Voluntary Carbon Markets Take Root in the Midwest

Nationwide efforts to curb the carbon footprint have created profitable opportunities in the Midwest to help reduce pollution.

Nationwide climate goals have created new market opportunities in the Midwest for carbon. Ethanol plants, agricultural producers, and pipeline operators, among others, have significant potential to capitalize on these opportunities. Below is an overview of how climate goals are creating new markets in the Midwest.

(1) Voluntary Markets

While no federal law currently requires emitters to track and mitigate carbon emissions, climate goals based in part on other states’ mandatory programs have driven demand for carbon credits. Each credit represents a one metric ton removal of carbon dioxide from the atmosphere. California and Washington, for instance, have instituted cap-and-trade programs. Under these programs, certain large emitters face fines if they do not reduce their carbon emissions below a cap or acquire credits from elsewhere to meet their cap.^[1]  Oregon has begun to implement similar laws.^[2]

Beyond these state-law requirements, many businesses have also announced voluntary goals of net-zero or net-negative carbon emissions. To meet these goals on a short timeline, the businesses typically rely on offsets. They contract with agricultural producers and other landowners, paying them to create carbon credits. In the absence of a federally set carbon price, the price per credit is subject to the private marketplace and can fluctuate significantly. For each new credit, the emitter claims a corresponding offset of its emissions.

Landowners and agricultural producers set the basis for these credits through carbon sequestration. Many methods of carbon sequestration are already common practice for agricultural producers. For instance, common methods include planting trees, cover crops, and buffer strips, engaging in no-till or strip-till farming, rotating crops, allowing regenerative grazing, and installing anaerobic methane digesters.

Contracts frequently incorporate the concept of “additionality,” meaning the sequestered carbon would have emitted but for the contract. Still, some sequestration contracts can be negotiated to permit existing or related farming practices and to incorporate federal farm program benefits. Subject to contract terms, these voluntary carbon markets may thus offer a practical opportunity for landowners to generate a new source of profit.

(2) Capture and Storage

Even more directly related to their emissions, some companies have integrated carbon capture and underground storage (“CCUS”). CCUS involves physically transporting emissions and storing them deep underground. 

CCUS can help companies meet their climate goals. It can also help companies take advantage of state and federal incentives. Under the federal 45Q tax credit, for instance, manufacturers can claim a credit of up to $50 per metric ton of permanently stored carbon.^[3] Additionally, states like Nebraska assume long-term liability for stored carbon within its borders.^[4]

Ethanol companies have implemented CCUS because it helps them generate credits under California’s low-carbon fuel standard. Ethanol producers receive credit for the difference between their emissions and those of gasoline production.^[5] CCUS can increase that difference.

Because CCUS projects frequently utilize pipelines to interconnect emissions sources to a storage site, landowners also play a role. They can charge a fee to permit pipelines across their property or to host subsurface storage. The terms of these arrangements can vary, subject to contract negotiations with the pipeline operators.

This burgeoning carbon market poses real potential for Midwestern ethanol plants, agricultural producers, and pipeline operators. With that opportunity also comes complexity, and contracts for carbon credits and CCUS typically involve land use, environmental permitting, tax issues, easements, intellectual property, and technical analyses. Consultants may be necessary to quantify a company’s emissions and verify the landowner’s additionality. Landowners, project operators, consultants, and emitters alike should consult competent legal counsel.

Attorneys at Baird Holm LLP specialize in environmental and energy law and related real-estate, contract, corporate, and tax issues. Please do not hesitate to contact us if you have questions about carbon markets, CCUS, or any related matter.

[1] See Cal. Health & Safety Code § 38500 et seq.; Wash. Rev. Code § 70A.45.005 et seq.

[2] See e.g. Or. Exec. Order No. 20-04 (2020) (directing agencies to implement a cap-and-trade program).

[3] 26 U.S.C. § 45Q. In this article, we analyzed how the Inflation Reduction Act of 2022 extends and enhances that credit in an effort to drive additional investments into CCUS.

[4] Neb. Rev. Stat. § 57-1619. We analyzed Nebraska’s statutory framework for CCUS in this article.

[5] See Cal. Code Regs. tit. 17, § 95480 et seq.