There is a lot of talk about Greenhouse Gases (GHGs), global warming, the Kyoto Agreement and agricultural sinks.
The Marrakech Accord (COP 7), which Canada signed and the Federal Government indicates it will ratify, contains four provisions that will likely have a profound effect on farmers. The following article will briefly explain what these provisions are, their implications and offer some suggestions on how farmers add value and reduce risk on their farms.
First, ag soil sinks are accepted as a GHG mitigation strategy. This means that the nation can use the removal and the storage of CO2 (carbon sequestration) by farmers as a method for reaching Canada's Emission Reduction (ERU) targets. COP7 defines these as Emission Removal Units (RMUs). It's useful to note there is no cap or limit to this potential excepting the adoption rate of Best Management Practises (BMPs) like reduced tillage, zero tillage or direct seeding systems that create ag soil carbon sinks.
Second, there are ERUs that will be tradable between countries that ratify the Kyoto Agreement.
Third, there is a base line that recognizes some, but not all, of the carbon sequestered since 1990. This means that the government will already take credit internationally for meeting some of its emission targets. It remains to be seen just what sort of recognition the farmers that have sequestered this carbon will receive.
Fourth, market mechanisms are to be used to facilitate balancing Emissions and Emission Reductions. The sulphur dioxide market that addresses acid rain is an example of an emission market.
Before we discuss the carbon market, we must first understand the nature of an ag soil sink. When a farmer changes to reduced tillage or zero till, he changes the dynamics of the carbon cycle. In simple terms, by using BMPs, we add organic carbon (plant residues created by photosynthesis) at a greater rate than we lose it (by oxidation). There is a limit to how much carbon can be stored. This limit is reached when the rate of removal matches the rate of loss. This is a new equilibrium known as "saturation". Also important to note is that sinks can be eliminated and the carbon returned to the atmosphere if the farmer reverts to tillage. This raises the question of permanence or for how long the carbon has to be stored.
Carbon sinks can be destroyed much more quickly than they can be created. This means that all the ERUs created after years of direct seeding can disappear with only a few years of tillage.
In scientific terms, an ag soil sink (RMU creation) can be a potential "source" of emissions if the soil is tilled. This is much the same as an underground oil reservoir that has the potential to become a "source" of emissions if it is pumped and burned. A fragile ag soil sink with tillage can also become a source. Maintenance of this ag sink or "permanence" is a very important consideration as we approach the market question.
Before we look at market options, we should try to understand the potential demand for RMUs and ERUs.
Figure 1: CO2 Levels
The first portion of this graph reflects the measured CO2 concentration in the atmosphere. The last part represents the projected levels. If global warming tracks this curve, we should conclude that the value of the both RMUs and ERUs will likely be greater in the long term than in the short term.
First, let's consider the implications of treating an RMU as a commodity:
Figure 2: Sequestration as a Commodity
As carbon is being sequestered, RMU credits are created and sold. The farmer also creates a Maintenance Liability. Farmers need to realize the risk they assume since ag soil sinks can become a "source" of emissions in the future. When the ag soil sink is full or "saturated" and no further BMUs are created, the soil no longer has value but the maintenance liability remains. In the worst case scenario, the zero till system fails and the farmers returns to a tillage system. The sink then becomes a source of emissions and the farmer must return to the commodity market to purchase the RMU credits he once sold. At this point, it would be prudent to revisit the demand curve in Figure 1. This could be the typical sell low - buy high scenario. Should the farmer or land owner sell the land, the maintenance liability would probably devalue the land.
Our second market option would be to consider Carbon Sequestration as a Service.
Figure 3: Sequestration as a Service
Farmers could lease, rent or lend carbon storage, in essence, providing a service. The service could be provided for a set period of time. This concept would provide a lower value in the short term but a greater value in the longer term.
Think of this in terms of a garage analogy. The Farmer is like the garage builder who creates RMUs with ag soil sinks (by building garages) and leases or rents the garages to Emitters (car owners) to store surplus emissions (the car) for a short period of time. At the end of the contract or term, the car owner may renew the lease to use the garage. Or perhaps the car owner no longer needs to use the garage. In that case, the garage is available for another car owner. When the ag sink is saturated, the farmer can no longer create RMUs (build any more garages) but he can still rent or lease them all. This would add value to the farm as long as cars need a place to park. Who know, perhaps the farmer will some day need the garage for his own car (emission reduction). The farmer's exposure to risk, then, would only be for as long as he agreed to provide the service.
Again, it is useful to look at Figure 1 to see how this value would accrue. Less value in the short term, but greater value in the long term.
Should the farmer or land owner decide to sell the land, the added value of leasing or renting the land would increase the value of the land. The ERU market would provide an arms length price discovery method upon which a lease or rental rate could be agreed.
To conclude, the Marrakesh Accord identifies the accounting unit for Emission Removals (RMUs) as different than Emission Reductions (ERU). Considering the Risk of Permanence, it would probably be prudent for farmers to enter contracts for storage that have a time limit. Treating sequestration as a commodity would provide short term value and result in long term liability. Treating sequestration as a service would limit short term value but value could accrue as long as the sink was maintained. Market structure will determine whether sequestration will add value or increase risk for farmers.