Carbon Market Opportunities
in US Ag & Forestry
&
Lessons Learned
David Miller
Chief Science Officer
AgraGate Climate Credits Corp
&
Director of Research
Iowa Farm Bureau Federation
• An entity for carbon credit
aggregation owned by Iowa
Farm Bureau Federation
• First licensed aggregator on
the Chicago Climate
Exchange (2003)
• Aggregation Specialists –
Building a nation-wide
network of contract
facilitators in every state.
• Handling about 6 Million
Carbon Credits annually
• “Country Elevator of Carbon
Credits”
• General Farm Organization
• Part of the American Farm
Bureau Federation
• 155,000 member families
• Political Representation
• Member Services
AgraGate Role
Provide farmers, ranchers, and land owners with
the following:
– information on opportunities available for
earning marketable environmental credits.
– reliable means to market their environmental
credits.
Services
• Information
• Enrollment
• Certification
• Verification
• Credit marketing
Within the US:
Agriculture accounts for 7 % of GHG emissions
Carbon sequestration offsets 11 % of U.S. emissions
U.S. GHG Emissions:
7,260 million metric tons CO2e
Fossil Fuel CO2: 80%
U.S. Carbon Sequestration:
828.5 million metric tons CO2e
Forests:
72%
Ag. N2O: 5%
Ag. CH4: 2%
Urban trees: 11%
Agricultural Soils: 5%
Wood products: 12%
Other: 14% **
Source: US EPA. 2007. Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 - 2005
Within agriculture:
Half of emissions are from livestock and grazing,
A third are from cropland nitrogen, and
The remainder from energy use and small sources
E nt e ric F e rm e nt a t io n
22%
M a na ge d Liv e s t o c k 10 %
G ra ze d La nds 18 %
R ic e C ro pping a nd
R e s idue B urning
2%
C ro pla nd S o ils
34%
E ne rgy Us e
14 %
U.S. Agriculture and Forestry Greenhouse Gas Inventory: 2005
Approaches to Greenhouse Gas Regulation
•
Traditional Command and Control
– Regulatory agency sets standards
• Specific technologies (scrubbers)
• Performance (tons, tons/unit output)
•
Cap and Trade
– Regulatory agency sets overall objective (total allowable emissions)
• Allocates or auctions emission allowances
• Firms must obtain allowances in order to emit a pollutant
– Firms can receive allowances, purchase allowances, or reduce
emissions
•
Cap and Trade with Offsets
• Unregulated firms can receive credits for reducing emissions
• Regulated firms can purchase offset credits to meet regulatory requirements
(“offsetting emissions”)
•
Emission Taxes
– Internalizes public damage
– Equates costs of abatement
Why is there interest in Cap-and-Trade?
Concept: Regulators set overall limits on emissions (or environmental
performance). Firms must have allowances to emit the pollutant.
Allowances can be bought, sold, or transferred
Attributes:
•
•
•
•
Establishes clear property rights for pollutants
Taps market forces to efficiently allocate resources to reduce pollution
Provides incentives to innovate
Equates costs of environmental control across all polluters
Concerns:
•
•
•
Makes it difficult to address localized environmental damage
Could concentrate pollution in lower income areas
Distribution of allowances creates new assets – and transfers of wealth
CCX Market Architecture (2003-2010)
Phase I: Commitments to reduce 1% per year below baseline from 2003-2006
Phase II: Commitment to reduce to 6% below baseline by 2010
Baseline = Avg. emissions from 1998-2001, emissions in 2000 (Phase II)
CCX Trading Model
•
•
•
Rules-based Exchange
• Members set
the rules
Voluntary decision to join, but
legally binding commitment
Ag Offset program
Standardized protocols
Enforced through contracts
Proposed Emission Reduction Targets: BAU Trend,
Administration, Markey-Waxman, CCX-extrapolated
130
trend
120
reduction goals
110
CCX
(extrapolated
@-.75%/y)
100
90
Obama
Administration
80
Markey
Waxman
70
60
2005
2010
2015
2020
2025
2030
0
CCX includes more industrial
emissions under its legally binding
cap than any country in the world
45
56
New South Wales
Finland
60
Belgium
71
86
The Netherlands
Greece
94
Czech Republic
California
US NE States
(RGGI)
130
170
151
171
Spain
France
174
206
Australia
United Kingdom
232
100
Italy
200
237
300
Poland
339
400
Canada
500
496
600
600
Germany
CCX
Hundred Million Metric tons CO2
Size of Live, Emerging, Possible GHG Markets
Live Market
Market in development
Under discussion
Emission Reductions and Project-based Offsets in CCX
2003 through 2007*
(metric tons CO2)
500,000,000
450,000,000
469,554,700
404,358,500
400,000,000
metric tons CO2
350,000,000
86%
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
53,359,000
3%
11%
11,837,200
Project-based Offsets
Forest Management
50,000,000
0
Internal On-site Emission
Reductions at Member
Facilities
*As of 2-20-09. A portion of new member emission
reductions are currently undergoing verification.
Total
Composition of CCX Domestic Offsets Pool
through April 2009
CCX CFI spot and derivatives volume 2004-2008
120
Million (metric tons)
100
Options
80
Futures
Cash
60
40
20
0
2004
2005
2006
2007
2008
Annual Average* Price for CCX CFIs
2003-2008
$5.00
Average price per metric ton CO2
$4.50
$4.43
$4.00
$3.71
$3.50
$3.16
$3.00
$2.50
$2.00
$1.89
2
0
0
9
$1.50
$1.00
$0.97
$1.15
$0.50
$0.00
2002
2003
2004
* Volume-weighted average for spot market trades
2005
2006
2007
2008
2009
The Carbon Credit Market Process
• Contract
• Worksheets
• Supporting documents
Enrollment
Sale
Verification
Certification
Registration
$
U.S. Farmer Participation in CCX
•
•
•
•
16 million acres nationally in 36
states
9,000 farmers, ranchers &
landowners
25 professional verification
entities approved
• “green jobs” employment &
income is a reality at CCX
Tens of millions of dollars in
new income through global
environmental services
•
•
2 major aggregators
– AgraGate & Farmers Union
Many minor aggregators
• 4.5 million acres no-till
• 2 million acres grass
establishment
• 5 million acres rangeland
• 0.5 million acres afforestation
• 4 million acres managed forest
• ag methane projects
CCX Offset Projects
•
As science directs, foster emission reductions all sectors: low cost, win-win
•
Landfill, agricultural and coalmine methane capture/destruction
•
Agricultural soils best management practices
•
Afforestation & forest management
•
Fuel switching, renewables
•
All projects must be independently verified by an approved entity
•
CCX Offset Rules can be found at:
http://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCredits
Principles Guiding CCX Offsets
− Predictability: facilitate carbon finance
− Other than Business as Usual: beyond
regulation, rare, recent
− Verifiable: eligibility, quantities, ownership
− No cherry picking – emitters must take entitywide reductions
− Fungible: All Carbon Financial Instruments are
equivalent
− Avoid perverse incentives
− Conservative crediting
− Reserve pools for sequestration assurance
Agricultural soil sequestration offsets in CCX
•
Focus first on well-documented actions
with clear ownership
•
CCX Special Committee on Soil Carbon
(scientific committee) provided guidance
on annual carbon gains, geography
•
20% Implicit Reserve to mitigate against
post-contract reversals
•
20% explicit reserve to mitigate against
in-contract reversals
•
•
Full accountability in-contract
•
100% annual certification; 10% visual
inspection;
•
Pilot project on satellite imagery
Avoided perverse incentive to till if only
“new” no-tillers allowed in
Forestry Offsets
Two Protocols
1. New tree plantings -- Planting and/or natural regeneration on
private lands after Jan 1, 1990 on land not forested on December 31,
1989. Thinning of a tree stand is not allowed.
– Credits based on net annual increase in carbon stocks (CO2
equivalents) during 2003-2010.
– Proof of ownership and legal description of land.
– Statement of Intent
– 15 year contract.
2. Sustainably Managed Forests -- Must provide evidence of
sustainable forest management of all their managed forest land.
– Must have a forest management plan and must be member of the
Sustainable Forestry Initiative or American Tree Farm System.
– Provide a description of forest management activity and
quantification model used.
– Stand thinning is allowed.
– Long-lived wood credits
Methane Offsets
• Ag Methane destruction projects that were put
into place after Jan 1, 1999.
– Dairy
– Swine
• Eligibility
– Liquid slurry storage
– Pit storage below animals
(> 1 month)
– Uncovered anaerobic
lagoons
Nitrogen Application Rates Corn
US
China
China now applies more nitrogen per acre than the US
Yield Comparison - Corn
US
China
China corn yields today are where the US was in 1968
Nitrogen Use Efficiency in Corn
US
China
Efficiency gains in US since 1975;
No efficiency gains in China
Emerging Issues for Carbon Markets
•
•
•
•
•
•
Scope of Coverage
Eligibility
Consistency of Rules
Financial Impacts
Environmental Considerations
Unintended Consequences
Impacts of Climate Change Legislation*
•
If enacted, the ultimate cost of H.R. 2454 would be determined by the
response of the economy to the technological challenges presented by the bill.
– The allocation of allowance value will determine who ultimately bears the
cost of the program.
– The cases generally indicate that the availability of offsets (particularly
international offsets) is the key factor in determining the cost of H.R.2454.
– The interplay between nuclear power, renewables, natural gas, and coalfired capacity with carbon capture and storage technology emphasizes the
need for a low-carbon source of electric generating capacity in the mid- to
long-term.
– A considerable amount of low-carbon generation will have to be built under
H.R. 2454 in order to meet the emission reduction requirement.
– Attempts to estimate household effects (or other fine-grained analyses) are
fraught with numerous difficulties that reflect more on the philosophies and
assumptions of the cases reviewed than on any credible future effect.
*From CBO analysis of H.R. 2454
Costs and Benefits of Climate Policy to Agriculture
• Three main issues:
– Production costs : energy and fertilizer inputs
– Offsets/incentives: GHG reduction potential
– Renewable energy: Wind, bioenergy
• Agriculture is energy intensive:
– Fertilizer and fuel costs account for 50-60 percent of variable costs of
production for corn;
– Because of higher personal transportation expenditures, rural
households are more likely than urban households to feel the pinch of
increased gas prices.
• The costs will be considered against the potential benefits from
offsets and renewable energy markets
• Lastly, by doing nothing, there will be a cost as well from the effects
of warming.
Estimates of Costs of W-M
• Congressional Budget Office (6/19)
– CBO estimates that households costs would range from an average
net benefit of about $40 to net costs of approximately $245. Overall,
costs for households would average 0.2 percent of their average
after-tax income.
– $3 Billion in Domestic Offsets annually
• EPA Analysis (6/23)
– 10-35% increases in electricity prices; 7-30% increases in natural
gas prices; and 3-15% increases petroleum prices between 20152050.
– Changes in GDP range from +0.03 in 2012 to -1.3% by 2050.
– Domestic offsets would range from 166 MMTCO2e – 643
MMTCO2e between 2012-2050.
Total Ag Net Returns in 2025*
*University of Tennessee analysis, October 2009
Issues for Ag & Forestry
• Who regulates?
• Will offsets be included
• Who will set standards for
ag & forestry?
• Effects on ag inputs
• Effects on energy markets
• Effects on economy
• Linkages to world markets
Key Carbon Offset Issues (RSVP&E)
•
•
•
•
Real – Quantification methodology
Surplus – Additionality measures
Verified – 3rd party certification
Permanence – Duration &
reversability
• Enforceable – Contract terms &
ownership
Potential roles for USDA in Carbon Offset Markets
•
•
•
•
•
•
Determine eligible practices;
Establish quantification protocols;
Establish reporting requirements;
Provide technical assistance;
Certify implementation;
Maintain registry of information, recordkeeping, including ensuring
against duplicate records;
• Conduct audits and spot checks;
• Award offsets or issuance of incentive payments;
• Monitor against loss of carbon that is sequestered.
Lessons Learned
•
The US “voluntary” market has
allowed ag & forestry to “learn by
doing”
•
Ag & Forestry offsets are the oil that
will enable a GHG reduction
program to run smoothly
•
•
•
As the carbon market matures,
more opportunities are likely to
emerge for ag & forestry
•
Over-estimation of offset supply
Political uncertainty can kill fledgling
markets
– Specific authority & recognition of ag &
forestry offsets
– USDA needs to be the lead agency on
ag & forestry offsets
– “grandfathering in” of early action
credits
Perfection is the enemy of progress &
success
– Mechanisms designed for developing
countries are not necessarily good for
the US
– Zero tolerance does not work for ag
– Reasonable operating criteria for
offsets – must work on “working lands”
Let us remember:
• For society as a whole, there is a very strong correlation
between energy use and standard of living. Energy makes
manual labor more efficient; is a catalyst for transformation of
ingredients and raw products to usable goods; and energy
extends the capabilities of the human mind.
• For society to prosper, it must grow. The debate cannot
become one of, “maintaining the status quo with less”. It must
be a debate about “how to do more with what we have.”
Questions?
For more information
www.agragate.com
Info@agragate.com