Editor’s note: This is part two of a three-part series on carbon credits and markets discussed during PDPW’s Carbon Conference Jan. 31.

MADISON, Wis. – Dairy farmers have much to consider before diving into a carbon market. Markets are a long-term commitment, and asking questions about everything from pricing to data collection to financial responsibilities is a critical first step.
Patrick Wood, founder of Ag Methane Advisors, explained the opportunities available to farmers during the PDPW Carbon Conference Jan. 31 in Madison. Digester projects creating renewable natural gas are one opportunity, but dairy farmers can also generate credits for the carbon market through projects involving enteric methane, alternative manure management and regenerative agriculture.
For any type of project, Wood recommends approaching it like a new business. The farm should consider the demand and value for credits in a specific carbon market and determine its reasons for pursuing the project.
Wood said before participating in a project, a farmer must understand what will be required of them and decide if they have the capacity to take it on. How the project will impact current operations and businesses should be considered. Knowing the cost, potential profit and risks is also important. Partnering with a project developer can make the process easier.
“For most farms to participate in carbon markets, there is going to be a project developer involved,” Wood said.
A project developer in the renewable natural gas market will be the one building, owning and providing capital for the digester. In other markets, the developer could be the person who develops the protocol and manages the project, such as a carbon project developer.
The capital costs of installing anaerobic digestion to produce RNG are high. A farm needs to consider if they want to finance the project themselves or if they prefer someone else to be the financier.
Wood said there are a variety of ways to structure carbon market deals, and farmers considering a digester project should think about whether or not they want to get into another market that he considers as volatile as the milk market. A farmer considering markets needs to determine how much money they want to leave on the table as well as their level of risk and ability to manage those risks.
If nobody on the farm wants to champion the digester project and be involved with it on a daily basis, those responsibilities should be handed onto a project developer. This person will have knowledge on the financial design as well as the physical design, operations and maintenance of the system. A farm considering the Low Carbon Fuel Standard market will need a way to get biomethane into a common carrier pipeline, and the developer can help with this as well.
“In order to produce RNG, the gas has to be cleaned up to pipeline quality specification that’s 99.99% pure,” Wood said. “That can be an expensive process and is part of why when doing an RNG project, it probably makes sense for most people to partner with gas experts rather than entering the gas business yourself.”
When evaluating a project developer, Wood said to research their history and track record. Find out what protocol, program or standard they are going to use. Wood said a developer should be following global standards and established programs.
Milestone payments along the way are not uncommon. It could take 18 to 36 months to get a project going, and there are places that will structure payments during that time period.
“Sometimes mixing payment streams based on minimum annual payments you know you’re going to get if the upside of the market is going to do well is a good strategy,” Wood said.
Ensuring a good fit between the farm and project developer is critical as these are long-term contracts. For example, a digester contract can last 10 or 20 years.  
“If someone is building a digester at your farm and going to own or lease the land and have their staff there every single day right next to your barn, you want to make sure you have a good working relationship with them,” Wood said.
A lawyer should review the contract before a farmer signs on the dotted line.
When installing a digester, a farm needs enough animals to achieve economy of scale. For RNG, a minimum of 3,000 cows is recommended. In a digester project that makes electricity, Wood was able to help a 1,000-cow farm generate about $80,000 per year in profit.
Options for smaller farms include a centralized digester that collects manure from multiple farms or a centralized injection that moves biogas from multiple digesters. Every participating farm must have a high anerobic baseline to create enough reductions for economic viability based on carbon markets.
When assessing the financial opportunity of the project, a farm must learn what the expected market value or price of the credits is as well as the desired strategy for selling credits. Possibilities include spot, fixed rate per credit, percentage share of revenue or indexed.
“Your partner may not have those answers upfront but should be transparent in communicating their strategy for approaching the market and why they do it that way,” Wood said. “Flexibility is important. Markets are dynamic and can change fast.”
Wood said prices should be steady and increase over time. Sometimes, a flood of supply or a shortage of demand can occur if regulators do not do a good job managing the market. It can cause markets to fluctuate substantially, he said. Similar to someone who manages retirement accounts, project developers manage a portfolio of assets and are the one primarily responsible for selling credits which leads to revenue.
“There are substantial benefits to having trusted advisors like the project developer who are following the markets and managing sales so you can focus on farming,” Wood said. “You need someone who understands the markets and someone you can rely on for info on market prices.”
According to Wood, current pricing trends in voluntary markets is dependent on project type and ranges from $3 to $40 per metric ton of carbon dioxide equivalent. Charismatic project types, such as those that are nature based, are likely to earn a higher price because they boost the story the buyer of the credits wants to tell.
“Over the past five to seven years, there has been a large trend toward nature-based solutions in the voluntary carbon market, such as storing carbon in soils and mangrove swamps that store carbon,” Wood said.
California Air Resources Board LCFS projects are currently $60 to $70 a piece, down from $190 to $200 in 2020 and 2021, respectively.
“A lot of people expect them to stay in the current range for several more years and then go back up but not to the point they once were,” Wood said.
The Oregon market, which is similar to the California market, is currently at around $120 per credit.
CARB offsets are currently priced at $18-$22 per metric ton of carbon dioxide equivalent and are generated based on time period of potential invalidation. This can lead to different prices in the market. Offsets can be invalidated if they are double counted, if someone does the accounting wrong and volume is overstated by 5%, or if an environmental violation occurs.
“It’s complicated, and that’s why it’s hard to say exactly what the price is,” Wood said. “They are markets, and they change. Unless you really want to get deep into another new business, you want a trusted partner managing this for you.”
Transportation markets are only eligible for fuel used in those states. If a digester in Wisconsin produces RNG, the farm needs to have a contractual pathway with somebody in California or Oregon who is going to take that gas off the grid and put it into a vehicle.
“Credits only get created when energy that’s produced actually gets used for transportation,” Wood said.
Dairy digesters for producing RNG are primarily in compliance carbon markets such as the CARB LCFS and the Environmental Protection Agency Renewable Fuel Standard and follow complicated regulations. Voluntary markets are growing, and that opens up new opportunities, Wood said.
“The ‘gold rush’ has probably passed, but there is still lots of value,” he said.
In addition to digester projects, there are other ag-related projects dairy farmers can consider. Alternative Manure Management projects reduce methane emissions by preventing a portion of manure volatile solids from entering the anaerobic storage system or lagoon. This may include using solids separation, vermicomposting or other dairy wastewater treatment methods.
Regenerative agriculture and nitrogen management protocols consist of practices that increase soil organic carbon or reduce nitrous oxide. Enteric methane protocols are mostly related to using feed additives that reduce the amount of methane cattle release into the air. Farms should understand the carbon credit value versus the feed additive cost. Data from the cows might also need to be collected to generate credits.
Economy of scale is a factor in carbon markets, and a large volume of credits is often needed to make a project worthwhile. An aggregated project where many people are doing the same practice can help achieve economies of scale.
In a regenerative agriculture project, a farm should think about how eligible management practices fit into their cropping system. Wood said farmers need to consider whether there is a product the farm will have to use or practice it will have to adopt to create enough credits per acre.
Wood said entering a carbon market can open up revenue possibilities for a farm, but the benefits need to outweigh the risks. Farmers have to do their homework and investigate which options are best for their business and which project developer would make the best partner.