Conservation Investment and Carbon Payments in US Agriculture: Implications of the Inflation Reduction Act of 2022

By Zhushan Du, Hongli Feng, and Lisa Schulte Moore

Conservation is essential for agricultural sustainability in order to preserve soil productivity and mitigate adverse impacts on ecosystems such as degraded water quality and wildlife habitats. It can be costly to adopt conservation practices that help sustain farm soil health in the long term but do not always generate a positive return for farmers in the short term (e.g., reduced tillage, cover crops). Furthermore, some conservation practices potentially improve off-farm environmental conditions but do not improve farm profitability (e.g., riparian buffers, wetland restoration). The United States has a long history of governmental investment in conservation to maintain the economic and environmental sustainability of agriculture. Recently, the pursuit of carbon neutrality has brought increased attention and funding to conservation in agriculture. This article briefly explores governmental conservation investment in agriculture and some key issues on its interactions with the fast-developing private carbon payment programs.

Key conservation and carbon items in the newly passed IRA

The Inflation Reduction Act of 2022 (IRA) was signed into law in August and will invest $369 billion in climate solutions and environmental justice and help reduce carbon emissions by roughly 40% by 2030 (US Senate 2022). About $19.5 billion will go toward agricultural conservation through increased funding for large, existing USDA conservation programs. The Environmental Quality Incentives Program (EQIP), Regional Conservation Partnership Program (RCPP), Conservation Stewardship Program (CSP), and Agricultural Conservation Easement Program (ACEP) have about $8.45 billion, $4.95 billion, $3.25 billion, and $1.40 billion in funding, respectively (based on IRA, Sec. 21001). EQIP and CSP, currently the two largest working land conservation programs, account for 43% and 17%, respectively, of the new IRA appropriation for agricultural conservation.

Figure 1 illustrates how IRA funds will be distributed from 2023 to 2026 (based on IRA, Sec. 21001). The focus of support for ACEP is to “reduce, capture or sequester carbon dioxide, methane, or nitrous oxide emissions” and the support for EQIP, CSP, and RCPP places a strong emphasis on conservation practices that “improve soil carbon, reduce nitrogen losses, or reduce, capture, avoid, or sequester carbon dioxide, methane, or nitrous oxide emissions, associated with agricultural production” (IRA, Sec. 21001). It is important to note that the IRA funds come on top of the existing appropriation these programs already have (Coppess et al. 2022).

Existing major federal conservation investments

Conservation programs have long been a significant component of US farm bills, making up around 28% of the $103 billion expected cost of the 2018 farm bill for non-nutrition programs from 2019 to 2023 (USDA-ERS 2022). Figure 2 shows the annual obligations of the three largest conservation programs since 2012. The Conservation Reserve Program (CRP), though it does not receive appropriation from the IRA, is the largest land retirement program in the United States. The average EQIP, CSP, and CRP obligations in the previous five years were $1.8, $1.4, and $1.8 billion, respectively—the additional IRA funding for EQIP and CSP is more than their total obligations in the past four and past two years, respectively.

While existing conservation programs like EQIP and CSP aim at providing multiple benefits, including mitigating soil and nutrient loss and improving water quality, the newly established IRA investment targets climate-smart agricultural practices (Coppess et al. 2022). Table 1 shows a list of the Natural Resources Conservation Service’s climate-smart practices, many of which are also covered by EQIP and CSP. In particular, eight of top-10 practices in terms of acreage enrollment in EQIP and CSP are also on the list of the climate-smart activities in table 1 (USDA 2022).
 

Along with the additional funding, the IRA also offers conservation technical assistance, including $1 billion for technical assistance through the Natural Resources Conservation Service and $300 million for a program to measure carbon sequestration and emissions of carbon dioxide, methane, and nitrous oxide (IRA, Sec. 21002). In February 2022, USDA announced an investment of $1 billion to expand market opportunities for climate-smart commodities, supporting climate-smart farmers, ranchers, and forest landowners (USDA 2022). In September, USDA announced $2.8 billion for selected projects in the Partnerships for Climate-Smart Commodities program (USDA 2022).

Carbon payments from private companies

In addition to government investment, significant funding has come from private entities to support conservation practices in agriculture and climate mitigation, mostly in connection with carbon credit trading. Numerous voluntary carbon initiatives, such as those by Truterra, Bayer Carbon, Agoro Carbon Alliance, and Carbon by Indigo, have launched to compensate farmers for adopting conservation practices and sequestering carbon. More than 200,000 metric tons of carbon have been sequestered with $4 million compensation through the Truterra carbon program in 2021 (Truterra 2021), and 20,000 carbon credits have been issued with five million acres enrolled in the Indigo carbon program so far (Indigo 2022). The demand for carbon credits is predicted to rise by a ratio of 15 or more by 2030 and by a factor of up to 100 by 2050, according to the Taskforce on Scaling Voluntary Carbon Markets (McKinsey 2021). For more on private carbon credit certification, see Plastina, Wongpiyabovorn, and Crespi (2022) and Plastina (2022).

Interaction between conservation programs and carbon-targeted programs

Given that existing conservation programs and the fast-growing carbon credit trading programs both target some major agricultural practices, some important issues will need to be considered in the design and implementation of these programs. The one issue that stands out most is the potential for “double dipping” issue arising from the overlapping of conservation practices. When a farmer considers the possibility of getting payment for the adoption of a conservation practice, say, cover cropping, should the farmer turn to traditional conservation programs or the nascent carbon credit payment programs, or both? From a policy design point of view, how should these two types of programs be coordinated to maximize conservation impacts and farmers’ net returns? The answers to these questions will hinge on how we value different environmental benefits including greenhouse mitigation, soil health, water quality, and wildlife habitat, etc. Traditional conservation programs have supported a portfolio of these benefits, while a carbon credit buyer will only be interested in the amount of carbon reduced.

The majority of voluntary carbon programs list cover crops, reduced tillage and nutrient management as actions that can generate carbon offsets which might be traded at carbon markets or used to meet voluntary carbon targets. Those practices are also among the major climate-related activities for EQIP and CSP. Different entities deal with overlapping issues differently. As one example, Indigo requires that land does not have CRP enrollment in its land use history; however, it has no restrictions on previous EQIP or CSP enrollment. Farmers who receive payments from CSP and EQIP are also eligible for Indigo’s carbon program. Participation in Indigo’s carbon program does not affect a farmer’s right to any USDA payments as long as they are not for carbon credits (Indigo 2022). On the other hand, Practical Farmers of Iowa (PFI 2022), which is not a carbon company and was founded in 1985 with the mission to equip farmers to build resilient farms and communities, forbids a farmer from concurrently registering for multiple voluntary cost-share programs, but the farmer can participate in both public and private programs. The coordination or lack thereof between private and public payments will affect how we achieve multiple dimensions of environmental benefits from limited resources.

Another issue we want to note is that payment levels by existing conservation programs and carbon credit buyers are likely to be substantially different. Currently, most voluntary carbon programs offer outcome-based payment for the amount of carbon captured and stored, which can vary greatly across natural and management scenarios. For Adams County, Iowa, cover crops can result in 0.33~0.63 tons of carbon removal per acre per year, while no-till will reduce carbon by 0.52~0.65 tons per acre per year, according to the COMET Planner Tool. Given the carbon price offered by Truterra and Indigo—$15 to $25 for each carbon credit—the carbon payment for cover crops is $4.95–$15.75 per acre, which is far less than the implementation cost of $15–$78 (SARE 2020) and lower than the $18–$33 per acre EQIP payments in Iowa, which depend on species used (Sawadgo and Plastina 2018). Furthermore, according to Schulte Moore and Jordahl (2022), termination methods, species of cover crop, and timing (fall or spring) of reduced tillage have directionally unclear impacts on soil organic carbon. Some conservation practices, such as standard artificial drainage, will likely decrease soil organic carbon. In such cases, no carbon credits will be generated and no carbon payment will be made, but this does not imply that these practices should not be supported when other environmental benefits are provided.

As the tremendous amount of government and private funding flows into agricultural conservation, it is imperative for us to understand the interactions between government and private programs. Such understanding will help us comprehend the roles of public support and willingness to pay by private companies and to leverage each to achieve the best conservation outcome broadly defined. So far, compared to private companies, the government continues to play the largest role in agricultural conservation and carbon sequestration. A simple comparison shows that the new IRA funding for EQIP climate-smart agriculture per year ($2.11 billion = $8.45/4 billion) would be more than five hundred times greater than the Truterra payment in 2021 ($4 million).

References

Coppess, J., K. Swanson, N. Paulson, G. Schnitkey, and C. Zulauf. 2022. "Reviewing the Latest CBO Farm Bill Baseline." Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign.

Inflation Reduction Act of 2022. 2022

Indigo. 2022. "Connecting Sustainability & Profitability."

Indigo Carbon Knowledge Base. 2022. "Carbon Program Eligibility FAQ."

McKinsey. 2021. "A Blueprint for Scaling Voluntary Carbon Markets to Meet the Climate Challenge."

Plastina, A. 2022. "The U.S. Voluntary Agricultural Carbon Market: Where to From Here?" Farm Foundation.

Plastina, A., O. Wongpiyabovorn, and J.M. Crespi. 2022. "What's in Store for Voluntary Agricultural Carbon Markets?" Agricultural Policy Review Winter 2022. Center for Agricultural and Rural Development, Iowa State University.

Practical Farmers of Iowa (PFI). 2022. "Cover Crop Cost-Share Program Requirements."

Sawadgo, W., and A. Plastina. 2018. "Cost-share Programs for Cover Crops Available to Iowa Farmers in 2018." Ag Decision Maker. Vol. 22, No. 12. Iowa State University Extension and Outreach.

Schulte Moore L., and J. Jordahl, (eds). 2022. "Carbon Science for Carbon Markets: Emerging Opportunities in Iowa." Ames: Iowa State University Extension and Outreach.

Sustainable Agriculture Research and Extension (SARE). 2020. "Creating a Baseline for Cover Crop Costs and Returns."

Truterra. 2021. "Sustainability Insights."

US Department of Agriculture Economic Research Service (USDA-ERS). 2022. "Farm Bill Spending."

US Department of Agriculture Farm Service Agency (USDA-FSA). 2022. "Conservation Reserve Program Statistics."

US Department of Agriculture Natural Resources Conservation Service (USDA-NRCS). 2022. "RCA Data Viewer."

US Department of Agriculture. 2022. "Climate-Smart Agriculture and Forestry."

US Senate. 2022. "Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022."

Suggested citation:

Du, Z., H. Feng, and L.S. Moore. 2022. "Conservation Investment and Carbon Payments in US Agriculture: Implications of the Inflation Reduction Act of 2022." Agricultural Policy Review, Fall 2022. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=146.