GUIDE TO UNDERSTANDING CARBON CONTRACTS
Disclaimer: This guide does not take the place of independent legal advice, and it is not intended to be used as legal advice.
Work with your lawyer when reviewing contracts and legal documents
- Broker: A person, corporation, or any other entity that purchases a product from a producer and sells it to another entity for any other purpose.
- Contract: A contract is a binding legal agreement between two or more parties that a court of law will enforce.
- Supplier: A farmer or any entity that produces an agricultural product.
- Term/Termination: The length of time the contract is valid and the date at which the contract is terminated.
- Force Majeure Event: Acts of God, acts of government, floods, fires, earthquakes, explosions, civil unrest, civil or military authority, acts of terror, war, riots, civil disturbances, insurrections, accidents, strikes, or public health emergency of national concern.
- Baseline: The expected soil organic carbon stock change trend when the practice was initiated.
- Payment Schedules: Contracts will differ in their payment terms with some examples of contracts including payment up front, spread over a specific number of years, and price guarantees v. minimums where the farmer participated in the upside
- Transaction Fees: Fees incurred by the buyer of the credit or the farmers. This may be in the form of a percentage of the total price.
- Payment Rate: The rate can be based on the total credits, or net of deductions, buffer pools, and fees.
- Vested: Payments earned or owned to a grower, ie those that are not delayed to ensure continued project participation, insurance against reversals, etc.
- Unvested Payment: Payments held in reserve to protect against land ownership changes, management changes, unintended reversals, etc
- Credit Ownership: Carbon Programs take different approaches to which party owns and controls the marketing of a carbon credit after it is registered – some provide growers more control over setting prices, while others transfer control to the program who then controls carbon sales and pricing.
- Land Control “Right to Use”: A producer will need to have and show exclusive control of their land for the duration of the contract terms and provide notice of any loss or potential loss of control of the land.
- Loss of Control: Termination of a lease or transfer of land ownership.
- Exclusivity “No Double Counting”: The carbon cannot be enrolled in another program or carbon initiative.
- Retention: The producer must make a reasonable effort to retain the carbon represented in the credit for a period of time specific in the contract. Contract may require annual data to be provided to demonstrate this. Some programs may contain multi-year obligations that survive past the termination in the program.
- Buffer Pools: Carbon Registries require a percentage of credits to be held in buffer pools in case there is an unintended reversal that releases stored carbon.
- Measurement, Reporting, & Verification: Programs may include requirements for one or more method for verification, depending on the program. There are four main ways practices are verified:
- Site visit: a program representative visits the farm to perform interviews, review records and make observations.
- Soil sampling: soil samples are collected for testing, usually performed by a program representative.
- Satellite imagery: remote sensing technology is used to confirm practice adoption.
- Desktop review: programs will use producer data and other records, such as photos or invoices verifying practice implementation, submitted via their digital tools or farm management systems
- Penalties: Penalties to the farmers resulting from project invalidation or the carbon retention period, not resulting from a Force Majeure Event, may result in forfeiting credits or penalty costs.
- Audits: The frequency of audits, requirements for a site visit, and sampling requirements
- Data Ownership/Privacy: How data will be used
- Aggregation / Deidentification: Some programs require farms to grant the carbon program [NOTE: not the buyer] the right to use, process etc.
- Land Management Records: The contract may include a requirement to provide detailed accurate land management records to quantify and verify the amount of GHGs avoided or sequestered. Records may include verification of your ability to meet program, methodology, and registry requirements and be used to calculate your GHG emissions and sequestration.
- Project Start/Baseline: Requirements for historical and projected soil management and cropping practices data at the time the practice was first initiated. Common records requested by verifiers may include seed receipts, equipment invoices, NRCS or crop advisor records, or crop sales receipts in addition to management data.