USDA can now help small producers participate in environmental markets. Should it?

With the somewhat recent passage of federal funding for the 2024 fiscal year, I was thinking back to passage of the last major appropriations bill at the very end of 2022. Like all appropriations, it had plenty of opportunities for hangers-on, and it provided a vehicle for passage of two bills related to environmental markets for agriculture.

The Growing Climate Solutions Act by Senator Stabenow explicitly directs USDA to help producers participate in carbon markets. But the SUSTAINS Act (section f in the link) is not as clearly related to markets.

In the words of its sponsor, House Agriculture Chairman GT Thompson, the SUSTAINS Act is a “common sense bill” to “dramatically expand voluntary conservation opportunities” by “encourag[ing] more private sector investment”. 

The concept is simple: Let USDA accept private contributions that would be placed in designated accounts.

These accounts fund additional projects through existing conservation programs, like EQIP or the Emergency Watershed Program. The hope is to alleviate the funding shortfall which had–at least before the passage of the Inflation Reduction Act–led to as many as 73% of applications to flagship programs being denied.

But tucked within is a crucial provision:

(D) with respect to an activity funded pursuant to this subsection that may result in environmental services benefits to be sold through an environmental services market, subject to the approval of the Secretary, [an entity contributing funds may] prescribe the terms for ownership of the entity's share of such environmental services benefits resulting from such activity;

This could allow USDA to serve as an aggregator of “environmental services” also known as environmental outcomes. While many people are most familiar with “carbon markets,” the environmental outcomes eligible here could be anything from “pounds of nitrogen prevented from entering the Chesapeake Bay” to “Monarch caterpillars surviving to maturity”.

Here’s the really simple way this could happen: Someone gives money to an EQIP account; EQIP funds projects just like it always would; the ecosystem services of those practices are calculated; and the funder gets to keep some portion of those environmental outcomes.

But a more sophisticated pathway could involve the Regional Conservation Partnership Program and its ability to make “performance-based payments” that directly buy conservation outcomes as a unit.

Performance-based payments (which we normally call Pay for Success) have lots of benefits. They can cut through red tape, increase private investment and the speed that comes with it, and allow for innovative solutions to our most vexing environmental problems. Most importantly, we have significant evidence that performance-based payments drive down costs through targeting, competition, and reduced paperwork. 

Simply put, when payments are made based on results, taxpayers get a better deal.

This is a really exciting concept, and it got me thinking about all sorts of ideas for how it could work:

• A small municipality in Wisconsin could provide USDA with funds earmarked for an RCPP project in their county that would reduce nitrogen flowing into waterways. Then, the practices funded with that money can be converted to nitrogen reductions using the Nutrient Tracking Tool. Those reductions can be counted towards a wastewater treatment plant’s permit requirements using watershed partnerships. 

• There’s already a robust market for wetland mitigation banking, and USDA already has a program to build wetlands. Could funds provided to the Wetland Reserve Easements component of the Agricultural Conservation Easement Program fund the creation of a wetland that could then be sold as a wetland banking credit? There are a lot of requirements for an Army Corps-approved wetland bank that would have to be met, but it’s a possibility.

• Imagine a box of Cheerios in the grocery store that says it’s “net carbon neutral”. General Mills could achieve that without greenwashing by providing an infusion to USDA to fund on-farm carbon sequestration equal to the emissions produced by manufacturing processes and transportation.

• Power companies that need to mitigate increased water temperature could get credit from funds provided to RCPP projects that plant streamside buffers through authorities like CREP.

• There may even be a way to use conservation standard 643 (restoration of rare and declining habitat) to produce credits for the emerging biodiversity market.

So what's needed to get there? USDA is currently exploring how to implement the SUSTAINS Act and will hopefully come out with guidance in the coming months. Unlike the Growing Climate Solutions Act, the SUSTAINS Act did not have strict timelines for when it had to be implemented, but Chairman Thompson has asked the NRCS Chief about it in a hearing.

Between Growing Climate Solutions, the Inflation Reduction Act, the Climate Smart Commodities projects, and more, USDA–and especially NRCS–staff have a lot on their plate. But one big reason it’s taken so long to develop this implementation is because relatively few have jumped to use the authorities.

Which brings us to the question I have left about this exciting concept :“Why?” 

What exactly is the benefit–private or public–of USDA serving as an aggregator? Why would someone looking to buy nitrogen reductions prefer to buy them through USDA instead of a private aggregator? Why should citizens want them to?

USDA has a large network that can allow them to reach producers all over the country, and many of these boots on the ground are very trusted in the communities where they work. However, I’m inclined to think that there are more farmers who’d work with a private aggregator but not USDA than would work with USDA but not a private aggregator.

Another answer is to better include historically underserved producers. We know that aggregation is crucial for small producers to be able to participate in ecosystem service markets and that all else equal aggregators and buyers would rather work with larger producers than smaller. So, this could be a way to level that playing field.

Maybe USDA could be something of a buyer of last resort, setting a price floor. But that would require a large guarantee of private funds that’s unlikely to span all possible markets.

I think the best reason is that having USDA in this space will allow an apples-to-apples comparison between its cost to produce environmental restoration and those of private aggregators. It would be participating in real competition in a real market, hopefully driving up cost-effectiveness for everyone.

So, to answer the question in my title: “Yes.”

USDA should prioritize using the SUSTAINS Act to serve as an aggregator of ecosystem services.

And if private aggregators begin to dominate the market, USDA should evaluate how it can streamline its processes and requirements to be more efficient at generating environmental outcomes.