Jeremy's Blog 26th February 2021: Carbon Deals
This article by Jeremy Moody first appeared in the CAAV e-Briefing of 25th February 2021.
Do we know what it means for a landowner to enter into an agreement for carbon sequestration? What are the implications of “selling” carbon for the land and its users? Are we at risk of uncritical assumptions that:
- this is a significant source of value for an average landowner?
- that, being associated with positive change, it imposes no practical constraints?
- that now or soon is the time to sell?
Simply putting those question points to the need for landowner to be advised on whether the proposed terms and price are right.
What is the agreement buying? If a lump sum is buying rights to or control over the carbon to be sequestered from the landowner, what freedom might the landowner have over the use of the land thereafter? Does that risk the landowner becoming the husbandman of someone else’s carbon? Or is it, whether an annual payment or a lump sum, buying specific management practices that are, overall, likely to sequester a certain amount of carbon? That would bring more uncertainty about the outcome but perhaps less liability and restriction. How would the agreement handle a minor change (building a reservoir), a force majeure event (flooding removing soil) or it proving impossible to fulfil the commitment?
For how long? The point of sequestration is for it to be long term. Biodiversity gain proposals in England look for 30 year agreements. What does an owner have to be paid to agree that?
What scale of agreement makes for value? Factors in that may include:
- the value to be paid for sequestering a tonne of carbon.
- how much carbon can be stored
- the uncertainties around that
- the overhead costs of the agreement and later monitoring
and, of course, the alternative choices, now and in the future, of the owner, as well as what might be demanded by the law or markets and the effect of tax. The buyer will often also be looking for easier or cheaper alternatives. Do those lead to a figure that works for both parties, What minimum area is needed for a deal?
Carbon prices vary around the world and over time. Owners can choose not only if but when to sell, while both carbon prices and policy measures can only be expected to rise over time. A productive farmer can, perhaps accepting support, choose to improve soils for the farming benefits without accepting long run restrictions.