

Dusty Weis:

And with that, it's time to once again introduce Nutrien Ag Solutions' very own Tom Daniel, director of retail sustainable ag, and Dr. Sally Flis, field manager of sustainable ag. Tom and Sally, we covered a lot about carbon in the last episode, but from a grower's perspective, a big first step is finding a partner and signing a carbon contract. What do we need to know about that?

Tom Daniel:

Yeah, so Dusty, I'd say this. You're totally correct. We're getting lots of questions as we're in the field right now from growers. They're wanting to know about carbon and about how should they be engaged in a contract right now? What should they be looking for in a contract, and what we believe is the best choice is for them as a grower around these contracts. And so, Sally, I know you've been involved with them a lot, too, and one of the main questions and one of the main lookouts that we try to tell growers, we talk about the length of the contract, the ownership of the credit, who's going to own it, how the credits are generated, verified, and is there going to be an outside buyer for those credits? That's a key piece. But the one that I have the biggest lookout for, Sally, is length of contract. What's your thoughts on that?

Sally Flis:

That's a big one, Tom. We talk about that not only from the grower aspect but also from our side as a company. If we're going to commit to a 10-year or a 20-year agreement and contract with growers on some of these projects and programs in generating credits. But most of the programs that are out there, you're looking at a minimum of a 10-year agreement. I don't know about you, Tom, but I don't know what I'm doing 10 years from now, and I would guess most of our growers and our retail locations are in the same place. Thinking about making that kind of a commitment to a practice change when we don't know what's coming down the line next is a big challenge across the industry for these carbon contracts.

Tom Daniel:

I would agree 100%. And the other issue, too, sometimes, there's a length of contract that may even extend out to 20 years. We've seen some contracts at 20 years, but they don't pay you for the full 20 years. They only pay you for a portion of the 20 years. Yet, the asset that's generated off the farm if there's a sequestered carbon credit belongs to the company you've contracted with for the full value, whether they've paid you for it or not, for that 20 years. I just don't see that as being something right now that I would want to engage in.

Speaker 4:

And there's so much changing in these every day, it seems like, on what's accepted. What's a new practice? What's not a new practice? What can we get a grower to qualify for? In addition to what is the value or is there even a market value? I do really appreciate that we took the route of going with one-year or two-year agreements in the pilots we're working on right now.

Tom Daniel:

Yeah, and the whole key for us was to learn, right? We wanted to be able to give our best advice to the growers on which way we thought they should go towards some of these different contracts that might be offered. Sally, another thing that I keep hearing about, too, is ownerships of the credits because obviously, if we're talking about sequestered carbon, then that's stored in the soil, right? Does that credit ... Is that earned by the grower who initiated the practice change, or is the credit ... Does it track with the land, go back to the landowner? That seems to be a big question coming out of some of these meetings we've had.

Sally Flis:

And it depends on what scope we're looking at. That scope one credit that we're looking for that big industrial-type buyer to take on where they are limited on their opportunities to reduce their footprint, so they're looking for carbon credits to offset what they're doing. Those scope one credits really are tied to the land, and that's where we get into these long permanence pieces like we talked about on some of the previous episodes of, is that practice going to be there a hundred years from now? Which is just mind boggling to even think about, versus the scope three credits that are really tied to those downstream processors. And Pepsi's making soda or sugar with the corn harvested from the field this year, and they want to say the Pepsi we made this year is more sustainable than the Pepsi we made last year ,and the Pepsi we're going to make next year is even more sustainable than the Pepsi we made this year.

Tom Daniel:

Right, so in that case, it's really more tied to the commodity, the corn or the soybeans or rice or whatever's being produced rather than to the land that it's produced on. Scope three may have a better fit, especially for some growers that are not looking for those long-term engagements that they want to get involved with. Hey, you mentioned something, too, that I thought was interesting. How important is it on these contracts that you know who the outside buyer is for these credits, that you know there is someone willing to purchase these credits?

Sally Flis:

That gets tricky, right? Because you've got a couple of different contracts out there right now where there isn't an outside buyer or there is an outside buyer, and it's really just an agreement between the entity that's generating the credits and the buyer that's agreed to buy those credits. And so those credits meet the needs of that contract between the entity generating them and the entity buying them, but they may or may not meet all the qualifications of getting onto a publicly traded market. What happens to those credits if the government or someone else steps in and says your credits don't count anymore? Who's at risk in that situation, right, I think is pretty unclear. And then you've got some where it's really hard to figure out if there is another party involved, or what exactly are you getting paid for? I think it's important to know who else is involved in the purchase and wanting to know the quality of the credit that's being generated.

Tom Daniel:

It's important, then, that we do know who the buyer is going to be or at least we know how the sale of the credit's going to be generated. To me, that's going to be a key point going forward. One last thing that I always tell growers is understand what the way to get out of a contract is. Can I get out of a contract? If I find something that I'm going through, let's say I've committed myself to a five-year cycle of crop rotations, for instance, and I have something that happens beyond my control that I have to leave that rotation, have I put my contract at jeopardy? If so, can I remove myself from the contract? Do I have a penalty where I have to go back and pay for some previous dollars that I was paid for generating credits? All of those things need to be looked at.

Tom Daniel:

I've heard some growers even make the comment that, well, look, it was a 20-year agreement, but I was told I could get out of it anytime I wanted to. Well, it may be true, but that acre still may be enrolled in that contract for the full 20 years. You may not be having to implement the practice changes that you signed up for, but that acre still may be under the control of whoever you signed the contract with. All of those things need to be addressed and looked at. And I guess the main thing I would say to growers today, I don't like to use the term seller beware. I think that's a little bit too much of a term. But I could say, be aware of the fine print in any contract that you look at right now. Sally, would you agree?

Sally Flis:

Yeah, it's definitely important to make sure you read the contract through. Consider, if you've got outside counsel that you work with, having them take a look at these contracts before you sign up for something that is locking you into a long-term agreement and has some ownership of either carbon assets or data tied to that property involved.

Dusty Weis:

These are some great factors to consider, and certainly, it's obvious at this point in the conversation that there is a lot more that we need to learn about carbon and sequestration. And so coming up after the break here, we're going to learn a little bit more about the expected time horizons to see the benefits of these practices. We're going to learn a little bit more about the role that geography plays in it. All those topics and more coming up in a moment here on The Future, Faster.

Dusty Weis:

This is The Future, Faster, a sustainable agriculture podcast by Nutrien Ag Solutions. I'm Dusty Weis, along with Tom Daniel and Sally Flis, and we're digging in a little bit deeper with our co-hosts about carbon in this episode, a topic about which they have accumulated a significant amount of experience and expertise here.

Dusty Weis:

Guys, carbon is the icing on the cake for sustainability. There are going to be environmental benefits if growers can get paid. But there's also just a value in carrying on with these practices even if you don't get paid for it. What do you think about that, Tom?

Tom Daniel:

When you talk about the sustainability cake and the icing that goes on it, sustainability, for the most part, is the cake itself. Okay? That's where you're generating improved ROIs on the farm that will have long-term benefits for the grower. The icing is kind of that extra payment that you get, right? For doing the practices that are good for the farm, so we're going to get the icing, but carbon is just one flavor of icing. Okay? There's going to be multiple flavors of ecosystem payments that a grower could qualify for. Some of those could be around water quality. Some could be around water efficiency, which, if you're in parts of the country today that are in a drought, you understand what water efficiency is about and how you need water to grow a crop. Right?

Tom Daniel:

But all of these different flavors of icings could be available. They go on that sustainability cake. Carbon is one of the first that we seem to be talking about the most today because that's the big discussion around environmental change and how do we impact the climate, right? That seems to be the one that's driving most of the market today.

Dusty Weis:

Boy, we should probably stop recording these around lunchtime because you're talking about cake, and all I want is a slice of cake now. But Sally, what do you think about it?

Sally Flis:

Yeah, totally on the same page with Tom. It's just a small piece of what we want to look at when we look at sustainability. Also, we've got to consider what are that field's and that farm's and that region's actual resource concerns? Is it a soil concern? Is it, like Tom mentioned, a water efficiency? Is it phosphorous? Is it something else that they have going on? If we don't understand the resource concern, we're not going to pick the right tools out of our toolbox to help solve the problem for that grower and improve sustainability. If we just focus on trying to generate carbon credits in the soil and cover crops and no-till, we may end up with those negative consequences in the future because we didn't take that whole acre approach to finding the right solution for that grower in that field.

Dusty Weis:

Nutrien Ag Solutions has gone all-in on these sustainability practices, and they've made clear that this is something about which they really truly believe. But how long can it take growers to see the benefits of these practices in their own fields once they implement them?

Tom Daniel:

I would say this, that these are long-term changes and long-term benefits come into play. But they don't happen, most of the time, in the short term. The reason that you see government entities involved in helping growers pay for cover crop or pay for practice changes on the farm is because the first one, two, three years, you don't get a lot of payback for those practice changes. Sally, I would say in the most part for a corn crop, for example, it would probably take year four, year five before you see a big impact on yield increase. And in soybeans, it's a little shorter. Most of the time, maybe in year three. But it's still out there. It's not going to happen in that year one or year two.

Sally Flis:

Yeah, again, I would totally agree, and this is one of those areas a little bit though I like to use my favorite agronomist answer of it depends. It's going to depend on the soil type. It's going to depend on the climate, temperature, rainfall, all those things, how quickly you're able to change your soil organic carbon or your organic matter. Because if we look at the Southeast, for example, where you've got sandy soils, high temperatures, high humidities, there've been growers doing practices there and growing grass in between their orange groves for 150 years, and they still just have sand for soil. We've got to understand, again, what is that actual location's ability to generate soil organic carbon before we make that the focus of a sustainability program for that grower.

Tom Daniel:

Yeah, and one thing I would say, too, Dusty, carbon is one of those discussions that it has a national discussion. It seems like we're talking about it in all parts of the country, right? But in truth, it only fits small geographies within the country. Carbon is all based upon climatic zones. Whether it's temperature or rainfall amounts, all of those things will go into impact as far as how we sequester carbon. Even soil types, Sally, have a big impact on what carbon can be sequestered.

Dusty Weis:

Tom, on an earlier episode, Brent discussed the portfolio and partner approach that Nutrien Ag Solutions is running right now. Can you tell us a little bit more about some of the pilots that Nutrien Ag Solutions is running right now?

Tom Daniel:

Sure, I can. Right now, 2021 for Nutrien Ag Solutions was considered to be the year of learning is what I would call it. We wanted to find out from as many different platforms how these different carbon markets were working and how our growers would react to them and how our retail would react to participating in these different projects. We have six projects or six pilots running in the US today, and we have three in Canada that are currently running. Each one of them are uniquely different. They can be different by geography and the area of the country they're participating in. And then we have multiple partners that we're working with. We have the Soil and Waters Outcome Fund, which is a group that was originally started by the Iowa Soybean Association. We're partnering with them in Illinois, along with co-participants in the pilot in Illinois of PepsiCo and Ingredion. Then we're also working with the Soil and Water Outcome Fund in Ohio, partnering up with American Farmland Trust. Those are two key ones that we're currently working with. And Sally, you might want to talk about the two ESMC pilots?

Sally Flis:

Yeah, ESMC is the Ecosystem Service Market Consortium, so it is a group of downstream suppliers, consumer packaged good companies, ag companies. There's a couple of ag retail companies involved in there. There's a lot of product, produce, ag companies involved in there and also some grower groups involved in the Ecosystem Service Market Consortium to try and stand up a market that's really for carbon and other ecosystem services like water quality, biodiversity, water efficiency that's based on what actually happens in an ag biological system versus what we're struggling with with some of these other registries right now that were designed for a forestry biological system.

Sally Flis:

In those pilots, we're working in Indiana and Iowa with Corteva and Syngenta to get growers signed up to see how that system works and what credit generation looks like in those programs versus the Soil and Water Outcomes Fund program, which also we've got a pilot in the Chesapeake Bay area with Soil and Water Outcomes Fund and BASF looking at how do we get growers in areas where there's already been a huge focus for probably the last 30 years on conservation practice implementation for restoring the bay into programs like this, and how does it work for growers? And can we get them paid for those practices they're already doing, and is there something more we can help them do to continue on that continuous improvement track for sustainability?

Tom Daniel:

Right. And we also have pilots running in Canada today. We have a partner there in Maple Leaf Foods that we're working with in our Canada locations, and we're also working around nitrogen management protocols and different opportunities within Canada. Once again, each geography provides its own little nuance, something new that we're testing and learning about.

Tom Daniel:

Sally, you mentioned one other thing, too. One big pilot that we're running within Nutrien right now is actually working directly with the registries. CAR and Verra are the two that we're working with the closest. And we're learning about how they view the global registries for carbon and how credits are validated and verified through those different processes. Sally, you mentioned earlier that most people don't realize it, but carbon's been trading for years and years and years. Right? But it's been mostly all forestry that's been traded off of. And the reason forestry fits that so well is because it's in a 30-year cycle. You don't have to worry about permanence and all the additionality discussions because you've got a forest.

Sally Flis:

Right. It's pretty easy to go out and take an aerial image and say, yep, those trees are still there, or no, they're not still there. Now, we need to get our credits back. Right? Versus, oh wait, did they happen to run a tillage pass over this field one time this year, and we don't have any way to verify if that happened or not in these ag systems, or why they did it if they did it?

Tom Daniel:

And it's a little bit easier to predict what the next cycle is going to be if you're working a 30-year cycle on forest, right? It's easier to measure. Let's just put it that way. And most of these larger global registries were completely developed around forestry. And so now we're trying to change that from forestry to farmer practice, and farmer practice cycles run in seasonal years, right? It's not a 30-year program anymore that we look at in farming. We're talking about this year's corn crop, so it does create a lot of different problems, and that's what we're trying to help. One of the reasons we're involved in these pilots is to help influence these registries to understand that if you want farmers involved, then you've got to be willing to work with them and work within their metrics of what they do in a farming operation.

Sally Flis:

Yeah, and just one other comment on that larger end-to-end, carbon end-to-end pilot that we've got going in the US is one thing that really makes that pilot different from a lot of the other projects that are going on across the industry is we really signed up growers across the country. We've got North Carolina to Montana, and we've got everything from sweet potatoes to corn and grain to wheat and barley. And we're really just trying to figure out how does this all work and what are the gaps in these registries so that all farmers really can try and participate in them versus focusing on just the areas of biggest opportunity for grower signup.

Tom Daniel:

And one of the big issues around farming, that one of the easiest ways that we've gotten growers engaged is really around the nitrogen management protocols because most every farm is using nitrogen fertilizer, synthetic fertilizer of some type. And we find that we have the best opportunities with a lot of growers to get them engaged just by helping them manage their nitrogen sourcing.

Dusty Weis:

You bring up an interesting topic there, Tom, because of course, when it comes to sustainability, we hear a lot about nitrogen in terms of runoff and managing that and water quality and all that. But nitrogen has a role to play in carbon as well. How so?

Tom Daniel:

Yeah, Dusty. One of the big impacts that we have on the farm that we don't even recognize ... Most people, if you ask them what's my big carbon footprint on the farm, they think about the equipment running across the farm and the diesel fuel they're burning. But in truth, it's nitrogen fertilizer. That's got the biggest problem on the farm as far as carbon is concerned. When we talk about a carbon footprint, nitrous oxide is 20 times more of a problem for carbon emission on a farm than just diesel fuel=, for instance, or fossil fuel is concerned.

Tom Daniel:

Anything that we can do to increase the efficiency or optimize the use of nitrogen fertilizer is always going to be a huge benefit, and so when we start talking to growers, one of the initial ways that they can get involved around a carbon platform is really, let's get involved around your nitrogen management. Let's look at variable rate fertilizers. Let's look at efficiency fertilizers on the farm. All of those are things that our agronomists can have a direct impact with because they know which products the grower needs to use based upon his localized farming operation and what he's capable of using.

Dusty Weis:

Tom, one thing that you said there that really made my eyebrows shoot up was the fact that nitrous oxide is 20 times worse than carbon dioxide as a greenhouse gas. And I guess, Sally, is this a fact that's commonly known among growers, and what do they need to do about it?

Sally Flis:

Probably not commonly known. I think growers are aware that there are losses of nitrogen when we apply them, and all the recommendations are made with some accounting for we're going to, like you mentioned, Dusty, there'll be losses to water through runoff or leaching, depending on the conditions when we apply that nitrogen. But the other big loss pathway is either volatilization as ammonia or volatilization losses as nitrous oxide. Nitrous oxide is a bigger loss than the ammonia losses from the changes that that soil bacterial population has on the nitrogen fertilizer we apply is going to put it into a bunch of different pathways, depending on those soil conditions.

Sally Flis:

Some of the things Tom mentioned, we've got the inhibitor products. Nitrification and urease inhibitors will change that pathway and how the nitrogen fertilizer we apply behaves in the soil. Or some of our coated products will help keep it more intact and limit the availability of that fertilizer prill to the soil bacteria being able to transform it into something else. It's just one of the probably four loss pathways for the nitrogen fertilizer we put on, so it gets to that efficiency. The more of that nitrogen we keep in the field in a form that the plants can take up and in the root zone, the better return on investment there is for the grower for even putting that nitrogen out there in the first place. And then we've got that added benefit of we're also reducing probably both water quality and air quality impacts of our fertilizer use.

Tom Daniel:

Yeah, there's always the ROI gain, too, Dusty. Because most of the time when we have nitrogen runoff and we have excess nitrogen that ends up in our streams it's because we may have applied more nitrogen than we needed to. As Sally said, we calculate for the loss, that we know we're going to lose a certain amount to volatilization. If we start using these efficiency-based fertilizers or these fertilizers that are treated with these products, we find that we can reduce that rate of nitrogen. And that reduction of nitrogen actually gets you a carbon offset, so you can actually gain another revenue payment on top of the savings that you're making on reducing that nitrogen rate but still keeping your productivity at a high level. Right? That's the key.

Dusty Weis:

I've got to tell you, Tom and Sally, this has really certainly shifted my perspective a little bit just on some of the practices that I see happening in the farms around where I go. I take my kid out driving through the farm fields right now, and he turns to me and wrinkles his nose up. He's three years old, and he goes, "Woo, daddy, what's that smell?" And of course, I give him the answer that my dad gave me and his dad gave him. Out in farm country, that's the smell of money. Except now when I look at him, it's going to be, "Well, that's just a missed opportunity there to reduce nitrous oxide emissions and cut down on greenhouse gases." But maybe we'll just keep the old terminology on that until he's a little bit older, huh?

Sally Flis:

Probably. Probably.

Tom Daniel:

Yeah. It's a little over him right now.

Dusty Weis:

Tom Daniel and Sally Flis from Nutrien Ag Solutions. Again, certainly an edifying discussion here about carbon and looking forward to the next one with you guys. But thanks so much for another great episode of The Future, Faster.

Dusty Weis:

That is going to conclude this edition of The Future, Faster, the pursuit of sustainable success with Nutrien Ag Solutions. New episodes arrive every other week, so make sure you subscribe on your favorite app and join us again soon. Visit FutureFaster.com to learn more. The Future, Faster Podcast is brought to you by Nutrien Ag Solutions, with executive producer Connor Irwin and editing by Larry Kilgore III, and it's produced by Podcamp Media, branded podcast production for businesses. PodcampMedia.com. For Nutrien Ag Solutions, thanks for listening. I'm Dusty Weis.