Payments Could Encourage Low Carbon Crops

Gil Gullickson, Contributing Editor

Although Siberian cool pervades the air-conditioned room filled with soil-health enthusiasts, Mitchell Hora exudes red-hot heat onstage.

He enthusiastically describes how farmer payments from a new carbon market concept could dwarf those of current carbon offset programs. It could also entice farmers to adopt conservation practices more than the farm bill, he says.

"What I'm freaking out about," says the Washington, Iowa, farmer and founder and CEO of soil-health data intelligence firm Continuum Ag, "is carbon intensity."

HOW IT WORKS

The carbon intensity (CI) system is fueled by a Section 45Z tax credit tucked inside the Inflation Reduction Act of 2022. It tracks the carbon footprint of the biofuels supply chain that includes on-farm greenhouse gas emissions such as carbon dioxide, nitrous oxide and methane, Hora explains. The fewer emissions used to produce a bushel of corn or soybeans, the more tax credits biofuel plants annually glean. This gives biofuels plants an incentive to buy low-carbon crops from farmers.

Payments from an acre of corn or soybeans could be worth hundreds of dollars, he adds.

"All told, this could be a $50-billion [annual] market," he says. "It's an amazing opportunity for the biofuels industry and farmers to work together."

The system plays on a growing trend, says Brian Hora, Mitchell's father and an Ainsworth, Iowa, farmer. "We will be tracked on emissions for everything," he says. "That's the way the world is going."

United Airlines recently committed up to 45% of its fuel to come from low-carbon intensity biofuels in the next few years, adds Matt Rohlik, managing director for Arva Intelligence. "Sustainably sourced crops being fed to beef, pork and poultry are also supporting these types of initiatives," he says.

Pilot programs based on carbon intensity currently exist, such as one ADM has in cooperation with Farmers Business Network, its data business management partner.

"We pay farmers based on the number of bushels and the [CI] score," says Theo Gunther, ADM Iowa re:generations program manager. "Incentives could change over time based on future tax credit opportunities or other market drivers."

CALCULATING CI

Measuring CI works on a sliding scale for fuel, grain and oilseeds. Average CI scores include:

-- gasoline: 100

-- ethanol: 56

-- corn: 29.1

Biofuels companies could earn a 2-cent-per-CI-point reduction per gallon under the Section 45Z tax credit, Mitchell Hora says. He adds ethanol plants conservatively create 2.7 gallons of ethanol from a bushel of corn. Thus, 2 cents per gallon multiplied by 2.7 gallons equals 5.4 cents per bushel of corn tax credit equivalent.

In an ethanol scenario, any production practice that lowers corn's average 29.1 CI score -- such as planting cover crops or reduced tillage -- could translate into money for the farmer and ethanol plant via the tax credit.

The Horas have created a minus 4.4 CI corn score -- 33.5 CI points below the average -- on their farm due to long-term no-till and planting cover crops.

When 33.5 CI points are multiplied by 5.4 cents per bushel, the value of the CI tax credit for their farm is $1.81 per bushel. At a 240-bushel-per-acre corn yield, this tallies a whopping value of $434.40 per acre. The concept is similar for using soybeans in biodiesel production, Mitchell Hora says.

Bear in mind, though, that this is just one farm. Even if this figure applied to all farms, growers would share this amount with myriad value chain members who could jointly optimize the tax credit, he continues. This includes farmers, ethanol plants, grain merchandisers, third-party verifiers and many others.

The farmer's share will be unknown until the IRS issues its final Section 45Z tax credit rules, which it had not done at press time. Still, Hora expects payments to dwarf single and low double-digit dollar-per-acre payments paid by existing carbon offset programs. Farmers glean payments in these plans for practices that offset greenhouse gas emissions.

The problem many such programs have include provisions such as additionality, which mandates that greenhouse gases that are sequestered or reduced must be due to a new practice. This nixes payments for farmers who have sliced greenhouse gases through certain farming practices for decades. Not so with carbon intensification, as payments occur on an annual basis, Hora explains.

The model used to record carbon intensification -- the Department of Energy's Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model -- fits agriculture well, he adds. The GREET model includes emissions used in producing a crop -- such as fertilizer, fuel and chemical -- and methods to offset them such as yield, reduced tillage and cover crops. Continuum Ag also developed its Carbon Intensity Tool, in which farmers can calculate their CI score by creating a profile on https://topsoil.ag/…

"In the carbon intensification space, it's not about additionality, it's not about changes in practices," Hora says. "It is about what your carbon footprint is per bushel. What I love about this is you are rewarding efficiency, better conservation practices and yield."

Such systems could reward Levi Lyle for using cereal rye in his organic rotation that's created biomass and a resulting 1% uptick in soil organic matter over seven years. Using rye to control weeds rather than herbicides lowers the CI score for the Keota, Iowa, farmer, since it nixes the energy used to manufacture, transport and apply herbicides.

"We have not been participating in carbon programs up to this point," he says, "but we are excited about carbon intensity."

GET READY

Data to back low carbon claims is crucial. "Every claim will have to be proven, whether through pictures, receipts or satellite imagery," Mitchell Hora says.

For now, he advises farmers to start thinking about practices that lower their CI scores. Currently, there's a three-year tax-credit window that applies to the 2025 to 2027 crop years. However, crops that enter the 2025 supply chain will need to be produced in 2024. This means certain production practices to lower CI in 2024 -- such as planting cover crops -- will need to be done in the fall of 2023.

It's likely that acres enrolled in carbon offset programs will not be eligible for CI payments, Hora explains. However, he sees low carbon supply chains as the future of carbon programs.

"The ability to create and aggregate data, and blend acreages make it possible to create low-carbon fuel on a mass scale," he says.

ENROLL NOW!

Farmers for Soil Health Offers Cost-Share Payments:

Growers in 20 states can get paid to plant cover crops through Farmers for Soil Health. To help transition, participants will receive a total of $50 (spanning three years) per new acre of cover crops planted.

The farmer-led, farmer-driven initiative is part of a $95-million grant from USDA. Farmers in Delaware, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, Nebraska, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia and Wisconsin are eligible.

The project will work to increase cover crops and conservation tillage in these 20 states, which produce more than 85% of the country's corn and soybean crops. Part of the goal is to help double cover crop acreage nationally.

A hallmark of the program is simplicity of enrollment and monitoring. Farmers will be able to enroll quickly and easily through the online enrollment platform, and all the monitoring/verification is done remotely via satellites.

Farmers for Soil Health is made up of a coalition of groups including the National Corn Growers Association, National Pork Board and United Soybean Board. DTN, the parent company of Progressive Farmer, is part of the collaboration and also includes the National Fish and Wildlife Foundation and USDA's Partnerships for Climate-Smart Commodities.

-- Farmers can enroll and get more information at https://farmersforsoilhealth.com/…

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