Farmers have long balanced environmental stewardship with profitability as part their daily lives. The idea of doing well by doing good provides part of the foundation to the proposed national cap-and-trade program of the incoming presidential administration and Congress. Many farms across the country have already reaped financial and environmental benefits by developing projects that supply carbon credits into the U.S. carbon marketplace – benefits like revenue, biogas production for energy use on the farm, better neighbor relationship management, decreased odors, rainwater diversion, reduction of the farm’s carbon footprint and many other real savings.

The agricultural community will be a big player in the new U.S. federal cap-and-trade system no matter what form it ends up taking; being well-versed in the mechanics of this system is a very important first step into the carbon world. What are carbon credits? Carbon credits are a financial instrument created from a greenhouse gas reduction project, often defined as a tradable, certified commodity representing one metric ton of carbon dioxide that was either prevented from entering or removed from the atmosphere.

Just like other commodities, carbon credits can be traded on registries and produce revenue for a farm. Unlike traditional commodities, however, the process of defining, creating and monetizing carbon credits is complicated. It all begins with greenhouse gas (GHG) A GHG absorbs and traps heat from the sun in the earth’s atmosphere. Increases in the major greenhouse gases – carbon dioxide, methane, nitrous oxide and several common refrigerants – have measurable effects on the way our climate system works globally. Each of the major greenhouse gases has different heat absorption rates or global warming potential.

For example, nitrous oxide is 310 times more potent than carbon dioxide (CO2). So a ton of nitrous oxide released into the atmosphere has 310 times the environmental impact as a ton of CO2. More common to the dairy industry, of course, is methane, which, by conservative estimates, has 21 times the potential to trap the sun’s heat than CO2. This difference is very important when it comes to determining the value of a carbon credit. Not all credits are created equally – one carbon credit is measured as an equivalent of one metric ton of CO2, thus the more potent the GHG being reduced, the more the emission reduction may be worth in the carbon trading framework.

Carbon markets Currently there are two distinct carbon markets: compliance and pre-compliance (sometimes called the “voluntary” market). Countries who ratified the Kyoto treaty, such as Germany and Japan, agreed to mandatory reductions enforced under a cap-and-trade system. In this market, a limit is placed on the total allowable emissions for each unit involved (country, company or market sector). If that entity is unable to reduce their own emissions, they have the option of purchasing emission permits from other sources that can make the emission reductions faster, cheaper or better.

From a global warming perspective, it doesn’t matter where a molecule of methane or GHG is reduced – just that the reduction occurs. For the time being, GHG reduction activities in the U.S. fall into the pre-compliance framework. Large emitters are currently getting involved in the U.S. market to voluntarily reduce their emissions, either in preparation for future regulation or as part of their corporate social responsibility (CSR) plan. Although no national framework exists, there are several voluntary trading marketplaces: Chicago Climate Exchange (CCX), Western Climate Initiative and the California Climate Action Registry (CCAR), to name a few.

The Northeastern states have a regional mandatory market-based registry called the Regional Greenhouse Gas Initiative (RGGI). California and several other states have passed legislation designed to curb the emissions of greenhouse gases. The current registries are helping to standardize the quantification of one carbon credit as one metric ton of CO2 reduced, but GHG emission project qualifications vary between them. The CCX is currently the only legally binding voluntary market that has clear and transparent carbon pricing available to the public. Independent third-party verifiers review the data, equipment and practices to ensure the quantifiable, verifiable characteristics of the emission-reduction projects.

Within the U.S., prices of carbon credits vary depending on the type and geography of the projects producing the emission reductions, the vintage (year that the emission reduction takes place), perceived quality of the emission reduction project and other preferences or needs of the buyers. What is the importance of carbon credits in the agricultural economy? According to the EPA, methane and nitrous oxide account for 13 percent of the total U.S. GHG emissions. Farms often have the ability to create emission reductions better, cheaper and faster than manufacturing or other economic sectors. This ability gives the agriculture sector the potential to be a major contributor of carbon credits to a cap-and-trade system.

The overall goal is to reduce net greenhouse gas emissions nationally. If a farm in Indiana or Ohio can reduce their own GHG emissions faster than a utility plant in New York with increasing power grid demands and have the large emitter pay for the overall reduction, then the winners are the environment, the power plant and the farm. One type of emission reduction project consistently listed by the current U.S. carbon registries is methane capture from manure management. According to the EPA, liquid-based manure management systems account for more than 80 percent of total methane emissions from animal waste, and the federal Agstar program estimates “some 3,000 livestock facilities could install cost-effective systems.”

An anaerobic system, be it a simple lagoon cover or a full-blown mechanical digester, can provide the means to capture emitted methane and lay the groundwork for carbon credit revenue. The captured biogas is either simply flared, or it can be used for energy on the farm – either way destroying the methane’s global warming potential. Carbon credits can provide a revenue stream, potential energy, decrease of the odor associated with decaying manure and reduce the farm’s emission footprint, allowing the farmer to do well by doing good. ANM

Editor’s note: In the next issue of Ag Nutrient Management, Subler will walk through how an individual farm can evaluate their own manure management practices by looking at their baseline, what fixed costs are involved and what overall agricultural operations have the ideal setup to create their own GHG emission reduction projects.

Dr. Scott Subler President, Environmental Credit Corp
(607) 288-4020
info@envcc.com