Farm and Forest Carbon Sequestration: Can Producers Employ it to Make Some Money?

Potential Policy Toward GHG Emission Mitigation

In early 2002, the US administration announced the Clear Skies Initiative, saying that the "administration is committed to cutting our nation's greenhouse gas intensity—how much we emit per unit of economic activity—by 18% over the next 10 years. This will set America on a path to slow the growth of our greenhouse gas emissions and, as science justifies, to stop and then reverse the growth of emissions" (President Announces, 2002). Under this initiative, emissions per unit of gross domestic product would be reduced by 2012. This program is currently voluntary. If implemented, it has been estimated that by 2012 the program would generate GHG emission reductions of a size about one sixth of those that would have arisen under the Kyoto implementation.

There are also various emission-reduction-related legislative initiatives, the most prominent of which is the McCain-Lieberman Climate Stewardship Act,² which, if passed, would limit countrywide emissions and establish a market in which producers could sell GHG emission offsets and sequestration.

Beyond the federal and global emissions reduction plans, there are a large number of state initiatives, all aimed at reducing emissions. For example, officials from eight states, including New York, New Jersey, Iowa, and California, recently filed a lawsuit against utility companies, charging that they generate carbon dioxide emissions that harm human health and the environment. Other states have demanded emission-reducing technologies in power plants. Oregon has started the Forest Resource Trust program, which facilitates sequestration offsets by power plants.³

Who Might Buy and Sell in a GHG Offset/Carbon Market?

Emission offset credits can arise from various sources. GHG emitters may alter their practices to lower emissions, reduce fuel consumption, or switch to alternative fuels (for example, from coal to natural gas or biofuel). Alternatively, various agriculture- and forestry-based strategies can be pursued that involve soil or ecosystem sequestration through tillage change (i.e., adoption of conservation tillage), grassland expansion, afforestation, biofuel production, or longer forest rotations, among many alternatives (see McCarl & Schneider, 2001, for details).

As currently envisioned in the US policy process, the set of buyers and sellers of emissions credits is largely constrained to the large GHG-emitting industries (mainly power plants and other industrial power generators) and the land-using sectors. The land-using sectors traditionally have been considered to be sellers of credits, although this status clearly depends on an eventual distribution of property rights. For example, emissions from the land-using sectors could be capped at levels that would require cutbacks in those industries. At this time, it is less clear how other important GHG-emitting sectors, such as drivers of cars or other vehicles, would fit into a trading system.

The Current Prospects for Sequestration Producers' Making Money

Existing Status of the US GHG Market

Given the current policy arena, a niche carbon market has arisen. Emitters and offset producers already have signed limited-scope contracts for producing carbon offsets. The motivations of the participants in this niche market appear to be a mixture of:

• environmental citizenship goals, where firms wish to show themselves to be responsible environmental actors (possibly for advertising purposes);
• business venture exploration, where firms desire to see if they can develop future salable capabilities for GHG emission management; and
• cost-reduction efforts, where firms wish to tie up or discover low-cost alternatives that may be used to comply with future emission limitations.

These niche markets generally are operating in one of two ways:

• Direct contracts. Some energy companies have directly approached producers to generate carbon offsets. For example, Reliant Energy, a Houston-based energy company, is funding planting of over 150,000 trees in an effort to capture an estimated 215,000 tons of carbon dioxide, generating "carbon credits" that will be retained by Reliant.
• Market trading. Commodity-market-like trading operations are emerging. In the United States, the Chicago Climate Exchange (CCEX) is based on a voluntary association of a number of emitters and offset suppliers. The CCEX has set up guidelines for participation. For example, in the case of soil sequestration, an entering group has to represent at least 10,000 metric tons of carbon, has to commit to four years of continuous conservation tillage, and must not plant soybeans for more than two years. No requirements are imposed on how that land was used in the past. Participating farms must have at least 250 acres. Farmers will be paid at the rate of 0.14 ton of carbon per acre. Carbon offsets generated from grassland also get credits at the rate of 0.2 ton of carbon per acre, provided grasses were planted after January 1, 1999. For forestry, the CCEX carbon allowance is based on a combination of age of the trees, planting densities, and tree species. A forester entering contract with CCEX must at least offer 3,400 tons of carbon for trees planted after January 1, 1990 on sites not forested before then. On average, an acre of trees provides approximately a ton of carbon (McCarl & Schneider, 2001). Under the CCEX, the auction prices as of early 2004 have ranged from $1.84 to $9.9 per ton of carbon, with a weighted average of $3.6 per ton of carbon. Under the CCEX terms and these prices, farmers would get $0.5/acre for tillage changes, $0.74/acre for grass conversions, and about $3.6/acre of forest.

Are Farmers Competitive Suppliers of Carbon Offsets?

Paustian, Kurkalova, Babcock, and Kling (2001) show that sequestration cost under the tillage change may vary from $0 per ton of carbon to over $300 per ton of carbon for farmers in Iowa. McCarl and Schneider (2001) show that land management practices (mainly tillage change and converting cropland to grassland) are competitive at relatively low GHG offset prices but indicate the potential may be capped because offsets from forestry and bio-fuel production are competitive at higher GHG offset prices.

Under the current policy situation in the United States, which focuses on voluntary actions and goals rather than targets, GHG offset prices are likely to remain low, and forestry and agriculture have a small role to play. However, current research suggests that a combination of strong near-term targets for GHG emission reductions and a fully functioning GHG market could raise the willingness to pay for sequestration options substantially. For example, Edmonds, MacCracken, Sands, and Kim (1998) estimate per-ton costs of meeting the Kyoto Protocol target for the United States showing prices as high as $250/ton if all cuts were borne by the energy industry. They also show that with full international trading, prices fall to around $25 per ton of carbon—a price that is still substantially higher than prices currently observed in the United States.

Key Problems Influencing Carbon Sequestration

• Additionality. Only the additional carbon generated under a project will earn credit. For example, CCEX accepts forest projects only for trees were planted after January 1, 1990 on lands not grown before then since carbon growth thereon was preordained.⁴
• Leakage. Creditable emissions reduction on a project site may not lead to more emissions elsewhere.
• Uncertainty and impermanence. If the amount of emission reduction arising from a project is uncertain or is not permanent, the buyer of emission reduction credits might pay the sellers less than the market price of the credits (McCarl, Butt, & Kim, 2003).

Closing Remarks

The prospects for future producers earning additional income through carbon sequestration requires either US policy-level implementation of mandatory GHG emissions reductions or introduction of well-funded programs that subsidize carbon sequestration enhancing actions. Neither is present today.

Notes

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