Governments around the world have launched climate change programs with the promise of having net-zero carbon emissions in their country by, in some cases, as early as 2030. These ambitious programs have led to increased spotlights on private businesses and developments. Many of these companies have offered climate pledges to do their part to reduce greenhouse gas emissions. An aspect that has come from these pledges is the rise of a new type of contract – carbon contracts. For businesses and real estate developers looking to enter into carbon contracts, it is important to understand what they are and the benefit these contracts can bring.

Carbon contracts are typically between a company and a landowner, normally a farmer or rancher, to undertake practices that reduce carbon emissions on the land, thus creating carbon credits. As a part of the contract, the company pays the landowner for their efforts and claims the carbon credits generated by the actions of the landowner, which can be applied towards their climate pledge.

Carbon contracts are negotiated by carbon-market brokers as part of voluntary programs. The carbon credits traded by carbon-market brokers have variable values like is seen in cryptocurrency and other non-traditional asset trading. Before entering into a carbon contract, there are several key terms companies need to consider and decide upon throughout contract negotiations.

Land Ownership – A company, working with their broker, will want to determine who has ownership and control over the land they are entering into a proposed agreement with. If the land is being leased by a farmer or rancher, the company should review the terms of the lease agreement to determine if a carbon contract agreement is tenable based on the length of the lease agreement compared to the length of the carbon contract and proposed use of the land. In the event of land that is leased, the company would need to enter an agreement with not only the tenant, but the landowner as well. A company should also consider setting forth its rights to the property in relation to the contract such as: (1) entering into any conservation or right of way easements for the property; (2) placing restrictive covenants, liens, or other restrictions on a landowners ability to transfer the property with or without the consent of the company; and (3) entry rights to the property to ensure compliance with the contract.

Data Ownership – Data is paramount in carbon contracts. A provision in the contract should address issues related to data use, access and ownership.

Indemnity – Indemnity clauses should be clearly defined for the protection of all parties involved in the carbon contract. A company entering into a carbon contract should outline proper safety procedures and land use requirements as well as protection clauses from loss of profit in the event of severe weather or due to changes in practices.

Payment – A company should outline a clearly defined structure within the contract on how the landowner will be paid. Will it be a flat fee for their services, based on production where one carbon credit equals a certain rate, or a per-acre payment for adopting new practices?

Penalties – The carbon contract should have clearly defined penalties and termination clauses should the agreement be violated by either party. The violations could be based on agreed upon output not being met, early exit of the contract, not following required practices, or other issues.

Required Practices – The agreement should set forth the required practices the landowner is willing to take on behalf of the company and determine whether any new carbon-sequestering practices should be required of the landowner. These could include no-till farming, planting cover crops, crop rotation, planting buffer strips, and regenerative grazing. Furthermore, a company may wish to place certain restrictions on the landowner’s use of the property to ensure carbon-capture practices are effective and further restrict the landowner from enrolling the same property in more than one carbon-capture program or contract.

The pressure of a green future for companies is now. As companies face increasing regulation and public pressure to reduce their carbon footprint, carbon contracts offer a way for companies to make an impact on the world at large. As with any contract, a legal pothole could be just around the corner and a company should consult with their legal counsel to assist in explaining and negotiating the terms of the carbon contract to ensure there are no bumps in the road to the green future.