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What Are Carbon Credits Worth?

Like many Prairie farmers, Bob Burns of Oxbow, Sask., has not yet sold any of the carbon credits he has earned by direct seeding. Bill Kemp of Craig, Sask., also direct seeds and contracted his credits to an aggregator two years ago. He has yet to receive a payment. Both growers are wondering how much money they may receive from the sale of their carbon credits.

The number one question on the mind of growers considering selling carbon credits continues to be “How much will I be paid for my carbon credits?” This is not an easy question to answer. That’s because growers in Western Canada have sold their carbon offset credits into three different carbon markets over the past few years. And each market has different rules, risks and rewards for carbon offsets.

THE ALBERTA MARKET

Alberta has a government-regulated carbon market. This market is open to only Alberta growers. Under the Alberta cap-and-trade system, any company emitting more than 100,000 tonnes of carbon dioxide a year has two choices to offset these emissions. It can buy carbon credits from other Alberta companies or Alberta farmers who have saleable credits, or it must pay an annual $15 for each tonne of emissions over its cap.

The option to pay the $15-per-tonne fee has put a $15 per tonne ceiling on value of carbon credits in Alberta. That is not to say growers will automatically be paid $15 for carbon credits. The actual price they get is determined by supply and demand of carbon credits as well as the quality of the credits the farmer is selling. (Not all credits are perceived to have the same value. The better the science behind the determination of the credit, the more value it is likely to have. As well, the risk of reversal of the credits impacts the carbon credit value. For example: Working land that has been zero tilled will release carbon, which has been be sequestered in the soil. That means credits created under the tillage protocol may not be as valuable as credits that are created from wind or solar powered generation of electricity for which reversals are not possible.)

In Alberta, values for carbon credits created under the tillage protocol have ranged from under $4 per tonne to over $12 per tonne.

CLIMATE EXCHANGE OPTION ON HOLD

The second market opportunity open to all Canadian growers is to offer credits for sale through a climate exchange. Chicago Climate Exchange (CCX) is the primary trading floor for carbon credits in North America and works similarly to a stock market exchange. Sellers offer carbon credits for sale and those seeking offset credits place bids for the credits they need.

The Montreal Climate Exchange opened in 2008 and will be the Canadian trading floor if and when a federally regulated Canadian carbon market is instituted. Until that time, the MCX is only offering carbon futures trading.

Most carbon credit sales made by Canadian growers (with the exception of Alberta growers participating in the regulated Alberta system in the last three years) were made under contracts through the Chicago Climate Exchange. Carbon prices rose from $1 per tonne when the CCX opened in December of 2003 to a high of $7.40 per tonne in April of 2008. However that price has had a meltdown to about 15 cents. Causes include the worldwide recession, a supply of credits that now exceeds demand, questions about the quality of carbon credits being offered on the exchange, as well as countries reneging on their commitments to reducing emissions.

What’s more, CCX is no longer accepting offers of carbon emissions credits created in Canada. Brookly McLaughlin, spokesperson for the CCX, explained the plans for a regulated carbon market in Canada has prompted the CCX to stop trading Canadian carbon credits due to the risk of double counting credits.

The only option open to Saskatchewan and Manitoba growers at this time is selling through the over-the-counter market. Basically, this is direct sales by aggregators or, in some cases, producers of carbon credits themselves to companies seeking to voluntarily reduce their carbon footprint. Since this market is voluntary and unregulated, there is a wide range of prices for carbon credits.

These three distinctly different markets, each with different rules for determining how many carbon credits are created by a management practice, make it difficult to determine the value of a farmer’s carbon credits.

SWITCHING MARKETS

C-Green, the Regina-based company that pioneered the marketing of Canadian tillage management carbon credits, has already sold over seven million tonnes of carbon credits generated from 5.5 million acres of conservation tillage. Jeff Gross, C-Green’s president, hoped to distribute another $5 million to producers by the end of 2009, based on an estimated selling price of the credits of $3.50 per tonne. Until auditing of the credits is completed, Gross cannot be sure of what the actual carbon price which farmers receive will be.

Gross says this payment for credits which farmers have already contracted has been delayed by the auditing process and a dispute with the government regarding the payment of GST on the sale of carbon credits. Just recently the GST question was finalized and payment of GST on the sale of carbon credits is required. Furthermore, it has been established that farmers are not allowed to apply for a refund of this GST as an input tax credit.

Gross says that since C-Green follows the CCX protocols for determining the number of carbon credits — which allows more credits to be created per acre than the Alberta protocol — a $3.50 payment to farmers who have contracted their credits with C-Green is equivalent, on a per-acre basis, to an $8 to $9 payment made under Alberta protocols.

Until now, C-Green has marketed most of the carbon credits they have aggregated through the CCX. But with the collapse of the CCX market, C-Green is now seeking sales opportunities in the OTC market. Gross hopes to offer growers interested in selling their carbon credits a new contract early in 2010. This new contract would once again provide Saskatchewan and Manitoba growers with a market for carbon credits.

SELLING BEFORE YOU KNOW THE PRICE

Even if growers have decided which market they will sell their credit into, they may not know what the actual selling price of those credits will be. There are currently two very different pricing strategies being offered to farmers.

The more common approach to pricing carbon credits is for farmers to contract their credits to an aggregator who then sells these credits. Proceeds of the sale are then distributed with a percentage going to the aggregator and a percentage to the farmer. The most common split is 30 per cent to the aggregator and 70 per cent to the farmer. Like the advantages in a crop share agreement, higher carbon prices are then shared by both parties. Agri-trend Aggregation uses this system. Its president, Bill Dorgan, says, “I’m happy that we have been adopting this process as the prices have been going up for our clients.”

On the other hand, many producers prefer a system in which the selling price of carbon credits is known before they contract their credits. Recognizing this demand prompted Viterra to offer a carbon credit program that provides farmers a known price for their carbon credits. Brian Comeault, Viterra financial products sales specialist for southern Alberta, says Viterra pre-sells carbon credits and so can offer a fixed price for the credits it buys from farmers.

Laurence Ray, Carbon Credit Solutions of Airdrie, Alta., says Viterra’s entry into carbon credit aggregation has pushed some aggregators to move to a fixed price system, or offer both a fixed price and variable pricing for credits. Carbon Credit Solutions is now also offering a fixed price for Alberta growers. Ray adds his company is also preparing to offer a fixed carbon credit price to Saskatchewan growers as soon as Saskatchewan moves to a regulated market.

The difference in pricing, combined with the marketing ability of aggregators in selling credits, has resulted in a very wide range in prices being received by growers, especially in Alberta. Even in this regulated market, the price paid for carbon credits has ranged from under $4 per tonne to over $12 per tonne within the same time period of sales.

BEFORE YOU SELL CREDITS…

Compare the historical prices paid to farmers by a number of aggregators. While historical prices are no guarantee of future price, a company that has consistantly obtained high prices for a grower’s may indicate better marketing ability.

Make sure you know where and how the credits will be sold. Will the sale be made in a regulated market like Alberta, will the credits be held until they can be sold through an exchange like Montreal or the CCX, or will they be sold over the counter to the voluntary market?

Make sure you know of all the fees and costs you will incur: what is the cost of aggregation, of record keeping, of auditing, and who is responsible for each of these charges?

Make sure you know of the timing of the sale by the aggregator and when you will receive payment.

Make sure you know of your obligations and what limitations will be imposed on your farm operation in the future. For example, for how long are you sequestering the carbon in the soil and what happens if you have to use tillage on a field for which you have sold the credits.

Most importantly, before you even consider selling your credits, you need to have thought about what you think carbon prices and the carbon markets will look like in the future. Amanda Stuparyk, offsets co-ordinator with Climate Change Central, believes Saskatchewan will introduce a regulated market that is very similar to Alberta’s within the next few months. As well, a regulated federal market is in the planning stages. Government regulated markets will support carbon prices. On the other hand, if the economy continues to stagnate and an international climate change agreement is not reached, prices for carbon credits may to continue to slide.

Gerald Pilger farms near Ohaton, Alta.

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