Janzen: Real estate laws hurting climate change fight?

Nearly every large food corporation today has pledged to combat climate change by reducing its own carbon footprint. McDonald’s has pledged to be “net zero” by 2050. PepsiCo has pledged to be net zero by 2040. Walmart has pledged to remove a gigaton of greenhouse gas emissions from its value chain by 2030, the equivalent of removing 200 million cars from the roads every year. These companies will work to reduce their own emissions, but these goals are only achievable by reducing the carbon footprint of their supply chains. This means using their enormous purchasing power to push climate-friendly practices down the supply chain all the way to the soil where crops are grown.

Midwestern farms are sitting on an untapped resource to meet climate change goals, namely, millions of acres of farmland that have always been farmed to maximize production. Soil and climate scientists are finding that with some production changes, such as planting cover crops during fallow periods to ensure soil is always pulling carbon dioxide out of the atmosphere, farmers can increase soil uptake of carbon in farmland. If this carbon remains trapped in the soil for years, it is considered “sequestered.”

This task seems simple: A cereal company buys corn from farmers who maximize soil carbon sequestration and the company lowers the carbon footprint of a box of cornflakes. From a contract standpoint, however, getting a farmer to change how corn is grown is more complicated. Most corn farmers have no direct contract with a food processor. The food processor has no ability to require farmers to continue sequestering carbon in their fields for multiple years after the crop was delivered.

Companies searching for ways to sequester carbon in farmland are thus creating new “soil carbon contracts” for farmers to sign, and in the process these companies are bypassing the legal tools traditionally used to convey interests in land.

Who are the parties involved in soil carbon contracts?

There are typically four parties with roles in a soil carbon contract: farmer, broker, verifier, buyer. The farmer grows crops on the land using certain protocols that promote greater carbon sequestration. The farmer contracts directly with a third-party “broker” who quantifies the amount of carbon sequestered and turns that result into a product that can be sold — a carbon credit. The broker uses protocols established by a “verifier,” an organization that has created scientific methodologies for sequestering carbon. And finally, the broker sells the carbon credit to a buyer.

How do soil carbon contracts generate carbon credits?

Regular tilling of soil releases organic matter and increases the return of CO2 to the atmosphere. The less a farmer disturbs the soil, the greater the increase in soil carbon sequestration.

The soil carbon contract is still too new for the industry to have settled on a single form. After reviewing many versions of these types of agreements, here are the common elements:

Enrollment of land. Whether the subject is an 80-acre cornfield or 1,000-acre grazing pasture, the first part of any soil carbon contract is the enrollment of land into the program. Farmers and ranchers must identify the land they are committing to carbon sequestration. This is usually done by identifying the borders of the property on a digital platform that uses satellite imagery.

Mandated farming practices. Land enrolled in a carbon sequestration program is committed to following certain prescribed farming practices. These carbon reduction “protocols” are provided by the broker to the farmer, who is contractually obligated to follow them. For example, a farmer may commit to planting a cover crop on a barren cornfield after harvest that will grow until the spring when the farmer is ready to plant the next corn crop.

Data collection. At least annually, the broker collects agricultural data (“ag data”) from the farmer to confirm the protocols were followed and estimates the amount of new carbon sequestered in the soil. Additionally, the broker may take soil samples from the land to ground-truth the carbon estimates.

Verification. The broker will submit the data collected from the farmer to the third-party verifier to determine if the carbon credits generated match the CO2 sequestered, according to the verifier’s approved methodology.

Transfer of carbon credits. At this point, the carbon credit is ready for sale by the broker to the buyer. Some brokers will share in the profits of sales with the farmers who generated these credits. Other brokers pay a flat fee per acre, keeping all the risk of market swings and also all the profit.

Prohibitions on “stacking.” If a farm produces 100 bushels of corn, only one person or company can buy and take delivery of those bushels from the farm. However, a farmer who sequesters enough soil carbon to generate 100 carbon credits could, in theory, engage two brokers to measure the soil carbon and generate 200 carbon credits. For this reason, soil carbon contracts prohibit this sort of “stacking” but also rely on the honesty of the farmer to ensure no stacking occurs, because there is no way for one broker to know if a farmer has signed up with another broker.

Continuity. The enrollment of land in a soil carbon sequestration program usually requires a long-term, continuous commitment. From a climate perspective, there is little value in sequestering carbon today and releasing it tomorrow. For this reason, soil carbon contracts have a continuity element, requiring year-after-year continual implementation of the protocols.

Legal hurdles for the real estate system

Companies wanting to enroll millions of acres of farmland into carbon sequestration programs have chosen to sidestep the traditional legal tools used to restrict land use. Brokers use online signup forms and describe property using GPS-based field descriptions. Farming protocols, too, are consented to as part of the online contract. These methods are much faster and cheaper than conducting a title search, obtaining a survey, signing and notarizing a deed restriction, then recording the same.

Still, the largest roadblock to using existing real estate contract forms must be the county-based system for recording interests in land. The challenge to enroll thousands of acres in hundreds of local county recording offices is insurmountable for any broker trying to establish a national soil carbon sequestration program. Of course, this means these carbon contracts will not run with the land unless the new owner consents to the same terms.

The carbon brokers’ choice to circumvent our existing legal tools for restricting land use should be a wakeup call for those practicing real estate n. The time has come to modernize our real estate legal system, using real estate descriptions based upon GPS coordinates anyone with a smartphone can plot. Similarly, county deed records need to be moved to cloud-based recording systems, easily accessible to anyone. Though painful to reform such a long-standing legal system, the result should lower the transactional costs to convey interests in property, a benefit to all landowners.

Carbon contracts are exposing farmers to a new type of agriculture that involves generating carbon credits in addition to crops. These contracts are also exposing the problems with our legal system for conveying interests in real estate. Climate change is a problem that requires solutions from everyone. As lawyers, we can do our part too by modernizing how we convey interests in property.•

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Todd J. Janzen is president of Janzen Schroeder Agricultural Law LLC. Opinions expressed are those of the author.

https://www.theindianalawyer.com/articles/janzen-real-estate-laws-hurting-climate-change-fight