Common Carbon Sequestration and Carbon Trading Questions:

How is Carbon Sequestration related to Direct Seeding? 

What is a carbon sequestration credit? 

How much carbon can be sequestered per acre through adoption of direct seed cropping practices? 

How is the amount of carbon sequestration determined? 

Who are potential buyers?

What drives the underlying “value” of a carbon sequestration credit, or ERU?

What kinds of risks exist in a sale of carbon credits?

What is the duration of sequestration agreements? 

Who bears the risk in a sale of carbon credits? 

How do risk and duration of sequestration affect the price of ERUs?

What are the advantages to farmers of LEASING carbon credits instead of selling permanent offsets?

Who else may pay farmers to sequester carbon?

Will pioneers of direct seeding be penalized for early adoption?

How is Carbon Sequestration related to Direct Seeding? Direct seed cropping systems have consistently shown the ability to improve soil quality and increase the level of organic matter is typically about 58% carbon.  Soil organic matter typically comes from plants (directly or indirectly).  Plants obtain carbon through the process of photosynthesis, wherein atmospheric carbon dioxide is broken down and part of the carbon is fixed in plant parts.  While several different gases contribute to the atmospheric greenhouse effect, there are more emissions of carbon dioxide (CO2) than any of the others. The potential economic and environmental benefits of carbon sequestration are several:

·    Agriculture can sequester (store) carbon and offset some emissions of greenhouse gases.

·    Increasing organic matter in the soil (increasing sequestered carbon) can increase yields, improve water and air quality and improve the environment for flora, fauna and wildlife.

·    Carbon sequestration credits have the potential to provide supplementary income to farmers for their contribution to an improved environment, either on an open market or through government payments to growers.

·     A farming system that sequesters carbon could also bring added value to the grower if consumers are willing to pay a premium for products grown using sustainable agricultural systems that benefit everyone.

What is a carbon sequestration credit?  A carbon sequestration credit is the unit measure of mass of carbon stored, or sequestered, that can be traded. In the international greenhouse gas emission reduction treaty, the Kyoto Protocol, the unit of trade is called an “emission reduction unit” (ERU) and is measured in metric tons of CO2 equivalent.  One ton of carbon is equivalent to 3 2/3 tons of CO2.  Credits are dated with the year in which they are generated and, if not used to offset an emission in that year, may be banked and used to offset emissions in a later year.

How much carbon can be sequestered per acre through adoption of direct seed cropping practices?  The amount of carbon added to soil under direct seeding depends on many factors.  The main factors are climate (temperature and rainfall), soil texture, crop, farming practices, nutrient and organic matter inputs, and history of practices.  Sequestration under direct seeding has been measured as high as ¾ ton CO2 equivalent per acre per year, and modeling predicts that it could be as great as 1 ½ tons CO2 equivalent per acre per year.  These rates might be sustainable only for half a dozen years or so.  After 10-20 years, the rate of sequestration of additional carbon is likely to decrease to 0.1 to 0.25 tons CO2 equivalent per acre per year.  At slow rates, sequestration might continue for several decades.  Research is investigating the costs and benefits of using organic and nutrient inputs to increase sequestration rates and amounts.

How is the amount of carbon sequestration determined?  Sequestration can be determined by laboratory analysis of the carbon content of soil samples, by modeling, or by a combination of modeling calibrated by field samples.  If sampling is used, the sampling and analysis system must be carefully designed to be precise in order to detect the relatively small proportional change in the amount of carbon in a field resulting from use of direct seeding.  Because the cost of repeated precision sampling is greater than the potential price of the amount of carbon likely to be sequestered, direct sampling alone is not economically feasible for sequestration credit exchanges.  Models are inherently uncertain, therefore model-predicted sequestration levels given as a range.  Model predictions differ enough from actual sequestration that buyers are likely to purchase only the smallest amount of a predicted range of sequestration.  Combining modeling and field sampling can reduce the uncertainty of model predictions and support extrapolation of measurements made at one site to many other fields.  Several models are available for predicting carbon storage under various production systems, including the adoption of direct seed cropping.  Each model has strengths and weaknesses.  Two of the leading models are the CENTURY model, developed at Colorado State University, and the CQESTR model, developed by the USDA Agricultural Research Service.  PNDSA is investigating establishing a system of field measurement sites to calibrate a model to the interior Columbia Basin, for determining carbon sequestration by PNDSA members.

Who are potential buyers?  If laws or regulations limit greenhouse gas emissions and if these rules count emissions as net of sequestration, the market for carbon credits would be large and could be international.  Purchasers of emission offsets would be emitters required to reduce net emissions.  Power companies are some of the largest potential buyers, but comprise only about 15% of the carbon emissions market.  Other emitters with processes that involve greenhouse gas release include manufacturers (especially of fuels and fertilizers), vehicles, and building heaters.  Prior to emission restrictions, some firms are buying emission offsets to enhance their environmental image, learn how to use offsets, and to provide models for future regulations.  Even though no legal caps on greenhouse gas emissions exist, sales of offsets and options for future offsets total more than 100 million tons.

What drives the underlying “value” of a carbon sequestration credit, or ERU?  The value is the emitter’s cost of the next cheapest substitute ERU.  If emitters are not required to reduce emissions, the price of emission reductions will be the public relations or speculative value of the reduction.  The emitter has many options of different ways to reduce emissions, or different kinds of emission offsets to purchase, and the cheapest available option will set the market price.  The value of an ERU could tie to potential penalties imposed on emitters, such as an emissions tax on fossil fuel.  Calculating emissions from gasoline, a fuel tax of 10 cents per gallon would be equivalent to a tax of about $10 per ton of CO2 emitted.

What kinds of risks exist in a sale of carbon credits?  A variety of risks occur in carbon credit sales.  Performance risk is the risk that one party to the agreement will not do what they promise.  There is risk that a given farming practice will not sequester the amount of carbon expected.  For the seller, market risk is the risk that prices will rise in the future.  For the buyer, market risk is the risk that market prices will fall in the future.  A great deal of risk arises from the fact that rules for emission reductions and crediting do not exist.  If no regulations limiting emissions are adopted, there will be little demand for emission reductions.  If rules are adopted, those rules will specify what kinds of offsets will be creditable.  It is also possible that agricultural soil sinks might not count toward meeting emission reduction requirements, or that specific measurement methods must be employed.  The larger the risk that a particular offset will not be creditable, the less someone will pay for that offset.  Emitters offering to buy carbon credits before crediting rules exist, assume risk that the offsets they purchase may not be worth anything in the future.  As a result, they will pay less now than the price they expect will be asked in the future. The future market price, however, may end up much higher than the price paid, and the seller (the farmer) would have sold at a low price in exchange for a guaranteed payment in the present.

What is the duration of sequestration agreements?  There is no specified duration of carbon sequestration agreements.  The Kyoto Protocol specifies a 5-year period during which parties commit to reducing their emissions.  As a result, most sequestration agreements are likely to run at least five years.  If a soil carbon sequestration agreement is permanent, it would become an easement on the land, and remain until replaced by an emission offset from somewhere else.  Unlike sequestration—which may be temporary of permanent—an emission credit generated by avoiding an emission that is permitted frees an emission credit that is permanent.  For example, if an emitter is allowed to emit 100 tons under regulations limiting emissions and, through energy conservation activities, lowers emissions to 99 tons, that emitter has 1 ton of credit that will remain permanently until applied to offset some future emission.

Who bears the risk in a sale of carbon credits?  The contract for sale of carbon sequestration credits specifies what risks the buyer and seller bear.  A buyer may contract for the seller to perform particular actions for a specified period of time (such as not plowing) and not hold the seller responsible for actually sequestering any specific amount of carbon.  In this situation, the buyer would bear most of the risk.  As long as the seller did not plow, the seller would be fulfilling required obligations, regardless of whether any carbon was actually sequestered.  In contrast, the seller might commit to delivering a specified number of tons of sequestration, regardless of weather and natural disasters.  In this case the seller would bear the bulk of the biological performance risk.

How do risk and duration of sequestration affect the price of ERUs?  The higher the risk to the buyer, the less they will pay for an ERU.  The greater the risk faced by a seller, the higher the price they will demand for an ERU.  In general, a buyer will pay more for longer-term sequestration.  In theory, after adjusting for risk and transactions costs for each year of sequestration, a buyer would pay the price of a unit of permanent sequestration times the annual interest rate, discounted back to the present.  For example, if a unit of permanent sequestration is worth $1 and a buyer has an 8% interest rate, that buyer would pay $0.08 for one year of sequestration, if there is no risk and no transaction cost.

What are the advantages to farmers of LEASING carbon credits instead of selling permanent offsets?

§     An agreement for a fixed period (such as 5-10 years) would allow the seller to avoid the potential of liability that may occur many years in the future, whereas a permanent agreement could mandate sequestration of a fixed level of carbon for an indefinite period.

§    Leasing would allow farming practices to change over time to adapt to unforeseen environmental changes.  A permanent sale of carbon credits might bind current and future landowners to specific land management practices.

§     Real economic loss may result if the farmer changes practices or regulations change.  The farmer could be re-defined as an emitter and be forced to re-purchase ERUs from another source, at a higher price.

§    Leasing avoids creating a permanent conservation easement that could reduce the future price of the land.

Who else may pay farmers to sequester carbon?  Presently, one of the main points of contention in global warming debates is whether agricultural carbon sinks should be counted as offsets to GHG emissions.  PNDSA supports the position that increasing carbon storage capacity should be considered a creditable and tradable means of emissions reduction.  Even if carbon sinks are not included in implementation of the Kyoto Protocol, carbon sequestration could still bring added value to direct seed cropping systems.  The public sector has shown an increasing willingness to pay a premium for products from cropping systems that benefit the environment.  PNDSA is exploring a number of avenues and relationships that could offer financial incentives to farmers who adopt no-till systems.  These financial incentives would be completely separate from carbon credit trading, but would similarly add value to agriculture.

Will pioneers of direct seeding be penalized for early adoption?  Early adapters to direct seeding may reach carbon sequestration saturation points sooner than those who adopted the cropping system more recently.  PNDSA supports the policy that farmers already following reduced tillage practices should receive credit for their beneficial activities, retroactively from 1990.

If you have questions or suggestions concerning agricultural carbon sequestration, please forward them to:

Pacific Northwest Direct Seed Association (PNDSA)
(208) 301-0810 or (208) 301-0811
PNDSA@directseed.org

Mailing Address: P.O. Box 9428, Moscow, ID 83843
Office Address: 2780 W. Pullman Road, Moscow, Idaho  83843