The Clark Group, LLC

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The Clark Group, LLC
Not your Fathers Carbon Market An Update from
Agricultures Point of View

• Laura Sands

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How would a carbon market work?

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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

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Overview

• Legislation to Watch
• Politics Process
• Measurement
• Market PotentialA very different scenario

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Legislation to watch
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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

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Each De-carbonizing Wedge represents 25 billion
tons of carbon avoided or reduced. 7 wedges
needed to reach stable carbon emissions.
Source Robert Socolow Stephen Pacala
Scientific American, Sept. 2006
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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

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Key emerging forces

• House Dingell draft billincludes 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.

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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

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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

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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

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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.

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Cap-and-Trade Is Climate Legislation Coming?

• Dingell/Boucher White Paper
• The agricultural sectors 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.

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Climate Politics changing
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Major confluence of events

• Democratic Congress
• Business is supportive
• Agriculture sees opportunity for major revenue
  stream
• Court decision is key

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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.
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www.us-cap.org/
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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

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What do (or should) we want?

• Ag should argue for unlimited agricultural
  offsets. This would bring down the cost of
  compliancesupport from utilities
• Generate potential for billions of revenue for
  ag-based GHG reductions
• Combination of allowance and offset may be best
  optionespecially for early adopter protections

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Stabenow amendment

• Called for 1 billion ton carbon limithigher 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

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The science of sequestration
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Consortium for Agricultural Soils Mitigation of
Greenhouse Gases

• Kansas State University Colorado State
  University
• Iowa State University Michigan State University
• Montana State University University of Nebraska
• Ohio State University Purdue University
• Texas AM University Pacific NW National Labs

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Duke Standard Measurement Guide
Authors/Advisory Committee from Texas AM
University Colorado State University University
of New Hampshire Institute for Lifecycle
Environmental Assessment Rice University Holland
Hart LLP Environmental Resources
Trust Princeton University Kansas State
University Stanford University Brown
University Duke University
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Whats different this time around?

• We will have a market

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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 acrefor practices
• Ag is best low-cost solution for rapid reductions
• Publicly traded commodity
• Potential for ag groups to aggregate and make

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Market potential
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Illustrative Ranking of Carbon as a Crop in U.S.
Per Proposed GHG Limits in Senate Bill 280
(Lieberman-McCain) 1/12/07
Carbon at 10/MT CO2e,
Crop Source USDA - National Agricultural
Statistics Service US Crop Rankings - 1997
Production Year Ranking Based on Value of
Production
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Estimates for a mandatory carbon market

• Mandatory carbon market price estimate
  10-20/MMTC.
• To get a more realistic picture of potential
  market value, lets assume 15 MMTC

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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

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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

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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

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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 _at_ 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.

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