Implementing Corn Belt Soil Carbon Projects

1. Implementing Corn BeltSoil Carbon Projects By: Gordon Smith, Environmental Resources Trust Forestry and Agriculture Modeling Forum Workshop 3: Modeling to Support Policy Shepardstown, WV, October 12-15, 2004

2. Presentation Outline • Assigned scenario: Implementation and effects of program design choices • Project experience • Pacific Northwest Direct Seed Association-Entergy • Existing Iowa soil carbon deals • Needed modeling • Selection bias and when we don’t need to know about uncertainty

3. Assigned Scenario • Corn belt soil carbon sequestration • 5 million tons C annual sink in 2015 • Assume: soil carbon sequestration by switching from plowing to no-till

4. Assumed Program Design • Aggregator contracts with farmers to use no-till for a specified period • Aggregator promises to deliver tons by a schedule • Sequestration is measured • Farmers demand payment up-front

5. How Big is this Program? • Assume sink 0.5 Mg C/ha/yr • 10 million ha (25 million acres) • Over 40,000 farms • assuming 600 ac/farm

6. Baseline - Conceptual Approach • Principle: Set baseline by looking at behavior of others not in program • What is happening to soil C? • Gained 0.25 Mg/ha/yr, 1970-1990 (Donigian et al. 1994) • What practices are used? • 42.5% of acres in Midwest in conservation tillage in 2002 (CTIC)

7. Baseline - In Practice • Principle: Set baseline by looking at behavior of others not in program • 1/4 to 1/2 of tons added to soil probably will not be beyond baseline • If proportional additionality, could double program size to 20 million ha (50 million ac) & 80,000 farms

8. Baseline - Alternative Concepts • Baseline is stock present on farm at enrollment in program • Would not increase program size • Current no-tillers would sequester little • Barriers approaches: Assess situation and motivation of individual farmers • Expensive • Not objectively verifiable

9. Measurement and Monitoring • Track locations of program lands • Confirm use of conservation practices • Annual farmer attestation (postcard) • Conservation District (windshield inspection) • Audit (sample field measurements) • Remote sensing? (not yet workable) • Quantify change in soil C stock • Program and baseline lands • Field sampling • Escrow $ for all monitoring

10. Verification Costs - Land Location • Track locations of program lands • Cheap to reference insurance or federal subsidy program records • Somewhat expensive to have farmer draw on ortho photo and digitize • Very expensive to GPS field boundaries • Future: download parcel boundaries from county assessor GIS • Would have to adjust to net field area

11. Verification Costs - Practices • Confirm use of conservation practices • Annual farmer attestation (postcard) • Conservation District (windshield inspection) • Audit (sample field measurements) • Remote sensing? (not yet workable) • Cost should be small

12. Verification Cost - C Stock Change • Sample program and baseline lands • Stratify by expected C stock change • Crop productivity/crop C input • Soil disturbance • Design must allow adding & deleting fields • Sampling & analysis cost of $100K for 5 million tons is $0.02 /ton

13. Uncertainty • Posit: Have 90% confidence that at least the claimed amount of offset has occurred • Could use mean estimate if no chance for adverse selection • Energy sector uses mean estimates • No performance uncertainty when measuring outcomes

14. Required Measurement Precision Acceptable Error

15. Reversibility • All terrestrial and geologic stores can be released, including coal beds • Rental viable if offset price is constant or declining

16. Payments for Reversible Offsets • Example, assuming: • Constant value of permanent offset • Annual interest rate = 6% • Constant sequestration of 0.75 MgCO2/ac/yr • One time, up-front rental payment for all sequestration and storage for life of project • No discount for uncertainty, performance risk, leakage, or non-additionality

17. Rental Payment Calculation Where: PR= price of rental PP= price of permanent offset r = annual discount rate t = number of years of rental

18. Example Payments per Acre

19. Payment for 600 ac. Farm

20. C Payment Relative to Land Value • At $10/ton CO2, undiscounted GHG payments can approach 10% of land value • Corn belt: 10 Mg C/ha = 15 Mg CO2/ac = $150/ac • Dry land: 2 Mg C/ha = 3 Mg CO2/ac = $30/ac • Will farmers choose permanent limit for this price? • Can soil C equalibrium level be raised, increasing C gain and revenue?

21. Fuel Emission Reductions • Assume 2 gallon/ac/yr reduction • Offset is permanent; no discounts • At $10/ton CO2 payment is $0.20/ac/yr • Present value of infinite stream: $3.33/ac at 6% discount rate • $2,000 payment for 600 ac farm

22. Leakage • Principle: If reduce production of a market good, must estimate displacement of production • Use price elasticities of supply and demand (Murray et al. 2004) • Large proportion leakage for commodities • Elsewhere may have lower emissions per unit of production

23. Transaction Costs • Sources of transaction Cost • Contracting with farmers • Contracting with buyer • Calculating farmer payments • Distributing payments • Quantifying sequestration • Providing for sequestration shortfall • $100/farm likely to be 5-10% of revenue

24. Contracting Issues • Easements on land substantially reduce its value • Landlords must sign any C contract lasting longer than the rental contract with the farm operator • 44% US cropland rented (NASS) • Rental may have to be swap for buyer to retire offsets

25. Aggregators • Aggregators required to: • Gather acres to spread measurement cost • Spread risk • Different contracts with farmer & buyer • Contract with farmer for practices • Contract with buyer for tons • Must have relationship with farmers to limit transaction costs

26. Pacific Northwest Direct Seed Association - Entergy • Contract established 2002 • Generate offsets by direct seeding • Two products: • 10 year lease of soil carbon sequestration • Permanent trade of fuel use reductions • 30,000 tons traded • $75,000 payment • Implies $10.66 price of permanent offset

27. Pacific Northwest Direct Seed Association - Entergy • Assumed greenhouse benefit • 0.15 ton C/ac/yr = 0.55 ton CO2/ac/yr • 4 gallon/ac/yr fuel reduction • Benchmark greenhouse benefit • 0.10 ton C/ac/yr = 0.37 ton CO2/ac/yr • 2 gallon/ac/yr fuel reduction • Planned measurement/monitoring not yet done • Contract not assign responsibility or budget

28. Pacific Northwest Direct Seed Association - Entergy • PNDSA limited enrollment to 100 ac/farm • Limits risk to farmers • Transaction cost becomes large part of total revenue

29. Iowa Soil Carbon Deals • GEMCo – IGF Insurance (1999) • No soil offsets delivered • Hog waste offsets delivered • Arizona Public Service – Sherwood Forestry (1999) • Options trade • Chicago Climate Exchange – Iowa Farm Bureau (2003-2006)

30. Needed Research:Confidence Intervals • Want certainty that getting claimed tons • Can accept large confidence intervals if multiple projects with unbiased estimates

31. Mean Estimatesvs. Confidence Intervals • Mean estimate OK when no chance of selection bias (e.g. national inventories) • Selection bias likely to exist with voluntary project enrollment • Project participation limits other options • Enroll lands with least earning potential • Correlates to lower productivity • Correlates to lower sequestration

32. Proposed “Discount” byQuantification Method

33. Needed Modeling:Emissions Per Unit Harvest • Calculate volume of product displaced using elasticities of supply and demand • Example: displacement of timber harvest from PNW to SE US: SE has much lower emission/acre harvested but several times area is harvested; net small gain • Estimate “slippage” in afforestation • Estimate emissions per acre

34. Needed Modeling:Forest Sequestration Projection • COMET for forestry • Forest Service has been improving look up tables • Forest Service FVS model • Make user interface simpler • Improve less intensive harvest regimes • Test reliability for older forests

35. END