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Selling carbon credits? Are they part of your legal bundle of rights?

Helene Cser for Progressive Forage Published on 01 November 2021
Carbon credits

There is a lot of debate on whether carbon sequestered in the land should be considered real or personal property.

In real estate, personal property is usually defined as being movable, whereas real property includes the land, physical improvements and rights of ownership commonly referred to as a “bundle of rights.” This bundle of rights includes the right of disposition, right of enjoyment, right to exclude others, right of possession and right of control. However, an open question is: Should carbon stored in the soil be considered a natural resource for contractual and property rights consideration?

There is increasing interest by corporations to buy carbon credits, but with varying contract terms. How will this asset be defined for the landowner and what rights will the landowner either possess or give up? Currently, no standard definitions exist, and this could pose a problem to landowners who do not seek legal counsel or fully understand what rights they have exchanged when entering a contract to sell carbon credits. The specific legal repercussions for a landowner will be what is specified in the contract; however, if carbon credits are not considered real property, this will impact a landowner’s traditional bundle of rights.

An issue concerning whether carbon credits are real property was brought to the Louisiana district court, Roseland v. U.S. Fish & Wildlife, 2006. Roseland Plantation LLC (“Roseland”) purchased property from Claude Lee Rabb and Sheri Wilks Rabb (“Rabbs”) on Oct. 6, 1995. The previous transfer of ownership was between the Rabbs and the government through a quitclaim deed on Oct. 3, 1989, where the government reserved a conservation servitude over a portion of the purchased property.

Roseland alleged the government later purportedly conveyed to a third party the rights to carbon credits generated by the trees within the conservation servitude, which in effect placed a cloud on title. The government claimed Roseland did not have standing to sue and thus no right to transfer, sell or exchange carbon credits because it implied “ownership of a thing which has not yet and may never come into existence,” meaning carbon credits did not and would not exist until the government proclaimed that they did via “further legislative or executive action.” Roseland disagreed and believed it owned any current or future carbon credits generated from the Conservation Servitude.

The result of this case is: The district court held that “the right to report, transfer or sell carbon credits was enough to designate them as part of property’s ‘bundle of rights’ and that the potential value of carbon credits is what makes them part of a property’s ‘bundle of rights.’” However, this is not the case for the state of California, as the “law specifically states that a carbon credit is not a property right, most likely to avoid implications of the Takings Clause under the cap-and-trade market.” If the carbon sequestered on a landowner’s property were considered real property, “California would have to compensate the owner if it ever revoked a carbon credit.” It will be interesting to see whether new court cases arise from the lack of settled law and whether carbon credits are considered real or personal property.

Carbon stored in the soil can be compared to other natural resources such as timber, coal, water and minerals with respect to real property rights. Natural resources can be classified in various ways, and one approach is to classify resources based on the stage of development. Four stages can be used and include potential, actual, reserve and stock, the purpose of which is to provide a timeline of a natural resources stage of development and why carbon sequestration could be considered a land resource and therefore classified as real property. Examples of each stage as it relates to carbon sequestration as a natural resource are as follows:

  • Carbon sequestration as a potential resource is what current companies are seeking when setting up contracts to buy carbon credits. The landowner has the potential to incorporate regenerative agriculture practices to build up carbon in the soil. This is where all the hype is occurring for new technology companies that will be able to model the buildup of carbon over time by collecting precision agriculture data or using remote sensing applications to demonstrate carbon sequestration is taking place through algorithms. Note that this carbon is assumed and not measured.

  • The resource can also be actual, which would apply to a landowner who has been practicing no-till for decades and has improved the land’s soil health. A problem arises when trying to sell these credits, as most companies use algorithms that calculate the potential moving forward versus calculating past practices. For these landowners, they may not be able to enter a contract, as it will be difficult to show a historical and actual measured change from practices that have already taken place. This may result in precluded participation in carbon markets, as many contractual arrangements only pay for new practices and not those already in use.

  • The resource could also be classified as a reserve or carbon sink, such as restoring former peatlands or wetlands. This would most likely result in very long-term practices that reverse the land to a former state absent any agricultural practices. This practice could result in setting up a contract arrangement similar to a conservation easement due to the length of time required to reach this stage of development.

  • Another way to classify resources is as a stock resource such as coal. Stock resources are typically defined as being finite and taking millions of years to form. It seems unlikely this classification will be part of the carbon market discussion, given that it pertains to carbon that was captured within organic matter over millions of years ago. The formation of coal resources started with the accumulation of dead plant material that eventually turned into peat – and through increasing temperature, pressure and burial, coal was eventually formed.

Things to consider before entering into a carbon credit contract

When entering into an agreement to sell credits, it will be vital to define what a carbon credit is and is not (i.e., what is being bought and sold and the rights that follow for both parties). The length of the contract should also be considered and any limits on a landowner’s bundle of rights. Below are other questions that a landowner should consider before selling carbon credits.

  • If carbon sequestration is defined as real property, will the contract create an encumbrance on the real estate which would transfer to a new owner?

  • If carbon sequestration is defined more as a practices-based contract (no-till, cover crops), would it then restrict a future owner’s options and thus land values?

  • Should the contract be recorded as a public record?

  • If the contract is recorded, will it show up on a title report?

  • How long will the contract be for? Contract terms for agricultural carbon sequestration can vary, with most contracts ranging from five to 10 years.

  • Does it inhibit any of the bundle of rights?

  • Could carbon credits be potentially taxed in the future?

  • Will an existing contract impact the future value of my property?

  •  Would a conservation easement provide more benefits than selling carbon credits?

The carbon market at this time is voluntary, and it will be interesting to see whether both parties hold up their end and are accountable. If contracts are not required to be recorded at a government office, potential buyers of the land run the risk of purchasing property with existing contracts in place that could hinder their bundle of rights. There is also the possibility carbon credits could be sold in the market multiple times, as no standard tracking system exists. So do your homework and consult with an attorney before entering a contract involving carbon credits.  end mark

ILLUSTRATION: Illustration by Corey Lewis.

References omitted but are available upon request. Click here to email an editor.

Helene Cser is the systems and services manager with Scythe & Spade. Email Helene Cser.