How Carbon Markets Could Benefit Hemp

Departments - Smart Start: Hemp Watch

President Joe Biden has proposed creating a carbon bank in his first 100 days in office. Here’s what it means and how hemp growers could use it.

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March 31, 2021

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Hemp is re-emerging as an agricultural commodity at a time of unusual social and geopolitical unrest, driven in part by a global pandemic and the resulting economic fallout. Hemp markets are developing as a wide range of programs roll out funding to address the above issues. These financial programs, along with additional funding opportunities that incentivize sustainability, are creating abundant opportunity within developing hemp markets.

But of all the funding opportunities emerging for hemp producers, a larger focus on climate change by the Biden administration may be the most compelling. President Joe Biden and his administration are looking to mobilize billions of dollars over the next several years for climate change initiatives via agricultural policy.

In the administration’s Climate21 Transition Memo, the Biden team outlines the importance of the U.S. Department of Agriculture and, more broadly, agricultural practices in mitigating climate change: “While the U.S. Department of Agriculture (USDA) has not historically been at the center of the public conversation on federal climate policy, the Department has enormous and underappreciated discretionary financial resources and agency expertise,” the memo states.

It goes on to say these resources allow the USDA to facilitate the reduction of greenhouse gases (GHGs), bolster the resilience of farms and forests to climate change, promote bioenergy and more.

The administration is aiming to give the USDA, and agriculture, a prominent role in the campaign against climate change. In addition to increasing agency staffing and overall capacity—with a focus on cultivating agency leadership—President Joe Biden plans to roll out programs that involve promoting climate-smart practices at both farms and forests, creating incentives through existing programs like crop insurance, as well as developing a carbon bank.

Carbon Markets

In the climate priorities laid out by the executive branch for the administration’s first 100 days, establishing carbon markets is right up at the top.

As explained in Biden’s memo, a carbon bank would allow the USDA to buy carbon credits from producers and forest landowners to sell to companies that want to reduce their carbon footprint. “A USDA carbon bank would provide a guaranteed price for producers while guaranteeing the environmental integrity of carbon conservation practices,” the memo states.

The concept of carbon trading is simple—the practice, not so much. One carbon credit equals one metric ton (MT) of carbon dioxide (CO2). This system allows companies to offset their GHG emissions by paying a farmer to utilize agricultural practices that sequester CO2 in soils. Carbon sequestration can be achieved by employing farming practices that forgo tillage or incorporate cover crops, for instance.

Measuring the amount of CO2 stored by various cropping practices, however, is where carbon markets have struggled historically, as soil sampling at scale hasn’t been practical. However, the Soil Health Institute, a nonprofit organization dedicated to improving soil health, has recently been awarded a $3.25 million grant from the U.S. Department of Energy to develop a soil carbon measurement and monitoring system called the DeepC system. This will not only make carbon inventories more accessible, but also be indispensable for researchers looking to understand hemp’s capacity to sequester carbon.

Settling contracts for carbon thus far has been handled primarily by modeling with tools like the USDA’s COMET-Farm system. The platform incorporates granular data from farm management applications, satellite weather and field sensor data to quantify CO2. At its simplest, if modeling shows a producer has captured 2 tons of CO2, and pricing is contracted at $15 per credit, the contract would be settled at $30.

The Biden administration has discussed establishing the carbon bank by accessing funds through the USDA’s Commodity Credit Corporation, which has $30 billion in borrowing capacity. Biden’s memo suggests allocating $1 billion to purchase carbon credits at $20 per ton.

Creating a carbon bank will require congressional approval, but U.S. Secretary of Agriculture Tom Vilsack is a USDA veteran, and like other members of Biden’s cabinet, he has considerable experience in moving the levers of government.

The Potential for Farmers

The current agricultural carbon marketplace is nascent, and practice is far from widespread.

But it is poised to leap out of the gates with a government-supported program.

Existing companies like Nori and Indigo Ag have been active in buying and selling carbon credits. Indigo Ag estimates that producers will realize .3 carbon credit per acre in their first year of using existing conservation cropping practices. This doesn’t refer to hemp specifically, which may have far greater potential. Indigo Ag set a floor at $10 per credit, but pricing could reach $15 on that platform. (European credits are trending over double that in current spot markets and in European Union carbon futures markets.)

Some companies have already begun utilizing the carbon marketplace. Land O’Lakes cooperative, for example, recently announced the sale of 100,000 MT of CO2 to Microsoft at $20/MT, as reported by Bloomberg. This allows Microsoft to voluntarily offset its GHG—something that may become compulsory in the future.

For hemp farmers, the ability to complement hemp prices with the sale of carbon credits is compelling. Fiber and hempseed producers will more likely benefit from this policy, as they tend to grow on a larger scale, but cannabidiol (CBD) producers using organic mulches and cover cropping may also.

Considerable research is still needed to fully understand the potential for hemp to sequester carbon in various soils. But hemp producers and researchers are developing agronomic practices for hemp concurrent with the emergence of carbon banks, which is enabling carbon offsets to shape production practices.

Ultimately, the development of carbon markets has potential to not only impact hemp agronomic practices, but also help hemp growers improve their soils while generating an additional revenue source.

Chase Hubbard is a senior hemp analyst at The Jacobsen, a commodity price reporting and price forecasting agency.