Course: BFM 101 Biofuels Fundamentals

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Carbon Offset Markets
Carbon Offset Markets

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 (e.g. power plants or manufacturers) who need to offset their emissions based on a government set emission “cap.” The emitter may either choose to reduce carbon emissions or purchase credit(s) from a seller who has taken action to reduce carbon emissions. Planting trees or using no-till or strip-till farming are practices that have been shown to capture carbon from carbon dioxide, a primary greenhouse gas. Consequently, forest owners and agricultural producers practicing no-till strip or strip-till farming may qualify as sellers of carbon credits.

History and Background

The Kyoto Protocol of 1997 imposed carbon emissions limits on participating nations. This meant that carbon-emitting enterprises in these nations were legally obligated to either remain within set 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 voluntary pilot carbon credit trading market for U.S.-based emitters. Because participation is voluntary, demand for credits is lower than in European markets, creating a disparity in carbon credit prices. For example, in Europe, the June 2008 price of a credit representing one metric ton of carbon dioxide was approximately $40.00, while in the U.S., the price was approximately $7.50. After operating for eight years, the CCX program shut down. The demise of the voluntary market approach is attributed to the uncertainty of passing climate legislation in the U.S. In addition, many economists believe a carbon market works more effectively with mandatory versus voluntary methods to measure and verify reductions.

The Role of Agricultural Practices and Forests

Grasses or plants in no-till or strip-till cultivation or trees in forests are known for their ability to absorb or sequester carbon. As a plant grows, it accumulates biomass. This biomass grows incrementally, using more and more atmospheric carbon for 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. 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 to use forest or agricultural biomass, rather than coal, to generate electricity. This brings 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 because no U.S. climate legislation has been passed. Two major carbon brokers – called 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 who had qualifying land practices. NDFU and AgraGate reported nearly 10,000 farmers and ranchers from 40 states earned about $16 million through the program between 2003 and 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 to around 50 cents per metric ton.

According to the enrollment records from NDFU and AgraGate, more than twenty million tons of carbon dioxide has been sequestered under the program since it started. There are a number of other aggregators throughout the country as well. However, lack of climate change legislation in the U.S. is affecting the carbon credit program. Congress did not pass the proposed cap-and-trade climate legislation in 2010. It may be that the weakened U.S. economy, 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.

However, ecosystem service payments may be offered through USDA. These may include water quality or nutrient trading, carbon sequestration/storage, or wildlife habitat credits. Landowners would receive incentive payments for land use practices that offer environmental benefits, such as: creating buffer strips, planting living snow fences or field windbreaks, or 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. Thousands of U.S. landowners received additional income that they would not have received otherwise, and conservation practices were established that protect soil, water, air and other natural resources.  The future of carbon credit program in the U.S. is unknown, but it could prove to be a valuable tool in protecting our resources as we sustainably manage our land for food and bioenergy.

Resources provided by the eXtension Farm Energy Community of Practice at http://www.extension.org/ag+energy

Landscape Diversity
Life Cycle Assessment