Carbon Market Opportunities in US Ag & Forestry

& Lessons Learned

David MillerChief Science Officer

AgraGate Climate Credits Corp&

Director of ResearchIowa 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

Ag. N2O: 5%

Ag. CH4: 2%

Other: 14% **

U.S. Carbon Sequestration: 828.5 million metric tons CO2e

Forests: 72%

Wood products: 12%

Urban trees: 11%

Agricultural Soils: 5%

Fossil Fuel CO2: 80%

Source: US EPA. 2007. Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 - 2005

Energy Use 14%

Enteric Fermentation 22%

Cropland Soils 34%

Managed Livestock 10%

Grazed Lands 18%

Rice Cropping and Residue Burning

2%

U.S. Agriculture and Forestry Greenhouse Gas Inventory: 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

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 2003-2006Phase II: Commitment to reduce to 6% below baseline by 2010Baseline = 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 programStandardized protocolsEnforced through contracts

Proposed Emission Reduction Targets: BAU Trend, Administration, Markey-Waxman, CCX-extrapolated

60

70

80

90

100

110

120

130

2005 2010 2015 2020 2025 2030

red

ucti

on

go

als

trend

CCX(extrapolated@-.75%/y)

ObamaAdministration

MarkeyWaxman

Size of Live, Emerging, Possible GHG Markets60

0

339

237

232

206

174

171

151

130

94 86

71 60 56 45

496

170

0

100

200

300

400

500

600

CC

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Live Market

Market in development

Under discussion

CCX includes more industrial emissions under its legally binding cap than any country in the world

Emission Reductions and Project-based Offsets in CCX 2003 through 2007*

(metric tons CO2)

404,358,500

53,359,000

11,837,200

469,554,700

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

500,000,000

Internal On-site EmissionReductions at Member

Facilities

Project-based Offsets Forest Management Total

met

ric

tons

CO

2

*As of 2-20-09. A portion of new member emission reductions are currently undergoing verification.

86%

11%

3%

Composition of CCX Domestic Offsets Pool through April 2009

CCX CFI spot and derivatives volume 2004-2008

0

20

40

60

80

100

120

2004 2005 2006 2007 2008

Mil

lio

n (

me

tric

to

ns

) Options

Futures

Cash

Annual Average* Price for CCX CFIs 2003-2008

$0.97 $1.15

$1.89

$3.71

$3.16

$4.43

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

2002 2003 2004 2005 2006 2007 2008 2009

Ave

rage

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etric

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2

* Volume-weighted average for spot market trades

2009

The Carbon Credit Market Process

EnrollmentEnrollment

CertificationCertification

VerificationVerification

RegistrationRegistration

• Contract• Worksheets• Supporting documents

SaleSale

$

U.S. Farmer Participation in CCX

• 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

• 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

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 entity-

wide 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

• Avoided perverse incentive to till if only “new” no-tillers allowed in

• 100% annual certification; 10% visual inspection;

• Pilot project on satellite imagery

Forestry OffsetsTwo 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 coal-

fired 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 2015-2050.

– 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