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The Carbon Credit Program

Dean Current, Diomy S. Zamora and Gary Wyatt

Carbon markets are thought to be one of many innovative, market-based solutions to global climate change. These markets allow for the purchase of carbon "credits" by carbon emitters who need to offset their emissions based on a government set "cap". The emitter could reduce carbon emissions or purchase credit(s) from a seller who is taking some action to reduce carbon emissions or sequester carbon. No-till or strip till farming in agriculture landscapes or trees in forested landscapes are great at sequestering carbon from carbon dioxide, a primary greenhouse gas. Consequently, agricultural producers practicing no-till strip or strip-till farming and forest owners may qualify as sellers of carbon credits -- a tradable permit that provides monetary value for sequestered carbon. This fact sheet explains some of the nuances of these emerging carbon markets and potential income opportunities available to agricultural and forest landowners. It also provides updates on the carbon credit program in the US.

History and Background

The Kyoto Protocol of 1997 imposed carbon emissions limits on its signatories. This meant that carbon emitting enterprises in signatory nations were obligated to either remain within its emissions limits or purchase carbon credits from the European carbon market. Because the United States did not sign the Kyoto Protocol, it could not participate in the European market, so a voluntary carbon credit trading market was established. In 2003, the Chicago Climate Exchange (CCX) set up a working carbon credit trading market for U.S.-based emitters (Sustainable Ag Energy CoP, 2011). Because this market is voluntary, demand for credits is lower than in European markets, creating a disparity in carbon credit prices. In Europe, the June 2008 price of a credit representing one metric ton of carbon dioxide is approximately $40.00, while in the U.S., the June 2008 price is approximately $7.50.

The Role of Agricultural Practices and Forests

When a manufacturer or producer exceeds its emissions limit, it must purchase credits from either another entity that is below its limit, or from a carbon sequestration project, such as a forest or in grassland, no-till or strip till agricultural practices, that results in a net reduction of atmospheric carbon dioxide. Grasses or plants in no-till or strip till or trees in forests are well-known for their ability to absorb or sequester carbon. As plant grows, it accumulates biomass. This biomass grows incrementally using atmospheric carbon in photosynthesis. A rapidly growing young forest, for example, has a large yearly incremental increase in biomass and thus has a large capacity to sequester, or absorb, carbon from the atmosphere. This ability to absorb carbon is what makes forests an important source of credits from sequestration projects. Further, carbon absorbed through no-till or strip till is stored in biomass and in soil. Carbon credits can also be generated when carbon-neutral fuels are substituted for fossil fuels. One such example is substituting coal with forest or agricultural biomass in electricity generation. This source of credits creates an additional income to landowners for harvest residues and other forest biomass that are used for energy production.

Updates on Carbon Credit Program/Market in the US

The carbon credit program that paid farmers and landowners millions of dollars for reducing greenhouse gasses through carbon storage land use practices (i.e., no-till or strip till farming, grasslands and forests) has virtually stopped primarily due to no U.S. climate legislation being established. Two major aggregators (i.e., North Dakota Farmers Union - NDFU and AgraGate) in the Midwest have been unable to generate revenue from the sale of carbon credits in recent months. Both NDFU and AgraGate still have large quantities of credits to sell, and are actively seeking buyers, in the hope of eventually returning additional revenue to participating farmers, ranchers and foresters. During its existence, the carbon credit program brought additional income to U.S. landowners which had qualifying land practices. NDFU and AgraGate reported nearly 10,000 farmers and ranchers from 40 states have earned about $16 million through the program since it started in 2003 up to 2010. The carbon credit voluntary market peaked at $7.50 a metric ton in 2008 and is now quoted at 5 or 10 cents a metric ton, with sporadic trading around 50 cents per metric ton.

Many benefits emerged from the voluntary carbon credit program. Thousands of US landowners received additional income that they would not have received otherwise. More than twenty million tons of carbon dioxide has been sequestered under the program since it started based only on the enrollment records NDFU and AgraGate. There are a number of Aggregators as well throughout the country. Conservation practice were implemented and established that protected soil, water, air and other natural resources.

However, lack of climate change legislation in the US is affecting the carbon credit program. Congress did not pass the proposed cap-and-trade climate legislation in 2010. The poor U.S. economy from the recession coupled with the possible increase in energy costs from a cap and trade bill led to the lack of support for this legislation. There may be carbon programs with regional cooperation among state and government entities such as the Western Climate Initiative, but these programs may not offer much opportunity for agricultural credits (David Miller, AgraGate, 2010).

However, ecosystem service payments may be offered through USDA. These may include water quality or nutrient trading, carbon sequestration/storage, wildlife habitat, etc. Landowners would receive incentive payments for land use practices which would offer these environmental benefits: buffer strips, planting living snow fences or field windbreaks, planting erodible fields to grassland or short rotation woody crops that may be used for biomass. But, such incentive payments would likely operate quite differently than carbon credits traded on an exchange.

The outcomes and benefits of the carbon credit program from 2003 to 2010 have been many. The financial benefits to landowners have been documented above. However, the future of carbon credit program in the US is unknown but there is value in protecting our resources as we sustainably manage our land for food and bioenergy.

Resources:

Center for Integrated Natural Resources & Agricultural Management (CINRAM)
University of Minnesota Extension - Agroforestry

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