Carbon Trading in Canada

1. Carbon Trading in Canada Conservation Agriculture Carbon Offset Consultation October 29, 2008 Don McCabe Soil Conservation Council of Canada

2. Presentation Outline • Environmental Concern to Market Solution • Real, Measurable, Additional (Government and Farmer Definitions) • Baselines and Start Dates • Market Participation (ownership, aggregation, liability, permanence)

3. Environmental Concern

4. Market Solution • Kyoto and Canada - recognition of soil carbon sequestration • Chicago Climate Exchange - commercialization • Alberta’s compliance market -soil offsets part of the solution • World Market Evolution

6. Key Elements of a Performing Global Carbon Market • Competitive energy markets • Common, fungible units of C • Standardized reporting of GHG data • Transferability of assets across boundaries Number One Risk – Lack of a Common Standard - World Bank, State and Trends of the Carbon Market 2007

7. Carbon Accounting Standards Alberta/ Canada Accounting Rigor Standardizing means making policy decisions! Others? CDM GHG Protocol CCX Ease of Use Policy Neutral, Flexible ISO 14064-2

8. Real, Measurable, Additional Process Definitions In Canada And some under construction…..

9. Emission Reduction Criteria Considerations • Real Reductions – beyond business as usual (Establish valid and defensible baseline – activity and emission factors are the best available (post 2000) • Measurable, Quantifiable – agreement on best available science and activity data – develop a Protocol. Must stand up to a Review Process. • ‘Verifiable’ – Tracking and reporting process to support the Program - clear, defensible, and have good QA/QC procedures.

10. Quantification Protocols • Canadian Government will have Approved Protocols to ensure ‘Real, Measurable and Verifiable’ criteria are met. • Science-based • International compatibility • Streamlined use • Transparency and consistency • Reduced costs and administration • Provides certainty for investors – GHG tonnes reduced Defines the Supply – Size of the Reduction

11. Process Definitions • Additionality (Incrementality) • GHG reductions/removals should only be recognized for project activities that would not have happened under business-as-usual • Reversibility • In removal projects, sequestered carbon can be released to atmosphere if activities terminated • Discontinuity • Ag projects often involve many small sites

12. Real, Measurable, Additional Farmer Definitions

15. Real Environmental Value • Water filtration and storage • Biodiversity (numbers, above and below)

16. Measurable & Additional • Soil organic matter testing • Carbon sold as a commodity

17. C sequestration as a Commodity Repurchase Credits Sell Credits Maintenance Liability

18. Measurable & Additional • Soil organic matter testing (M & A) • Carbon sold as a commodity (M&A) - Contracts and aggregators - reversibility and discontinuity solutions Not too much of anything in farming to a farmer is “Business as Usual”

19. Presentation Outline • Environmental Concern to Market Solution • Real, Measurable, Additional (Government and Farmer Definitions) • Baselines and Start Dates • Market Participation (ownership, aggregation, liability)

20. Baselines and Start Dates • Baseline types - Project specific - Sector specific (eg. composting) BUT for tillage protocols, Canada requires regional flexibility due to different methods of no till, climates and crop production.

22. Basic Credit Creation in Tillage GHG reduction = Coefficient X Activity Development of the Coefficients: • Canada emissions inventory approach for IPCC Tier 2 coefficients - changes in Soil Organic Carbon using all realistic cropping-tillage-climate-soils management combinations at the SLC (soil landscapes of Canada) analytical unit • Soil C Change Coefficients were weighted-averaged up to the soil reporting zones for CO2e • Fuel consumption changes and N20 changes with tillage were derived as well and scaled to similar units

23. Tillage Protocol Variables required based on farm location / dominant soil zone: Reduction Factor / Sequestration Factor For Relevant Till Practice in Relevant Area and Geographic Zone Map of Soil Zones

24. Ensuring IncrementalityBy Baseline and Start Date Definition Adjusting the Baseline Coefficients – ensures only incremental carbon is rewarded • The quantification science uses a discounted or ‘adjusted baseline’ to subtract out carbon accrued to date (2000 start year) • Focus is on the new C removals, not the new activities – only exception to the rule (maintaining the sink is important) • The coefficients in some regions are nearly zero due to high rates of adoption, or discounted by 40 to 60% in others. • Allows early adopters to gain credit and maintain the sink, alleviating a perverse incentive to till soil to enter the Offset system.

25. Tillage System Management Protocol Baseline Condition

26. Tillage System Management Protocol Relevant SS’s: Energy use from: B9 Pesticide Production B3 Seed Distribution (On-Site) B7 Fertilizer and Lime Distribution (On-Site) B11 Pesticide Distribution (On-Site) Carbon sequestration under B13 Soil and Crop Dynamics Nitrogen emissions under B13 Soil and Crop Dynamics

27. Presentation Outline • Environmental Concern to Market Solution • Real, Measurable, Additional (Government and Farmer Definitions) • Baselines and Start Dates • Market Participation (ownership, aggregation, liability, permanence)

28. Ownership Carbon credits created by farmers on their own land or through contracts with landlords belong to landowners (SCCC, 2003) Aggregation Needed to “bulk” the carbon commodity, ensure low transaction costs and liquidity to market Market Participation

29. Market Participation Liability/Permanence • Canadian Govt. wants temporary (buyer liable, 1 yr.) and permanent credits (25 yr? period, producer liable for reversal) • Market buyers are clear. Temporary credits are for TEMPORARY TARGETS. No market here! • Producers require protection

30. Alberta Approach to Permanence • Government backs the liability • Assurance Factor • Based on expert opinion • Risk Assessments - frequency of reversal of tillage practices • Reversal risk – shaves off C for every tonne created – into Reserve-Holdback enabled by government policy • Backs the liability of a reversal of Soil C • Farmers must disclose reversal of practice - no credits earned for that year (no liability on farmer/project developer) Takes a Time-discount problem and solves it with a volume-discount reflecting historical reversal frequency

31. Jenny’s Equation for soil formation Soil=f(cl,pm,r,o,t) Soil is a function of climate, parent material, topography, biota and time Farmers are managers of the carbon and nitrogen cycles. Biota and time are the factors that can be managed here. Summary

32. Summary • Farmers have real, measurable, additional carbon credits to offer world markets • Clear policy is needed and will make or break the opportunities • Commercialization can maintain and enhance sustainability with policy harmonization • Stay tuned……..

33. Thank You! Questions? Don McCabe don.mccabe@ofa.on.ca