The Clark Group, LLC

Not your Father’s Carbon Market: An Update from Agriculture’s Point of View

Laura Sands

Regulated Entity

Agriculture Offset Aggregator/Verifier

Soil CarbonSequestration

ProjectsMethane

from Manure Capture

Low CarbonFuel

ProductionReforestation

DirectEmission

Reductions

How would a carbon market work?

What agricultural practices would qualify? No or low till Methane capture or flaring from dairies Reductions in nitrous oxide emissions from

use of precision agriculture or split application of fertilizers

Grassland management or forestry

Overview

Legislation to Watch Politics & Process Measurement Market Potential—A very different

scenario

LEGISLATION TO WATCH

Why Congress is interested in Ag? Ag can play a role in climate reductions

because it can store carbon in soils and biofuels are low carbon solution

Source: Robert Socolow & Stephen Pacala; Scientific American, Sept. 2006

Each “De-carbonizing Wedge” represents 25 billion tons of carbon avoided or reduced.

7 wedges needed to reach stable carbon emissions.

Cap-and-Trade: Is Climate Legislation Coming?

110th Congress: 165 climate change bills, resolutions, amendments introduced by July, 2007*

Some bills -- not all --would allow a role for agricultural sinks, other agricultural emissions reductions

11 major bills in Senate, 10 in House, would/might provide some credit to agriculture for emissions reductions activities

*Pew Center on Global Climate Change, www.pewclimate.org

Key emerging forces House Dingell draft bill—includes some role

for ag President Elect Obama is committed despite

economy (as was Senator McCain) The Supreme Court has opened the door to

regulation of GHGs, which could have an adverse impact on ag. Cap and trade would override court decision.

Lieberman-Warner Bill (Environment Committee) Allows GHG emitters to meet up to 15% of

their required reductions by purchasing agriculture offsets

Provides 5% of emissions allowance for the agriculture industry (through USDA) to establish government program to reward carbon-friendly practices

Tale of two proposals: Cap-and-Trade: What Role for Agriculture?S.2191 – The Lieberman-Warner Climate Security Act

of 2007 Offset projects include ag and forestry sinks Rigorous project plans, incl. procedures to monitor,

quantify and discount ag and forestry offset projects Discount protocols for MMV, leakage, additionality Ensure permanence by mitigating and

compensating for reversals; annual certification Procedures for 3rd party verifiers/verification

Bingaman-Specter Bill (Energy Committee) No agriculture offset market Provides agriculture industry with 5% of

emissions allowances to establish government program to reward carbon-friendly agriculture practices

Contains an economic “safety valve” which caps the price of carbon at $12/MTC02e

Allows companies to pay a government fund rather than offset market or make reductions

Cap-and-Trade: Is Climate Legislation Coming?

House Energy and Commerce Committee, led by Chairman John D. Dingell, introduced the 1st white paper on Climate Change October 3, 2007, “…as we move towards development and eventual passage of comprehensive climate legislation.”

Conclusions: “The US should reduce GHG emissions 60-80% by 2050.”

“The central component of this program should be a cap-and-trade program.”

Cap-and-Trade: Is Climate Legislation Coming?

Dingell/Boucher White Paper: “The agricultural sector’s direct emissions

generally should not be included in the cap-and-trade program because of difficulties monitoring emissions and large number of sources with low emissions.”

“This sector may present opportunities for emission reductions that would be measurable and might then provide offset or credit opportunities.”

CLIMATE POLITICS

CHANGING

Major confluence of events Democratic Congress Business is supportive Agriculture sees opportunity for major

revenue stream Court decision is key

“USCAP urges policy makers to enact a policy framework for mandatory reductions of GHG emissions from major emitting sectors . . .

The cornerstone of this approach would be a cap-and-trade program.”

www.us-cap.org/

Cap-and-Trade: Is Climate Legislation Coming?

Relevant US-CAP Principles: Congress should immediately enact cap-

and-trade legislation to reduce emissions 60-80% below current levels by 2050

Capped entities should be permitted to meet part of obligations through purchase of verified emissions offsets from a range of domestic sinks and emissions sources

What do (or should) we want? Ag should argue for unlimited agricultural

offsets. This would bring down the cost of compliance—support from utilities

Generate potential for billions of revenue for ag-based GHG reductions

Combination of allowance and offset may be best option—especially for early adopter protections

Stabenow amendment Called for 1 billion ton carbon limit—higher

than Lieberman Warner Had support of coalition of ag groups and

utilities Supported by Lieberman and Warner Bipartisan co-sponsorship Framework for moving forward Workable and verifiable offsets

The science of sequestration

Kansas State University Colorado State University

Iowa State University Michigan State University

Montana State University University of Nebraska

Ohio State University Purdue University

Texas A&M University Pacific NW National Labs

Consortium for Agricultural Soils Mitigation of Greenhouse Gases

“Duke Standard” Measurement GuideAuthors/Advisory Committee from:

Texas A&M UniversityColorado State University

University of New HampshireInstitute for Lifecycle

Environmental AssessmentRice University

Holland & Hart LLPEnvironmental Resources Trust

Princeton UniversityKansas State University

Stanford UniversityBrown UniversityDuke University

What’s different this time around?

We will have a market—

A real market is not business as usual Carbon per acre prices of

$1.50/acre

No incentives to buy from ag

Protocols not transparent

No significant money for aggregators, price is low

Carbon prices that could generate between $15-$25 an acre—for practices

Ag is best low-cost solution for rapid reductions

Publicly traded commodity

Potential for ag groups to aggregate and make $

MARKET POTENTIAL

Illustrative Ranking of Carbon as a Crop in U.S. Per Proposed GHG Limits in Senate Bill 280

(Lieberman-McCain) 1/12/07

0

5

10

15

20

25

Pro

duct

ion

Val

ue (

$B)

[Crop Source: USDA - National Agricultural Statistics Service – US Crop Rankings - 1997 Production Year Ranking Based on Value of Production]

Carbon at $10/MT COCarbon at $10/MT CO22e, e,

Estimates for a mandatory carbon market Mandatory carbon market price

estimate = $10-20/MMTC.

To get a more realistic picture of potential market value, let’s assume $15 MMTC

Will any of this be easy? No. Major opponents are energy industry Some utilities Competing policy ideas which would exclude

agriculture Some pressure on the left which would also

exclude ag

A little information is not a good thing Coal and railroad alliance has amassed a $30 billion

war chest Junk studies (CRA, Searchinger) Serious pushback from oil interests who want a

carbon tax (keeps them on top); or safety valve Alignment against ag offsets continues on the left SOMEONE will want to sell offsets-if not ag, others

are looking to cut them out. Splitting ag makes sense from a strategic point of view

Myth: Energy costs, especially in Rural America, will skyrocket Overall, there is no significant increase

nationwide In some places, electricity costs will actually

go down…. Rural Co-ops have extra allowances and

funding, a free ride not given to other utilities States will get billions of dollars for

assistance for low or middle income energy users

Gas prices will go through the roof Gasoline prices gradually go up under S.

2191, tracking the CO2 allowance price (i.e. 10$ a ton CO2= @ 10 cents on a gallon).

However, some models show increasing efficiency will reduce gas demand, taking pressure off

Other factors will have more impact, MidEast politics, China etc.

If you are not at the Table

You ARE on the Menu!