Keep informed on the carbon credit market
March 3, 2009
A change in administrations in Washington, D.C. has, at the very least, modified and perhaps stimulated discussions of climate change and the role of greenhouse gases. While such discussions can become emotional, there are a number of facts which remain incontrovertible, regardless of one’s view of the dispute:
– Atmospheric concentrations of compounds identified as greenhouse gases, including carbon dioxide, have increased measurably in the recent past.
– Human activities, including combustion of fossil fuels, lead to the production, or emission of carbon dioxide.
– Natural processes, notably photosynthesis and plant growth and decay, which occur on managed agricultural lands can sequester carbon.
– A voluntary, private sector market has developed which facilitates the purchase and sale of “carbon credits.”
One portion of this carbon credit market deals with rangeland managed for livestock production. An appropriate question for rangeland owner/operators is: “If I choose to, how can I best capitalize on this carbon credit market?”
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Like any market, understanding the product, what gives it value and how it is traded, are essential. While the “commodity” traded is given units of metric tons of CO2, the contracts negotiated involve acres of land. The Chicago Climate Exchange (CCX) provides an orderly arena for buying and selling carbon credits in a manner similar to livestock or grain exchanges. Currently, carbon credits have value because buyers are voluntarily willing to purchase them.
The premise which supports the market is that carbon dioxide emitters, or polluters, may compensate for their contribution to atmospheric carbon dioxide (or other greenhouse gas) buy purchasing “offsets” which in turn provide a monetary incentive to the seller to either decrease emission or reduce atmospheric concentrations. Like all commodities, there are buyers, sellers and speculators. Some of the perceived value in carbon credits is related to the possibility that future regulation will change the voluntary domestic trade to a mandatory, regulated system. Also, like other commodities, recent price history has been exceptionally volatile. Since May 2008, carbon credits have traded over a range exceeding $7 to less than $1 per metric ton. Credits are currently trading at the $2 level.
The process of carbon sequestration depends on normal biological processes. Plants remove carbon dioxide from the atmosphere, grow, decay and can contribute to the soil carbon pool. A further premise is that under proper grazing management, this soil carbon pool is stable or gradually increasing, reliably “tying up” some quantity of carbon. For rangelands in the Tri-State region, the assumed rate of sequestration is 0.27 metric tons of CO2 per acre per year.
For rangeland owners, CCX has established procedures that allow contracts to be established with potential buyers, facilitated by the Exchange and third party “aggregators.” Just as livestock and grain contracts require a minimum quantity, carbon credit contracts generally require the accumulation of managed acres offered by multiple owners to meet minimum levels. This service is provided by aggregators, many of whom are farm organizations and who are also members of CCX.
Minimum contract requirements include: a signed sales contract, enrollment worksheets which describe the relationship between seller aggregator and CCS, maps of the land enrolled and a rangeland management plan. Contracts obligate the landowner to management for a five year period. The management plan describes the landscape and vegetation and provides procedures that will insure patterns and levels of use which are consistent with moderate utilization. The plan describes records that will be maintained, such as precipitation, turn-in and turn-out dates and numbers and weed control practices. A required portion of the management plan is drought mitigation practices which describe how livestock numbers will be modified in order to ensure moderate utilization levels. Contracts are subject to verification by third party inspectors, which would include ranch visits.
Landowners should be aware of some differences from conventional livestock contracts. Aggregators accumulate contracts and then attempt to sell carbon credits when they believe the market is favorable. For example, at current prices, soil carbon credit exchange volume is very low. Because the market is new and volume is small, sales may occur infrequently and producers have essentially no control over when the sale occurs. If the exchange grows and volume increases, liquidity may also increase. Additionally, CCX procedures require maintenance of a 20 percent reserve which protects the exchange and buyers from default on contracts. Contracts are designed to result in an annual payment. If the contract is completed, payment for the 20 percent reserve is included in the final payment of the contract.
Carbon offset credits provide owners of rangeland used in livestock production with a potential alternative income stream. At current trading levels, payments may be on the order of 40 cents per acre. At recent market highs, contracts might have been worth three times as much.
Potential risks and returns must be evaluated. The downside may be that flexibility may be reduced and inspection and verification are required. However, the management plans necessary promote and require good grazingland stewardship. Regardless of your feelings about global warming, and whether you are prepared to sign a carbon credit contract, staying informed about the carbon market makes good business sense.