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Carbon Market Opportunities for Agriculture

By Dave Beede, Meadows chair for dairy nutrition and environmental management (.(JavaScript must be enabled to view this email address))
Wendy Powers, director of environmental stewardship for animal agriculture (.(JavaScript must be enabled to view this email address))

Carbon markets offer the potential to capture additional farm revenue, help reduce greenhouse gases and improve
energy efficiency. Farm businesses and other industries can generate carbon credits through projects that reduce greenhouse gas emissions and then sell the credits in markets as carbon offsets to polluters. This paper provides an introduction to carbon markets and summarizes important attributes for developing an on-farm carbon-credit-generating project.

Introduction
Carbon credits (CC) from agriculture are a relatively new commodity. They are generated on-farm by employing a management practice or project that reduces emissions of greenhouse gases (GHG) such as methane, nitrous oxide or carbon dioxide. The carbon credits generated on-farm are measured and verified, typically by an independent, third-party verifier. They are sold in markets to other businesses (polluters) that purchase the “carbon offsets” as an environmental attribute (Figure 1).


A carbon credit is 1 metric ton (2,204 pounds) of carbon dioxide equivalent (CO2e). It is the currency for trading of GHG emissions that are reduced, destroyed (e.g., by burning), removed from the air (e.g., sequestration) or never produced. Carbon markets to trade CC are voluntary in most of the United States, but they are legislated, regulated and mandatory in some countries. Markets have been established because GHG polluters must purchase carbon offsets to enable them to emit in excess of their defined cap limits. Cap-and-trade laws and carbon markets to help facilitate compliance with Kyoto Protocol targets have existed in Europe and other countries for several years (http://www.envcc.com). The United States currently does not have a mandated national cap-and-trade system for GHG emissions. However, Congress will consider federal cap-and-trade and/or carbon tax legislation in the near future. California recently instituted its own cap-and-trade system. There are several voluntary, legally binding markets, such as the Chicago Climate Exchange (CCX) (www.envcc.com).
Carbon Market Overview 


Carbon market overview and goals
Carbon credits are generated through GHG reduction projects or practices by some entity such as an agribusiness (see Figure 1). These credits are captured, measured and verified. The credits then can be sold via an organized market mechanism as carbon offsets to compensate for carbon emissions in excess of the buyer’s allowable limit. The producers of the carbon credits (reduction in GHG emissions) receive monetary payment for those credits.
Primary goals of carbon markets are to reduce GHG emissions and provide an organized, competitive, market-driven mechanism to reduce these emissions, and to reduce, over time, the absolute quantity of GHG emissions. Demand for carbon offsets occurs when a cap-and-trade system is implemented. Also, while carbon trading is going on among sellers and buyers, polluters are required by the legislation to reduce their overall, absolute quantities of emissions incrementally over a period of time.


The market price for carbon offsets varies depending on demand. In June 2008, carbon offsets were worth about $7.50 per metric ton of CO2e on the Chicago Climate Exchange. In early 2009, the market price was about $2 per metric ton (Figure 2). If and when a U.S. federal cap-and-trade program is implemented and demand for offsets increases, U.S. prices are projected to increase to $10 to $12 per metric ton by 2012, $20 by 2020 and $45 by 2030 as markets develop.

Carbon-credit-generating projects
Currently, carbon credits from agriculture can be generated by sequestering carbon in trees (forests) and through soil/tillage practices, or by capturing methane in anaerobic digesters. (Methane can be flared off, producing carbon dioxide; used to generate electricity; or cleaned and compressed to natural gas to produce power or heat.) Other potentially beneficial practices, such as reduction in digestive tract methane production by ruminants, are being investigated.


An on-farm dairy anaerobic digester converts manure to biogases. A single dairy cow produces about 5 metric tons of CO2e/year, which is equivalent to five carbon credits. If the methane generated during the fermentation of manure is captured, quantitatively measured and then burned (which converts the methane gas to carbon dioxide, which has 1/20th the global warming potential of methane), carbon credits can be sold. Or, more likely, the methane could be used to generate electricity or heat, and the carbon credits could then be sold. Both scenarios reduce methane emissions and global warming potential and provide a revenue opportunity.

Carbon Graph

Essential attributes of carbon-credit-generating projects
An agricultural business desiring to develop an on-farm practice or project to generate and sell carbon credits can work with a firm that helps create environmental assets—a carbon broker or aggregator. These firms can help develop a project and also may facilitate on-farm measurement of carbon credit generation, third-party verification and bundling of credits from several farms to help market carbon credits. Additional information can be found at www.epa.gov/agstar.


To be considered a bona fide carbon-credit-and-revenue-generating project, a carbon credit project must have four essential characteristics: project baseline and additionality; quantification, monitoring and verification (QMV); permanence; and no leakage (Fernandez at al., 2005).

Project baseline and additionality (Figure 3)
Baseline and Additionality


There must be the ability to quantify accurately GHG emissions to set a project baseline. For example, the baseline for an anaerobic digester project is accurate information about how much methane per unit of time was emitted before the project technology was implemented. The project must establish that the subsequent GHG (e.g., methane) reductions would not have occurred without the project; this is known as additionality.


Quantification, monitoring and verification (QMV). Accurate quantification, monitoring and verification methods must be available for a carbon-credit-generating project. Examples include: collecting and weighing of field crop residue (per the Chicago Climate Exchange); or metering and collecting biogas (methane). The United States currently has no standardized QMV methods. Third-party verification will likely be part of standard practices for QMV. QMV are essential to ensure that a project is resulting in real, absolute reductions in GHG emissions over time. Consistency among markets in accepted QMV methods will be important in the future for widespread, uniform trading of carbon credits in and among various markets.

Permanence
Generation of carbon credits due to reduction of GHG emissions resulting from a project must be permanent to have a lasting benefit to the environment. A project should have close to 100 percent permanence. Permanence is the length of time or the degree to which GHG are removed from or kept out of the earth’s atmosphere. For example, burning methane permanently removes it from the atmosphere. Carbon credits generated in a project with 100 percent permanence likely will have greater monetary value than those with less permanence. Other projects such as a no-till farming practice or sequestration projects may not achieve complete permanence because this sequestered carbon may find its way back to the atmosphere (retransmission such as logging of a forest or rotting organic matter). Though they lack complete permanence, carbon credits generated through sequestration still provide valuable mitigation benefits by removing GHG long enough to counteract greenhouse effects, and they buy time for technological developments that will provide more cost-effective options to reduce GHG emissions. A storage threshold for permanence is likely to be 100 years from the time of capture. Whether the United States will adopt this threshold is unknown. Nonetheless, carbon stored for less than 100 years could be discounted monetarily but still have value.

Currently, there is no regulatory guidance for dealing with permanence. Instead, trading systems and GHG registries have set eligibility cutoffs for minimum storage of GHG to claim carbon credit generation and offsets. Achieving permanent GHG reductions through mitigation projects is an environmental and economic priority.

No leakage
Leakage is the shift or displacement of GHG emissions to some location outside the project boundaries and must be avoided. Leakage occurs most commonly with land-based carbon emission-reduction projects. A forest that was actively sequestering carbon but is then cut down and replaced by a dairy farm with an anaerobic digester project is a good example. The forest may have continued to reduce GHG emissions more than the digester project. To minimize potential leakage, land-based projects should be located in areas that have few or no competing uses or potentials to reduce net GHG emissions. Leakage of GHG associated with a project should be considered and possibly estimated before project implementation.

Summary
Carbon markets provide a financial incentive to adopt conservation, mitigation and carbon-credit-generating technologies and practices to reduce GHG. They also offer some agricultural businesses the potential to generate revenue and to help compensate for additional on-farm costs associated with voluntary and/or future mandatory air quality improvements and energy management.

This paper is from the 2009 Manure $ense guide. To download the entire guide click here.