What are direct payments?
Direct payment programs provide financial assistance to private entities in exchange for implementing practices that remove carbon from the atmosphere. These payments reduce the net costs of carbon removal practices, encouraging wider-scale implementation by helping private actors overcome financial barriers. While direct payments may be issued for either natural or technological carbon removal practices, such payments have only been used thus far by the U.S. Department of Agriculture (USDA) to compensate landowners for adopting conservation practices to address natural resource concerns.
How do direct payments work?
Owners or operators of land or technology may apply for direct payments by proposing a plan to implement a specific carbon removal solution. The federal agency administering the program then evaluates applications and awards contracts to those it selects. The criteria used in selecting projects can determine the program’s efficacy in meeting its objectives. For example, considering carbon removal potential as a criterion for project selection could make direct payments more effective for securing carbon benefits.
Direct payment contracts obligate the owner or operator to implement their proposed carbon removal technology or practice over a specified number of years in return for either a lump-sum upfront payment or recurring annual payments. Payment rates are typically standardized by the administering agency on a state-by-state basis according to prevailing costs for necessary inputs, technology, or land. In order to be effective, payments must be high enough to justify any initial investment or ongoing costs that applicants would incur in implementing the carbon removal solution, as well as transaction costs associated with program enrollment. Programs can reduce these transaction costs by extending eligibility to third-party intermediaries like private companies, non-profit organizations, and local or state governments, which can benefit from economies of scale and streamline payment processes for individual applicants.
How a program structures its direct payments also has implications for its efficiency in achieving carbon removal outcomes, its attractiveness to different types of project applicants, and its administrative complexity:
- A cost-share approach entails the government paying a percentage of project costs. This approach provides the most level playing field for anyone who implements a given practice by subsidizing a percentage of total costs, so a project applicant who incurs higher costs in implementing a practice would receive proportionally higher federal support.
- A practice-based incentive entails the government paying for each acre or facility in which the practice is implemented. This approach offers an administratively simple alternative to cost-share that could be more cost-effective, since payment rates would not increase in proportion to project costs. This structure would therefore focus most on the “lowest-hanging fruit” of practice adoption.
- A performance-based incentive entails the government paying for each ton of CO2 removed, matching payments to projects that deliver the highest level of carbon removal. Performance-based incentive programs—including carbon offset markets—require more stringent monitoring and verification, which can increase participation costs and administrative complexity. If these costs are placed on the applicant, applicants would require access to the upfront capital in order to participate. These programs may also exclude practices for which the underlying science on carbon removal remains uncertain or difficult to quantify.
Direct payment programs can also tailor eligibility requirements and contract provisions to ensure that projects maintain high standards of environmental integrity. These provisions are especially important for natural carbon removal projects, which are more likely to impact significant areas of natural ecosystems or agricultural production, but some provisions may be relevant for technological carbon removal as well. Key elements of environmental integrity include:
- Avoiding harm to local ecosystems, for example by requiring native species plantings for forests and grasslands; excluding practices in inappropriate areas, like planting trees on natural grasslands; or setting limits on the area of natural lands that may be disturbed for carbon removal facilities;
- Excluding “business-as-usual” projects from collecting federal payments, such as by restricting eligibility to practices that are uncommon in a given area;
- Minimizing indirect land-use change that could increase emissions elsewhere, such as by limiting the enrollment of projects that would take agricultural lands out of production; and
- Promoting permanent carbon removal across the landscape with measures to incentivize long-term continuation of practices, such as higher payment rates for longer contracts or incentives contingent on benchmarks for cumulative carbon removal.
Key design considerations
Should projects be selected according to a ranking system or specific eligibility criteria? Should carbon removal potential be a criterion for project selection? What other criteria should be employed to ensure the program meets its objectives?
What is the appropriate value of payments to landowners and operators? How should payments be calculated, and by whom? Should the value of payments be tied to the cost of practice implementation (e.g., a cost-share approach), the extent to which the practice is implemented (e.g., a practice-based incentive), or the benefits derived from the practice (e.g., a performance-based incentive)?
Should intermediaries be eligible for payments? What eligibility and/or reporting requirements should participating intermediaries meet?
What requirements or incentives should payment contracts include to ensure that projects result in real, lasting carbon benefits without causing undue environmental harm?
U.S. experience with direct payments
USDA administers a number of direct payment programs that address resource conservation concerns like soil erosion, water quality, air quality, and wildlife habitat. In order to qualify for direct payments from USDA, a landowner or operator must propose an appropriate conservation treatment for their land, such as cover cropping, timber stand improvement, or planting a conservation cover using approved grass or tree species. USDA programs primarily contract directly with landowners, and typically do not allow third-party intermediaries. Carbon removal potential is not considered as a factor in project selection, though many projects do provide carbon benefits.
The Conservation Reserve Program (CRP) pays farmers an annual land rental rate plus incentive payments and cost-share assistance over a 10- to 15-year contract to remove cropland from production and plant native grasses or trees. CRP lands may return to crop production after their contracts expire, potentially losing some or all of their carbon removal benefits—but nearly one-quarter of lands re-enroll to extend those benefits, while others may transition to a long-term conservation easement. CRP enrolled 22.3 million acres in 2019 with a budget of $2.1 billion.
The Environmental Quality Incentive Program (EQIP) provides one-time cost-share assistance to implement specific conservation practices under nonrenewable 3- to 5-year contracts. Because of this structure, EQIP is well-suited to fund practices like cover cropping and agroforestry that entail high start-up costs but can provide significant economic benefits after a few years of implementation, making up for the value of the expiring payment. EQIP enrolled 13 million acres in 2018 and had a budget of $1.6 billion in 2019.
The Conservation Stewardship Program (CSP) provides recurring incentive payments through renewable 5-year contracts to implement a suite of practices that go beyond minimum standards for conservation. This focus on more holistic conservation strategies makes CSP useful for developing high-quality working land ecosystems, but less adept at scaling up specific carbon removal practices across large acreages. CSP enrolled over 8 million acres in 2018 and received $1.5 billion in funding in 2019.
USDA also administers other, smaller direct payment programs, including the Agricultural Conservation Easement Program (ACEP) for agricultural and wetland conservation easements and the Healthy Forests Reserve Program (HFRP) for easements and cost-share agreements on private forest land. Many states also operate their own direct payment programs, which are often geared toward regional conservation priorities or locally important industries. For example, the Maryland Agricultural Water Quality Cost-Share Program provides $25 million per year to support agricultural best management practices like cover cropping for water quality improvement in the Chesapeake Bay.
- Food and Agriculture Climate Alliance Policy Recommendations
- Congressional Research Service, “Agricultural Conservation: A Guide to Programs,” 2019, https://fas.org/sgp/crs/misc/R40763.pdf
- Maryland Department of Agriculture, “MACS at Work for a Healthier Chesapeake Bay: Maryland Agricultural Water Quality Cost-Share Program 2018 Annual Report,” 2019, https://mda.maryland.gov/resource_conservation/counties/MACS2018.pdf
- US Forest Service, “Federal and State Forestry Cost-Share Assistance Programs: Structure, Accomplishments, and Outlook,” 1995, https://www.srs.fs.usda.gov/pubs/rp/rp_so295.pdf
- World Resources Institute, “CarbonShot: Federal Policy Options for Carbon Removal in the United States,” 2020, https://www.wri.org/publication/carbonshot-federal-policy-options-for-carbon-removal-in-the-united-states
- World Resources Institute, “Restoring Trees to the Landscape: Creating ‘Shovel-Ready’ Jobs Across the United States,” 2020, https://www.wri.org/publication/restoring-trees-landscape-creating-shovel-ready-jobs-across-united-states