Carbon Markets: A Potential Carbon Markets: A Potential Source of Income to FarmersSource of Income to Farmers

Southern Region Agricultural Outlook Conference

September 23, 2008

Luis A. RiberaAssistant Professor & Extension Economist

Carbon SequestrationCarbon Sequestration

•Carbon sequestration can be defined as the capture and secure storage of carbon that would otherwise be emitted to or remain in the atmosphere.

•What are Carbon Credits? Two ideas:

•Prevention/reduction of carbon emissions produced by human activities from reaching the atmosphere by capturing and diverting them to secure storage.

•Removal of carbon from the atmosphere by various means and securely storing it.

Agriculture’s Role…Agriculture’s Role…

•It is estimated that U.S. agriculture could sequester 275 - 900 million tons of carbon dioxide annually.

•Dr. Richard Sandor (CCX Founder) estimated future value of agricultural offsets at up to $20 Billion annually

•Agriculture could be the “bridge” to climate stabilization in the coming years at a much cheaper cost than some of the big technology ideas like underground or ocean storage.

Chicago Climate Exchange - CCXChicago Climate Exchange - CCX

•The CCX was launched in 2003

•Trading operation that is based on a voluntary, but legally binding association of a number of emitters and offset suppliers.

•The commodity traded at the CCX is the Carbon Financial Instrument (CFI), each of which represents 100 tonnes of CO2e.

•The volume traded on the CCX in the first quarter of 2008 was about 25 million tonnes of CO2e or annually around 100 million tonnes.

CCX – Carbon Financial InstrumentCCX – Carbon Financial Instrument

Price forecasts for US carbon creditsPrice forecasts for US carbon credits

Chicago Climate Exchange - CCXChicago Climate Exchange - CCX

•Four types of eligible offset projects

•Soil Offsets

•Rangeland Offsets

•Forestry Offsets

•Methane Offsets

CCX – Conservation TillageCCX – Conservation Tillage

•Conservation Tillage•Minimum contract size 10,000 tonnes from a group of farms so need around 20,000 acres•Aggregator is like the county elevator•Minimum 5 yr commitment of min till – no history•At least 2/3 of soil undisturbed and at least 2/3 of residue on the soil surface must remain•Farms must have at least 250 acres•No commitment after contract expires

•Cropland converted to permanent grass (after Jan 1, 1999.)

CCX – Conservation TillageCCX – Conservation Tillage

CCX – Permanent GrasslandCCX – Permanent Grassland

CCX - RangelandCCX - Rangeland

•Rangeland•Non degraded rangeland to increase CO2 sequestration through grazing land management•Follow NRCS Guidelines on stocking rates and managing harvest of vegetation with grazing animals•Restoration of previously degraded rangeland•Must take place on rangeland with avg. rain between 14” to 40”

CCX – Rangeland ManagementCCX – Rangeland Management

Example on Cons. Tillage Contract (2,500 ac)Example on Cons. Tillage Contract (2,500 ac)

• Assumptions:– Rate of Absorption: 0.4 Mton/Year– Price $6/Mton/Year– Aggregator Charge: 10% of market price– Verification Fee: $0.12/credit– Registration Fee: $0.15/credit– Trading Fee: $0.05/credit– Retention: 20% of total offset each year

• Sources:– http://www.chicagoclimatex.com/– http://www.agragate.com/

Example on Cons. Tillage Contract (2,500 ac)Example on Cons. Tillage Contract (2,500 ac)

Market Price (/tonne) $6.00

Aggregator Fee (/tonne) $0.60Verification Fee (/tonne) $0.12Registration Fee (/tonne) $0.15Trading Fee (/tonne) $0.05Total Fees (/tonne) $0.92

Actual Price (/tonne) $5.08

Acreage 2,500Rate of Sequestration (tonnes/yr) 0.4

Year 1 2 3 4 5

Carbon Abs (tonne) 1,000 1,000 1,000 1,000 1,000Retention (20%) (tonne) 200 200 200 200 200

Carbon - Retention (tonne) 800 800 800 800 800Retention Released (tonne) 1,000

Net Returns $4,064 $4,064 $4,064 $4,064 $9,144

Average Net Returns $5,080Total Net Returns (5 yrs) $25,400

Sensitivity AnalysisSensitivity Analysis

Sequestration Carbon Price

Rate ($/tonne)

(tonnes/ac) $2.00 $4.00 $6.00 $10.00 $15.00 $25.00 $35.00 $45.00

0.12 $0.18 $0.39 $0.61 $1.04 $1.58 $2.66 $3.74 $4.82

0.16 $0.24 $0.52 $0.81 $1.39 $2.11 $3.55 $4.99 $6.43

0.20 $0.30 $0.66 $1.02 $1.74 $2.64 $4.44 $6.24 $8.04

0.24 $0.36 $0.79 $1.22 $2.08 $3.16 $5.32 $7.48 $9.64

0.27 $0.40 $0.89 $1.37 $2.34 $3.56 $5.99 $8.42 $10.85

0.28 $0.41 $0.92 $1.42 $2.43 $3.69 $6.21 $8.73 $11.25

0.32 $0.47 $1.05 $1.63 $2.78 $4.22 $7.10 $9.98 $12.86

0.40 $0.59 $1.31 $2.03 $3.47 $5.27 $8.87 $12.47 $16.07

0.52 $0.77 $1.71 $2.64 $4.51 $6.85 $11.53 $16.21 $20.89

0.60 $0.89 $1.97 $3.05 $5.21 $7.91 $13.31 $18.71 $24.11

1.00 $1.48 $3.28 $5.08 $8.68 $13.18 $22.18 $31.18 $40.18

Bottom LineBottom Line

• Not enough money to make producers get on board

• Expectations on EPA regulations

• Will the US join Kyoto protocol?

• What will the next government do?

• First adopter problem

• Paper: http://www.afpc.tamu.edu/