The Inflation Reduction Act: implications for U.S. timberland and agriculture

Incentives for landowners practicing sustainable and climate-smart land management strategies

The Inflation Reduction Act of 2022 provides direct support for private farmland and timberland owners to accelerate the development of natural climate solutions and sustainable land management practices. The legislation has earmarked $369 billion for clean energy and climate change mitigation through a combination of direct funding and various grants and tax credits. Provisions applicable to timberland and farmland include financial support for programs to improve measurement of carbon emissions and sequestration by forests and farm soil, fire and drought mitigation and prevention, conservation easements, the development of innovative wood products that lower greenhouse gas (GHG) emissions, carbon capture and storage projects, and electricity generation from biomass. These financial incentives are intended to encourage private landowners to develop and deploy management strategies that could help combat climate change and enhance sustainability while continuing to generate strong returns.

We summarize some of the act’s most significant implications for agriculture and timberland investors. 

Clean energy measures can create a tailwind for timberland and farmland investors

The measures covering energy and energy security further incentivize investment in renewable and clean energy, including biomass, biofuels, wind and solar, and extend the market for carbon capture. These measures could stimulate additional demand for timberland and farmland products while increasing options for alternate land uses on timberland and farmland properties. Further expansion of biomass energy production could result in additional demand for timber for use in products such as wood pellets, with additional support for wind and solar power likely to bolster alternate land-use demand for timberland and farmland holdings. Meanwhile, the tax credit for sale of sustainable aviation fuel (SAF) as well as funding to support investments in advanced biofuels could generate additional demand for agricultural products such as feedstock for SAF, including corn, oil seeds, and agricultural residues. The combination of these factors could create a tailwind for net income and appreciation for timberland and farmland investments.

Conservation funding highlights the integral role of natural climate solutions in the fight against climate change

USDA funding for programs around conservation, environmental quality, and measurement of carbon sequestration and carbon dioxide, methane, and nitrous oxide emissions could provide additional transparency and clarity to the rapidly developing carbon credit market. And approximately $20 billion of the act’s funds will support the USDA’s conservation programs within the Natural Resources Conservation Service. This includes additional funding available to farmers and ranchers to support carbon sequestration and reduce GHG emissions on their land. Additionally, nearly $40 billion will be invested into existing programs that support the needs of rural communities, including the promotion of climate-smart agriculture initiatives that involve regenerative farming practices such as conservation tillage and cover crops that increase carbon sequestration, promote biodiversity, improve soil health, and build greater resilience to severe weather events. This conservation funding should help accelerate the development and expansion of sustainable land management practices, natural climate solutions, and voluntary carbon markets, helping to more clearly define the integral role and financial value of sustainability and natural climate solutions in the fight against climate change.

“This is an unprecedented investment in voluntary private land conservation and the work of land trusts across the country to protect our irreplaceable farmlands, forests, ranches and wetlands.”

Land Trust Alliance

Sustainable forestry boosted by funding for restoration and carbon sequestration

Funding is provided for forest restoration and wildfire prevention, and for the acquisition of land and interests in land, such as conservation easements, which could help mitigate wildfire risks and result in increased demand for land. The act also includes grants that offer financial support for carbon sequestration and storage for private forest landowners, along with $100 million earmarked for the Wood Innovation Grants Program for research that supports traditional wood use projects, expands wood energy markets, and promotes wood as a construction material.

To further support carbon sequestration efforts, 45Q tax credits for CO₂ storage have been increased and extended to incentivize usage of direct air capture, onsite carbon capture, and storage (CCS) in geologic formations. These tax credits would serve to lower the cost of CCS, potentially lowering the cost of the currently most expensive carbon sequestration options, which could influence the future demand and price curves for natural climate solutions and voluntary carbon credits. 

Protection of natural resources prioritized in efforts to address drought and climate change

Water availability is a growing concern, especially for farmland in the U.S. West. Funding is maintained for drought mitigation in Western states, with priority given to the Colorado River Basin and other basins experiencing comparable levels of long-term drought. Various programs will help farmers prepare for climate change, in addition to energy efficiency, wildfire, extreme heat, and climate adaptation planning provisions that address risks to drought-affected regions across the United States. Financial funding in support of water supply and climate change preparation and mitigation in the U.S. West may provide at least a modicum of much-needed support for productive farmlands in the region.       

Air pollution and GHG reduction initiatives may accelerate demand for biofuels and new wood products

Support for investments in advanced biofuels could benefit corn-based ethanol, with $500 million reserved for the infrastructure needed to sell higher ethanol-content gasoline at fuel stations. In addition, guaranteed loans are provided for projects that avoid, reduce, use, or sequester air pollutants or GHGs alongside funding to support the standardization and transparency of corporate climate action commitments that should help to remove uncertainty around net zero commitments and add corporate accountability—potentially driving additional demand for carbon credits. Development, standardization, transparency, and reporting criteria for environmental product declarations extend to construction materials as well, measuring GHG emissions at all stages of production, use, and disposal, along with funding to identify and label construction materials with substantially lower GHG emissions.

These initiatives could help to accelerate the development and understanding of the voluntary carbon credit market and the benefits of natural climate solutions. They could accomplish this by providing additional transparency, clarity, standardization, and confidence to the nascent market while helping to highlight the comparative environmental benefits of using wood products as a substitute for other building and packaging materials. This could bolster demand for timber through the adoption of new wood products such as cross-laminated timber as a substitute for cement and steel in multistory construction and paper packaging as a substitute for single-use plastics. 

Global decarbonization efforts look to natural climate solutions

The Inflation Reduction Act alone will direct nearly $370 billion into natural climate solutions and energy-related spending, including tens of billions of dollars in tax incentives over the coming decade. This legislation bodes well not just for global decarbonization efforts, but for more widespread adoption and awareness of the traditional sustainable timberland and agriculture land management practices that support natural climate solutions. It could also benefit timberland and farmland investments, where the inherent competitive risk-adjusted returns and inflationary hedging and diversification benefits are increasingly augmented by their natural capital value.