carbon agreements

Vintage picture of cowgirl on a horse with a lasso.
By: Peggy Kirk Hall, Friday, February 25th, 2022

It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts.  Here’s a look at the inquiries that have come our way,

I’m considering a carbon credit agreement.  What should I look for?   Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist.  For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions.  That’s a lot!  Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”

I want to replace an old line fence.  Can I remove trees along the fence when I build the new fence?   No, unless they are completely on your side of the boundary line.  Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them.  You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence.  You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree.  Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.

I want to sell grow annuals and sell the cut flowers.  Do I need a nursery license?  No.  Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass.  A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state.  Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.

Must I collect sales tax on cut flowers that I sell?  Yes.  In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax.  That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax.  The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly.  Read more about vendor’s licenses and sales taxes in our law bulletin at this link.

I’m an absentee landowner who rents my farmland to a tenant operator.  Should I have liability insurance on the land?  Yes.  A general liability policy with a farm insurer should be affordable and worth the liability risk reduction.  But a few other steps can further minimize risk.  Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period.  Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition. 

My neighbor and I both own up to the shoreline on either side of a small lake--do I have the right to use the whole lake?  It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body.  Both of you could limit access to your side of the property line as it runs through the lake.  You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.”  You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water.   The law changes if the lake is part of a “navigable” waterway.  It is then a “water of the state” that is subject to the public right of navigation.  Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side.  Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.

If I start an agritourism activity on my farm, will I lose my CAUV status?  No, not if your activities fit within the legal definition of “agritourism.”  Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity.  The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production.  This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.

Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer.  Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.

No till plsnting on Ohio farm
By: Peggy Kirk Hall, Tuesday, August 03rd, 2021

“Carbon farming” is a term that came and went about a decade ago, but it’s back and gaining traction.  Ohio farmers now have opportunities to engage in the carbon farming market and receive payments for generating “carbon credits” through farming practices that reduce carbon emissions or capture atmospheric carbon.   As with any emerging market, there are many uncertainties about the carbon market that require a cautious approach.  And as we’d expect, there are legal issues that arise with carbon farming.

Some of those legal issues center on carbon agreements--the legal instruments that document the terms of a carbon farming relationship.  Each carbon market program has its own carbon agreement, so the terms of those agreements vary from program to program.  Even so, understanding the basics of this unique legal agreement is a necessity. 

Here’s what we know at this point about carbon agreements and the legal issues they may raise.

New terminology.  Carbon markets and carbon agreements speak a new language, containing many terms we don’t ordinarily use in the agricultural arena.  The terms are not fully standardized, and their meanings may differ from one program to another.  Understanding these new terms and their legal significance to the carbon agreement relationship is important.  Common terms to know are below but check each program to clarify its definitions for these terms.

  • Carbon practices.  Farming practices that have the potential to reduce carbon emissions or sequester carbon.
  • Carbon sequestration.  The process of capturing and storing atmospheric carbon.
  • Carbon credit.  A measurable, quantifiable unit representing a reduction of carbon dioxide emissions that can be transferred from one entity to another.  A credit typically represents one metric ton of “carbon dioxide equivalent, which is a metric that standardizes the global warming potential of all greenhouse gases by converting methane, nitrous oxide and fluorinated gases to the equivalent global warming potential of carbon dioxide.
  • Carbon offset.  Using a carbon credit generated by another entity to offset the emissions of an entity that emits carbon elsewhere.
  • Carbon inset.  A reduction of carbon within a specific supply chain that emits carbon, accomplished by adopting practices within that supply chain.
  • Carbon registry.  An entity that oversees the registration and verification of carbon credits and offsets.
  • Verification.  The process of confirming carbon reduction benefits, typically performed by a third-party that reviews the carbon practices and the accounting of carbon credits generated by the practices.
  • Additionality.  Carbon reduction that results from carbon practices incentivized by the carbon agreement and that would not have occurred in the absence of the incentive.
  • Permanence.  The longevity of a carbon reduction, which may be enhanced by a requirement that carbon practices remain in place over a long period of time and steps are taken to reduce the risk of reversal of the carbon reduction.
  • Reversal risk.  Risk that a carbon reduction will be reversed by future actions such as changing tillage or harvesting the trees or vegetation planted to generate the carbon reduction.

Initial eligibility criteriaEach carbon program has specific requirements for participating in the program.  Two common eligibility criteria are:

  • Location.  The program may be open only to farmers in a particular geographic location, such as within a specified watershed, region, or state.
  • Acreage.  A minimum acreage requirement often exists, although that can vary from 10 acres to 1,000 or more acres.  Some projects may allow adjacent landowners to aggregate to meet the minimum acreage requirement, but that can raise questions of ineligibility should one landowner leave the program.
  • Land control.  If the farmer doesn’t own the land on which carbon practices will occur, an initial requirement may be to offer proof that the farmer will have legal control over the land for the period of the agreement, such as a written lease agreement or certification by the tenant farmer.

Payment.  While the goal of a carbon agreement is often to generate carbon credits to be traded in the carbon market, there are varied ways of paying a farmer for adopting the practices that create those credits.  One is a per-acre payment for the practices adopted, with the payment amount tied to the reduction of carbon resulting from the adopted practices.   Another approach incorporates the carbon market—a guaranteed payment that can increase according to market conditions.  Concerns about market transparency abound here.  Yet another method is to calculate the payment after verification and quantification by a third-party.  For each of these different approaches, the amount could be based upon a model, actual soil sampling, or a combination of the two.  Payments may be annual or every several years.  Another consideration is the form of payment, which could be cash, company credits, or “cryptocurrency”—digital money that can be used for certain purposes.  Also be aware that some carbon agreements prohibit “payment stacking,” or receiving payments for the same carbon practices from multiple private or public sources.

Acceptable carbon practices.   Carbon practices are the foundation for generating carbon credits.  An agreement might outline acceptable carbon practices a farmer must adopt as the basis for the carbon credit, such as NRCS Conservation Practices.  Alternatively, an agreement might allow flexibility in determining which carbon practices to use or could state practices that are not acceptable.  Typical carbon practices include planting cover crops, using no-till or reduced tillage practices, changing fertilizer use, rotating or diversifying crops, planting trees, and retiring land from production. 

Additionality.  Many agreements require “additionality,” which means there must be new or “additional” carbon reductions that occur because of the carbon agreement, which would not have occurred in the absence of the agreement.  On the other hand, some agreements accept past carbon practices up to a certain period of time, such as within the past two years.  This is a tricky term to navigate for farmers who have engaged in acceptable practices in the past.  An agreement may address whether those practices count toward the generation of a carbon credit or for payment purposes.

Time periods.  Two time periods might exist in an agreement.  The first is the required length of time for participation in the program, which may vary from one year to ten or more years.  The second relates to the concept of “permanence,” or long-term carbon reductions.  To ensure permanence and reduce the risk that gains in one year could be lost by changes in the next year, the agreement may require continuation of the carbon practices for a certain time period after the agreement ends, such as five or ten years.

Verification and certification.  Here’s an important question—how do we know whether the carbon practices do generate carbon reductions that translate into actual carbon credits?  Verification and certification help provide an answer.  But verification is a testy topic because there is uncertainty about how to identify and measure carbon reductions resulting from different practices on different soils in different settings.   Predictions that are based upon models are common, but there is disagreement over appropriate and accurate methodology for the models.   Some programs may also verify practices with data acquisition and on-the-ground monitoring activities and soil tests.  And it’s common to require that an independent third party verify and certify the practices and carbon credits, raising additional questions of which verifiers are acceptable.  A final concern:  who pays the costs of verification and certification?

Data rights and ownership.  The verification question naturally leads us to a host of data questions.  Data is critical to understanding and verifying carbon practices, and every agreement should include data sharing and ownership provisions.  What data must be shared, who has access to the data, how will data be used, and who owns the data are questions in need of clear answers in the agreement.

Legal remedies.  There’s always the risk that a contract will go bad in some way, whether due to non-performance, non-payment, or disputes about performance and payment.  A carbon agreement could include provisions that outline how the parties will remedy these problems.  An agreement might define circumstances that constitute a breach and the actions one party may take if breach conditions occur.  An agreement could also list reasons for withholding payment from a farmer; one concern is that insufficient data or proof of carbon reductions or carbon credit generation could be a basis for withholding payment.  There could also be penalties for early withdrawal from the program or early termination of the agreement.   It’s important to decipher any legal remedies that are contained within a carbon agreement.

We’ve heard of carbon farming before, but today it raises new uncertainties.  Caution and careful consideration of a carbon agreement should address some of those uncertainties.  Our list offers a starting point, but it’s not yet a complete list.  As we learn more about the developing carbon farming market, we’ll continue to raise and hopefully resolve the legal issues it can present.

For more information on carbon agreements, see this listing from the Ohio Soybean Council of programs available to Ohio farmers with a side-by-side comparison of those programs, and this report on How to Grow and Sell Carbon Credits in US Agriculture from Iowa State University Extension..

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