carbon market opportunities in us ag & forestry & lessons learned david miller chief science...
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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([email protected]%/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
X
Ger
man
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Can
ada
Pol
and
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Uni
ted
Kin
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Aus
tral
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Spai
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nce
US
NE
Sta
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(RG
GI)
Cal
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Cze
ch R
epub
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The
Net
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ands
Gre
ece
Bel
gium
New
Sou
th W
ales
Fin
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Hu
nd
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Mill
ion
Met
ric
ton
s C
O2
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
pric
e pe
r m
etric
ton
CO
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.”