Carbon Markets: A Potential Source of Income to Farmers

1. Carbon Markets: A Potential Source of Income to Farmers Southern Region Agricultural Outlook Conference September 23, 2008 Luis A. Ribera Assistant Professor & Extension Economist

2. Carbon Sequestration • Carbon sequestration can be defined as the capture and secure storage of carbon that would otherwise be emitted to or remain in the atmosphere. • What are Carbon Credits? Two ideas: • Prevention/reduction of carbon emissions produced by human activities from reaching the atmosphere by capturing and diverting them to secure storage. • Removal of carbon from the atmosphere by various means and securely storing it.

3. Agriculture’s Role… • It is estimated that U.S. agriculture could sequester 275 - 900 million tons of carbon dioxide annually. • Dr. Richard Sandor (CCX Founder) estimated future value of agricultural offsets at up to $20 Billion annually • Agriculture could be the “bridge” to climate stabilization in the coming years at a much cheaper cost than some of the big technology ideas like underground or ocean storage.

5. Chicago Climate Exchange - CCX • The CCX was launched in 2003 • Trading operation that is based on a voluntary, but legally binding association of a number of emitters and offset suppliers. • The commodity traded at the CCX is the Carbon Financial Instrument (CFI), each of which represents 100 tonnes of CO2e. • The volume traded on the CCX in the first quarter of 2008 was about 25 million tonnes of CO2e or annually around 100 million tonnes.

6. CCX – Carbon Financial Instrument

7. Price forecasts for US carbon credits

8. Chicago Climate Exchange - CCX • Four types of eligible offset projects • Soil Offsets • Rangeland Offsets • Forestry Offsets • Methane Offsets

9. CCX – Conservation Tillage • Conservation Tillage • Minimum contract size 10,000 tonnes from a group of farms so need around 20,000 acres • Aggregator is like the county elevator • Minimum 5 yr commitment of min till – no history • At least 2/3 of soil undisturbed and at least 2/3 of residue on the soil surface must remain • Farms must have at least 250 acres • No commitment after contract expires • Cropland converted to permanent grass (after Jan 1, 1999.)

10. CCX – Conservation Tillage

11. CCX – Permanent Grassland

12. CCX - Rangeland • Rangeland • Non degraded rangeland to increase CO2 sequestration through grazing land management • Follow NRCS Guidelines on stocking rates and managing harvest of vegetation with grazing animals • Restoration of previously degraded rangeland • Must take place on rangeland with avg. rain between 14” to 40”

13. CCX – Rangeland Management

14. Example on Cons. Tillage Contract (2,500 ac) • Assumptions: • Rate of Absorption: 0.4 Mton/Year • Price $6/Mton/Year • Aggregator Charge: 10% of market price • Verification Fee: $0.12/credit • Registration Fee: $0.15/credit • Trading Fee: $0.05/credit • Retention: 20% of total offset each year • Sources: • http://www.chicagoclimatex.com/ • http://www.agragate.com/

15. Example on Cons. Tillage Contract (2,500 ac)

16. Sensitivity Analysis

17. Bottom Line • Not enough money to make producers get on board • Expectations on EPA regulations • Will the US join Kyoto protocol? • What will the next government do? • First adopter problem • Paper: http://www.afpc.tamu.edu/