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Update On Carbon Credits

KEY POINTS

—When considering the sale of carbon credits, know exactly what practices you are committing to and how many years you commit for.

—Since there is a wide range of markets, rules, and prices for carbon credits, be aware of which markets you are selling carbon credits into.

—As you do when selling any commodity, compare the historic and projected returns from a number of buyers (aggregators) before committing to a carbon credit sale.

—Before selling carbon credits find out exactly what constitutes a carbon credit with the selected aggregator, what records need to be kept, what services the aggregator offers, how is verification done, and the total costs of aggregation and carbon credit sales through that company.

—Growers practicing zero tillage can earn money selling carbon credits now. However you need to read the contract carefully, understand what your commitments are, and realize carbon credits will not make you rich.

Like many new crops and opportunities promoted to Western Canadian farmers in the past, carbon credits are not measuring up to the hype. Prices for credits are nowhere near what early talk might have promised. This is not to say farmers shouldn’t sell carbon credits, but do so wisely. Growers who manage and market their carbon credits very carefully can make some money off them. We’ll get to that later. First, the basics.

WHAT ARE CARBON CREDITS?

If you do something to reduce atmospheric greenhouse gases (GHG), you can get a credit that can be sold. Who in the world would buy such a thing? A company that wants to reduce its emissions can buy these credits as an offset. The company doesn’t have to actually take steps to reduce its own pollution as long as it pays someone else — in this case, farmers — to reduce GHGs on its behalf.

The idea for emission reductions was born out of the belief that the increasing level of carbon dioxide (CO2) in the atmosphere is causing global warming and climate change. Therefore, by reducing CO2 levels in the atmosphere and reducing the amount of man made CO2 entering the atmosphere, global warming can be moderated.

The United Nations Framework Convention on Climate Change played the lead role in setting targets for GHG reductions with the drafting of the Kyoto Accord. As outlined in the accord, which 183 countries have signed, industrialized countries must reduce their 2008-12 GHG emissions by an average 5.2 per cent below 1990 emissions levels. Unfortunately, it is impossible for many industry players to simply reduce GHG emissions enough to be able to meet this target. However, Kyoto allows these industries to meet their reduction targets by purchasing GHG emission reductions — “credits” — from other emitters in the world who exceed their required reductions or from other industries, such as agriculture, that have developed ways of capturing and storing atmospheric GHG.

Agriculture can play two roles in GHG reductions. First, agriculture is a major GHG producer. It is estimated 10 per cent of the world’s GHG emissions are the result of agricultural practices. Fortunately, management changes can significantly reduce agricultural GHG emissions. Zero tillage, application of fertilizer at time of seeding, incorporation of manure, modification of rations to reduce livestock methane production, and

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seeding cropland to perennial forages are examples of ways farmers can reduce their GHG emissions. Since primary agriculture does not fall under the Kyoto agreement, all agricultural emission reductions are saleable. Furthermore, these types of carbon credits are created whenever these best management practices are carried out, so farmers can earn carbon credits each and every year.

Agriculture can also remove and store (sequester) GHG from the atmosphere. The best example of this is again zero tillage. The increase in organic matter, which happens under zero tillage, is a reflection of the storage of carbon (CO2) in the soil. This process is referred to as a carbon sink. However, as soon as the land is again worked, some of that stored carbon is released. Therefore growers who sell carbon credits based on the sequestration of GHG in the soil are making a long-term commitment to not work the land and could possibly incur real economic costs if they decide to work the land. Or they could incur opportunity costs if they decide to sell and the buyer is restricted from working the land.

So the first thing a grower must be aware of when considering the sale of carbon credits is exactly what practices is he committing to and the time period for which this commitment is for.

WHO BUYS CARBON CREDITS?

Anyone can buy carbon credits. A number of European countries have already mandated a cap on the amount of GHG that specific industries including power plants, oil refineries, and coke ovens can emit. Therefore, these European industries must either reduce their emissions through investment in cleaner equipment and new technology, or buy offsetting carbon credits from other companies that exceed their reductions, or purchase credits from industries such as agriculture, which are exempt from GHG emission caps. The fine for failing to comply with the EU mandate is now 100 euros per tonne of CO2 over the cap. As a result of this legislated reduction, the price of carbon credits to EU industry is the highest in the world, with prices of over 50 euros per tonne documented. With the global financial meltdown, prices have dropped and currently the wholesale price of carbon credits in Europe is in the 25-euro range.

Most countries in the world have not yet mandated emissions caps, but that has not stopped companies in these countries from also purchasing carbon credits. In many cases this voluntary purchase of carbon credits is to test the carbon credit trading system. That way, industry is prepared to participate in emissions trading once it is legally binding.

Even more companies are simply participating in the carbon markets to portray their businesses as environmentally friendly.

Voluntary carbon credit purchasing is as much a marketing strategy as it is dealing with an emissions problem. Much lower prices are being paid for carbon credits in the voluntary market. Wholesale prices are in the range of US$6 to $7 per tonne.

Even individuals are being encouraged to purchase carbon credits. If you book a flight through Air Canada, for example, you are given to option to pay an additional fee which will be used to purchase offsetting carbon credits for the GHG emissions created during your flight. On a recent flight from Edmonton to Toronto, my travel added 0.6 tonnes of GHG to the atmosphere. I was offered the opportunity to purchase offsetting carbon credits for $9.60. ($16 per tonne of CO2 equivalent.) That $9.60 would be used (less administration and trading costs) to plant trees in Maple Ridge, B. C.

NHL PLAY ERS VOL UNTEER TO BUY CREDITS

The NHL Players Association has partnered with the Suzuki Foundation to offer NHL hockey players the opportunity to offset their yearly travel emissions with a $290 annual purchase of carbon credits (10 tonnes at $29 per tonne). Already about 500 hockey players have participated and the funds collected are being used for supporting wind energy projects in Madagascar, biomass energy production in India, and a hydroelectric project in Indonesia.

In North America, there is only one regulated market and that is Alberta. Alberta’s large final emitters (LFE), which are industrial plants emitting more than 100,000 tonnes of CO2 equivalent greenhouse gasses annually, were legally bound to reduce GHG output by 12 per cent in 2007-08 and a further two per cent the following year. A company that fails to do so has to pay $15 per tonne for emissions over its calculated cap. This fee is payable to the Alberta government Technology Fund which will be used to research new ways of reducing emissions. The fee effectively puts a $15 ceiling on what companies will pay for carbon credits from growers or other sources. A number of other provinces are looking at similar cap and trade systems as Alberta has implemented.

It is important to note Alberta has instituted a closed cap and trade system. Alberta industries must purchase their carbon credits from Alberta suppliers of carbon credits. Therefore a Saskatchewan farmer cannot sell carbon credits into the regulated Alberta system.

Since there is a wide range of markets, rules, and prices for carbon credits, growers have to be aware of which markets they will sell their carbon credits into.

HOW DOES A GROWER FIND A BUYER?

Since purchases of carbon credits are typically in lots of 100,000 tonnes of CO2 equivalent and agricultural farmland creation of carbon credits are in a range of 0.08 to 0.40 tonnes of carbon credits per acre annually (depending upon the soil type and carbon credit market you are participating in), farmers simply cannot participate in carbon trading on their own. They need the services of an aggregator who works with a large number of individual farmers to create a saleable block of credits.

An aggregator must be registered with the market exchange they will be selling the credits into. The Chicago Climate Exchange (CCX) was the first in North America and there are two western Canadian companies now registered as aggregators and selling carbon credits generated from Western Canadian farmland through the CCX. They are C-Green of Saskatchewan and Flatlander Environmental Services of Alberta. Other companies are working as agents for C-Green and Flatlander in aggregating acres, however they are not registered to directly sell the carbon credits on the CCX.

C-Green made the first sale

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