It is essential that farmers understand the benefits and the risks of being short-changed by markets. It is important to know that currently all "Carbon Markets" are speculative. Governments have made no policy decisions or laid down any rules to regulate Carbon Markets. The current trading mechanisms offer no safe guards and the uninformed farmer is very vulnerable.
This paper will briefly address the issues that lead to Carbon Credits and the international process that has transpired to date. The focus will be on how farmers will be affected. Aside from a few brief definitions to help clarify the types of Carbon Credits, the paper will focus on market structures and the risk benefit relationships.
The global warming (GHG) debate is best summed up by saying that there appears to be a clear link between GHG levels in the atmosphere and global temperature i.e. as GHG levels rise so does the temperature. See Figures 1 and 2.
Canada is seeing clear evidence of this in the Arctic and Canada's National government has given a clear indication that it supports and intends to ratify the International Agreement (the Kyoto Accord). Although there is still some scientific uncertainty to the outcome, only those with a vested interest are opposed to taking action to combat GHG levels.
It is important for farmers to be aware that current targets for emission reduction are probably low and more stringent curbs on emissions are likely in the future (regulations or taxes). In market terms, the demand for Carbon Credits will likely grow more quickly than the supply.
At the latest COP7 (Conference of Party) in December of 2001 at Marrakech (where the Kyoto Accord was signed by all countries but the U.S.), three accounting units (credits) were defined.
CER's and ERU's are emission reductions. The difference being CER credits are traded between a country that has signed the Kyoto agreement and one that has not.
An RMU is an emission removal with a carbon sink. ERA's can only be traded between countries that have ratified the Kyoto agreement.
To relate this to a farm, the ERU would be a credit for reducing emissions by burning less fuel (less CO2 released), fertilizer management with rates, timing and placement (less Nitrous Oxide emissions), and manure management (less Methane emissions.) It is likely that farmers that adopt best management practices (BMP's), like Direct Seeding, would have ERA's to sell. This could be a commodity that will trade in the same carbon market with industrial ERA's. An RMU credit (emission removal unit) is a credit created by a farmer for practicing any BMP that removes CO2 and stores it in the soil as organic carbon. This creates an agricultural carbon sink.
The 30-second science lesson is that a plant takes solar energy and by the process of photosynthesis, transfers the CO2 gas into carbon (organic matter) and then returns the oxygen to the atmosphere. The removed carbon, which is stored in the soil and measured as organic matter is the RMU (emission removal). Zero-till, direct seeding, forages and pasture management can create RMU's.
These RMU's are reversible. Farmers must realize that these Ag Soil sinks are not necessarily permanent. For example, reducing tillage creates RMU's, returning to tillage releases them. This is very important to remember. If we treat RMU removals as a substitute for ERU reduction in a Carbon Market, farmers are at risk!
To understand this, first let us consider two characteristics. Ag Soil sinks are in a constant state of flux. For example, let us take a long-term view from a farmer's perspective. A farm is converted to a reduced tillage system for several years and starts to sequester carbon; the same farmer then moves to zero-till and sequesters carbon at a greater rate. The farm then develops a weed or disease challenge that requires tillage and some carbon is lost. The weed or disease problem is then controlled and zero-tillage becomes practical and carbon is sequestered again. Perhaps the farmer experiences an extended drought cycle and continuous cropping no longer makes economic sense - so summerfallow is reintroduced and the carbon levels in soils will also be reduced.
Let's consider another couple of possibilities. Suppose a land manager seeds a permanent cover crop and keeps the stand for several years. A considerable quantity of carbon will be sequestered in that time. Some of the sequestered carbon will be lost if for production and market reasons, the field is then plowed and returned to annual cropping. Another possibility for losing sequestered carbon could occur if those producers in a direct seeding or zero tillage system were ever to lose the ability to do a pre-seed burn-off. These are only a few examples that show the uncertainties a farmer will face in creating and preserving RMU's with Ag Soil sinks.
The second point I wish to make is that under any given land management system, soil can only hold a certain amount of carbon. Thus as carbon accumulates over many years soil carbon levels approach a new equilibrium which means that no new RMU's will be generated. In simple terms, farmers need to remember that carbon sequestration is reversible so permanency is an issueand that Ag Soil sinks eventually become saturated.
If RMU's are treated as a commodity and a farmer sells them in a Carbon market, he would probably be left with the responsibility of maintaining the ag soil sink in perpetuity. Once the ag soil sink is saturated, no more RMU's will be created and the only thing remaining will be the liability of maintaining the sink. One system would create a carbon easement, which would be attached to the land title. This encumbrance would reduce the value of the land.
Keeping all these problems in mind, how is a farmer to avoid being short changed? The answer might be in treating RMU's as a service rather than a commodity. Farmers should agree to temporarily lease, rent or loan the storage of surplus emissions for a period of time.
To help clarify this I would like to quote an analogy. Suppose we have a car driver (the emitter) who rents a garage (RMU) to store his car (his surplus emissions). In this analogy, the garage owner (the farmer) rents or leases his emission storage facility (soil). At the end of the rental or lease period, the car driver (or emitter) either renews his lease or finds another place to park his car (or emissions). The car driver (or emitter) might use this lease time to find a better lease agreement or build his own garage (buy or create an ERU or park on the street - penalty or tax). If the car driver (or emitter) found a new place to park his car or emissions, the garage (or the soil sinks) could be offered to another driver or (emitter) at a new negotiated price. To continue the metaphor, the garage owner (or farmer) may even find that he needs the garage (or RMU's) himself. The farmer may need this option in order to meet regulations in the future. This rental or lease agreement could provide a regular supplementary value and enhance the value of the land. (This garage analogy was first used in the paper, "Renting Carbon Offsets: The Question of Permanence" authored by Sedjo, Marland and Fruit).
To summarize, markets that treat GHG removals as a service rather than a commodity would better reflect the nature of biological sinks. The service provided would be removal and storage of carbon dioxide for a period of time. This could be a rental or storage lease, or a loan from the sequestered carbon bank. The unit would designate a specific quantity and a specific time. This would address the permanency issue and price risks. Although the short- term return to the farmer would be reduced, the disincentive of longer-term risk would be addressed. Few farmers need more risk.
If markets are used to provide incentives for both GHG emission reductions and removals, the markets must reflect both the differences between emission reductions (ERA's) and emission removals (RMU's) with biological sinks. Canada has the opportunity to address a significant portion of its Kyoto commitment due to the unlimited cap placed on GHG removals with Ag Sinks. The only limitation will be the rate of adoption by farmers of BMP's that sequester carbon.
It is critical that if a market is to provide incentives, this market must reflect the reality that a farmer faces. If the emission removal market transfers risk to the farmer from the emitter, he will rightly interpret this as a disincentive and the opportunity for the country to benefit from Ag Soil sinks will fail to materialize.
Figure 1. Carbon dioxide concentrations.
Figure 2. Atmospheric carbon dioxide concentration and temperature change.