Conservation Marketplace

NACD's mission is to serve conservation districts by providing national leadership and a unified voice for natural resource conservation.

Market-driven approaches to conservation can stimulate new areas of innovation and flexibility by utilizing market forces to achieve environmental improvements. Trading provides incentives to sellers to provide more environmental protection measures than legally required and allows buyers to achieve compliance in a way that is faster and less expensive than the ultimate facility upgrade that might be necessary for a regulated entity. Agriculture and conservation can help provide the solution and benefit in the process.

Our society is based on capitalism, an economic system in which the means for production and distribution of goods and services are privately owned. It is one keystone to the unprecedented success of our growth and strength as a nation because it rewards innovation and efficiency. Yet, throughout most of our history, industry and business have made advances at the expense of the environment, squandering natural resources and polluting air and water.

The modern era of environmental protection over the last 30 years established the Clean Water Act, the Clean Air Act and other major federal and state environmental legislation. For the most part, advances in the protection of natural resources and reversing the trend towards increasing air and water pollution were achieved by legal mandates or through voluntary compliance, much of which was accomplished with government incentive programs offering grants or cost sharing.

The private sector didn’t have a way to market environmental improvements. Major industry considered environmental improvements to be a significant new cost of doing business that made it harder for them to compete, especially internationally with countries with no such restrictions. Local point sources such as wastewater treatment plants struggle on tight budgets with increasing standards of nitrogen and phosphorus removal and an increasing population within their service areas. Utilities strive for the least expensive cost per kilowatt-hour to serve increasing demands for power. Many power plants still rely on scores of railcar loads of coal per day to keep costs down and power levels up.

The first major attempt to offer a market-driven approach was contained within the Clean Air Act Amendments of 1990 to reduce acid rain. It was successful beyond all expectations and provided the role model for those that follow.

The Trading Concept

Trading allows a regulated entity to negotiate with others to buy their environmental improvements to help the buyer achieve a standard it cannot immediately achieve on its own. Depending on the conditions established in the trading program, the unit of trade, a credit or allowance, can be sold for either a pre-determined price or negotiated on an individual transaction basis. It could be conducted directly between buyer and seller or through a central banker, who will collect payments from buyers and distribute it to sellers in exchange for the implementation of their environmental improvement. Some trading programs may restrict trading to just between regulated point sources and some will allow point to nonpoint source trading.

Most trading programs are created in a highly regulated industry. When a cap is placed on emissions, it sets the mark on which all players must comply. In a cap and trade mechanism, those whose emissions are below the cap can create credits to sell to those who exceed the cap. When trades are conducted directly between buyer and seller with no set price, the market determines the price through supply and demand. Sellers have incentive to maximize efficiency in emissions reduction to maximize credits for sale that in effect, turn what was a major business expense into a source of revenue. Buyers participate because they can meet standards through buying credits for substantially less than an immediate plant retrofit, but part of the incentive for the next facility upgrade is being able to meet the standard alone and save the cost of credit purchase.

Trading works best when the problem occurs over a large area, there are many sources responsible for the problem, the cost of controls varies from one source to another and emissions can be consistently and accurately measured. The regulating agency must be able to effectively manipulate the large amount of emissions and allowance transfer data, be able to determine compliance fairly and accurately and consistently enforce the rules.

Trading is not intended to be a permanent solution. It offers an option of bundling the voluntary efforts of others to supplement a regulated entity’s performance to meet a higher standard until expensive retrofits or even an entirely new facility can be funded and constructed. Most industrial, utility and municipal facilities have a planned life, after which the long-range plan of the entity will call for major upgrades or a new plant. Trading can fill a gap between an unplanned or unanticipated increase in required performance standards and the planned date of renovation or new construction. Without this option, financial hardship, even plant shutdown and employee layoffs might be the result in extreme cases.

There are a number of things that environmental trading is not: it is not a substitute for a regulatory framework; it is not a way of letting the market decide an environmental outcome; and, it does not let polluters avoid their full responsibility.

Elements of a Trading Program

Although the details of trading mechanisms can differ significantly, certain elements must be consistent. There should be a clear, legal authority that establishes the basic tenets of the trading programs either through legislation, regulation or permit provisions. The unit of trade, whether expressed as a rate or as a mass/unit of time, must be interchangeable and clearly defined. There should be standard protocols for credits, allowances, loads or load reductions. The U.S. Environmental Protection Agency (EPA) supports the USDA-Natural Resources Conservation Service (NRCS) Technical Field Guide as a reference that can be used to determine protocols. For example, the load reductions of agricultural best management practices (BMPs) such as phosphorus reduction by riparian buffers could be determined through the Revised Universal Soil Loss Equation (RUSLE). NRCS and the Agricultural Research Service (ARS) are also working on protocols for carbon trading.

A trading program should also contain mechanisms to assure compliance. Integrity in the program can be supported through adequate record-keeping, monitoring, reporting and inspections. Periodically, like any program, a trading mechanism should be evaluated and adjusted as necessary to make it more effective and efficient.

Another aspect of a trading program is to establish a margin of safety factor to account for the element of uncertainty, especially with nonpoint sources. There will be enough discrepancies between BMP performance as estimated by formula and the on-the-ground reality for such components as annual additions of soil carbon, loading, load reductions, modeling, maintenance issues, losses by acts of God or improper management to warrant that the margin needs to be greater than 1:1.

Market-Driven Approaches Refine Environmental Economics

The commodities market is based on supply and demand, both real and perceived, and reflects investor confidence or the lack thereof. When market prices for environmental services become as commonplace as corn or coffee, it may help the general public better understand the true cost of a healthy environment. Once orchard managers everywhere could take for granted that wild bees would pollinate the orchard, the essential first step to a bountiful harvest. Now that wild bee populations have gone through devastating losses through diseases and other causes, many orchard owners must hire professional beekeepers to come and pollinate their trees. Those individuals now know the dollar value of the service once provided for free by wild bees.

Emerging market-based programs such as water quality or carbon trading can achieve multiple environmental and economic benefits. For example, a landowner agrees to install a riparian buffer in a watershed that has established water quality trading. He has credits to sell to a wastewater treatment plant that are valued for the pounds of nitrogen, phosphorus and sediment that the riparian buffer will retain. If carbon trading were also established in the watershed, he could also sell credits to a coal-burning power plant for the carbon that was being sequestered in the buffer area to offset carbon dioxide being released by the utility. If these and other markets were allowed to evolve and mature, they could eventually be combined into one in which environmental credits have a market value that reflects the total array of environmental benefits and services that each best management practice (BMP) provides. The sale of these environmental credits for a riparian buffer would establish a dollar value for the retention of nitrogen, phosphorus, sediment, pathogens, pesticides, carbon, wildlife habitat, etc.

Assigning dollar values to environmental services can be illuminating for politicians when determining budgets for conservation work. In the past, it was difficult to assess whether the allocation of funds for conservation work achieved cost-effectiveness due to a gaping lack of concrete values for the natural resources that were being protected. During the debate for the 1996 Farm Bill, in the midst of widespread concern over a serious federal budget deficit, budget hawks demanded to know if the public was getting its money’s worth for the $2 billion per year expenditures for the Conservation Reserve Program (CRP). At the time, the program was saved by impressive figures for the prevention of millions of tons of sediment and the dramatic comeback of wildlife, but that was only part of the return on public investment. If there were market values that could calculate a more definite dollar value for the millions of tons of nutrients, pesticides, carbon and sediment that were retained on the 136 million acres of CRP land, even the most skeptical politician could more clearly believe the slogan used for decades by the conservation community, “Conservation doesn’t cost, it pays”. A beneficial by-product to well-established markets for environmental credits might be significant increases of federal, state and local budget allocations for natural resource protection because it provides compelling data that hasn’t been available before.

Trading Enhances Voluntary Incentives

Trading is a way to activate increased voluntary pollution reduction from all sources. Regulated sources have an incentive to achieve water quality standards above and beyond their legal requirement in order to have credits to sell that, depending on supply and demand, might significantly defray the costs involved. Agriculture would play a major role because the cost of installing agricultural BMPs is generally less expensive than retrofitting or upgrading point source facilities such as wastewater treatment, power generators or industrial plants.

Water quality or carbon trading is very compatible with traditional federal and state agricultural conservation cost-share and grant programs. The sale of credits plus cost-share payments could accumulate enough incentives to appeal to the most reluctant landowners. With such incentives, landowners may volunteer to restore or create wetlands, improve floodplains and create wildlife habitats in addition to agricultural BMPs such as conservation tillage, buffers and grassed waterways. Such a diversity of environmental enhancement and natural resource protection could result at a level well beyond that which pure regulatory action could demand.

A Great Opportunity for Agriculture and Conservation

NRCS Chief Bruce Knight joined EPA Administrator Christie Todd Whitman at the National Press Club on January 13, 2003 to announce USDA’s support along with EPA of the concept of water quality trading. Through NRCS, ARS and the Cooperative State Research, Education and Extension Service, USDA can:

Provide technical assistance on agricultural BMPs;
Develop and refine new practices and nonpoint prediction models;
Develop conservation plans w/conservation systems for trading;
Determine sediment and nutrient load reduction from BMPs; and,
Use the leverage of credit sales to encourage producers to also apply for USDA conservation programs (EQIP, CSP, CRP, etc.).

USDA is also working on protocols, measurement and research necessary to support carbon trading.

Opportunities for the Conservation Community

Conservation districts and resource conservation and development councils can play key roles in developing and implementing a trading program. Some of those roles include:

Locally led outreach and education for landowners – Conducting a public information campaign that introduces the concept to producers, coming from a local, trusted source.
Coordinate and build watershed coalition of partners – Any watershed project needs an organization that is willing and whose leaders have sufficient people skills to form a working group that represents all the key stakeholders in the watershed. The coordinator needs to work through initial difficulties with a new group representing diverse interests (“storming and norming”) to develop a coordinated, effective coalition willing to accept responsibility and to work together to solve problems.
Represent private landowners - In the early design of a trading program, conservation officials can work with program planners to insure that the best interests of landowners will be served.
Monitoring duties - Conservation officials can visit farms to insure that BMPs installed through credit sales are being maintained. It would also give them an opportunity to discuss other conservation practices or problems.

What are the Right Conditions for a Landowner?

As each trading program is somewhat different, the terms and conditions that landowners would be required to accept in order to participate will vary. As any lawyer would advise, all terms and conditions should be understood and acceptable before a landowner should sign a credit sales agreement, which is a binding contract.

Landowners should expect that, in addition to the sale of credits, they could also take advantage of other cost-share or grant programs that would supplement the cost of installing a BMP. Combining the assets of several programs increases the incentives to the landowner and the effectiveness of each of the programs.

Some trading programs determined that if credits were sold for a BMP that had been cost-shared, the landowner was only entitled to the number of credits pro-rated to his share of the cost of the BMP. If a practice were cost-shared 75 percent, the landowner would only be entitled to 25 percent of the total credits that could be sold for that BMP. One argument to support that restriction is a concern about allowing credits generated with taxpayer money to be sold for private gain. A counter argument is that cost-sharing is a voluntary incentive that reflects the public benefit to be gained from the installation of BMPs on private land. If landowners could accept additional incentives through other programs, the combination increases the leverage of public funds to encourage landowners to volunteer to install conservation practices. It would increase the amount of conservation on the ground, more than either program could achieve separately.

Landowners should compare the maintenance responsibilities of the BMP as specified in the sale of credits with traditional cost-share program requirements. For example, many agricultural BMPs have been assigned a ten-year maintenance life by traditional cost-share programs, after which the landowner has no further maintenance responsibility. A landowner should check to see if the maintenance period under the credit sales agreement is significantly different. Because of the definite life span of most agricultural BMPs, some prefer to consider the transaction to be that of leasing credits rather than selling credits. Trading programs and buyers should take into consideration the life span of BMPs and tie it to the life span of the credits they generate.

If, for example, credits were sold for conservation tillage, a farmer should consider how long he would continuously no-till before he might need to chisel plow to counteract soil compaction. Some carbon would be lost in that process and the farmer should either agree to a term that ends before he needs to chisel plow or there is a provision in the contract to address it. Otherwise, he may violate the terms of his contract.

Trading programs should also take into account that weather events such as flooding, drought and storm damage can impair the performance of BMPs despite the best efforts by the landowner to maintain it. The margin of safety factor compensates for such damages or losses to a degree. Landowners should insure that they would not be held accountable for bona fide acts of God.

Sulfur Dioxide Trading – The Successful Model to Reduce Acid Rain

Sulfur dioxide (SO2) trading is a program administered by EPA to help reduce the problem of acid rain. Big coal burning power plants had released large amounts of SO2, an acid chemical related to sulfuric acid. Clouds of SO2 would be blown by winds across the country and come to earth by becoming part of rain, snow or fog. Overly acidic lakes and streams were found all over the country affecting aquatic life. Acid rain caused extensive tree damage. It was also linked to breathing and lung problems in children and people with asthma. It was damaging stone buildings, statues and even dissolving the inscriptions on gravestones. By 1980, rising public concern about the extensive environmental and health impacts of acid rain prompted Congress to commission a ten-year study. The acid rain program became part of Title IV of the 1990 Clean Air Amendments.

An innovative approach to solving the serious problems created by excess SO2 emissions provided a successful model to utilize the power of markets to improve the environment. The Clean Air Act Amendments of 1990 established a cap of SO2 emissions for electric-generating facilities. All power plants under the acid rain program had to install continuous emission monitoring systems (CEMS) machines that keep track of the amount of SO2 and nitrogen oxides the plant is releasing. Realizing that retrofitting scrubbers and other processes necessary to reduce sulfur dioxide emissions would cost millions of dollars, the regulations allowed for a transitional trading period. In addition to installing pollution control equipment, the utilities could also consider alternatives such as switching fuel sources from high-sulfur coal to medium- or low-sulfur coal, fuel blends or natural gas, employing energy-efficiency measures, using renewable energy and trading with other utilities or brokers.

Electric power plants are given allowances, each allowance authorizing the release of one ton of SO2 emissions, to equal the total tons that could be emitted up to the cap. At the end of the year, each plant must have enough allowances to cover its emissions for the year. There are stiff penalties for plants that release more pollutants than their allowances cover. Allowances can be traded nationwide by anyone who wants to take part in the allowance market. Once a year, EPA also auctions a certain number of allowances and utilities, environmental groups, allowance brokers and individuals can participate. Limiting allowances to the level of the cap provides environmental certainty and also creates scarcity, which insures economic value and provides incentive to reduce emissions.

Unused allowances could be sold, traded or saved for future use. Those industries whose emissions exceeded the cap could compensate for their excess by buying credits from those industries whose emissions were below the cap. Bonus allowances are provided to power plants for installing clean coal technology or using renewable energy such as wind, solar or geothermal energy. The market for the new "commodity", sulfur dioxide, would determine by supply and demand, how much it cost to stay out of compliance; and conversely, how much reward would result from doing a better than minimum job of improving air quality.

Here was an opportunity for business to react and succeed with the market force and skills that it employs every day by making environmental improvement a commodity. As a result, the market price of SO2 remained in a range far below the price per ton predicted by economists and the performance goals were achieved years ahead of schedule. By 2002, emissions have been reduced by more than 6.5 million tons per year from 1980 levels. By 2010, the program will lower the cap to 8.95 million tons per year – a 50 percent reduction from 1980 SO2 levels. EPA projects they will prevent thousands of premature deaths and the annual human health benefits in 2010 will exceed $50 billion.

EPA reports that the elements of the sulfur dioxide trading program that allowed it to exceed expectations includes:

The cap provides environmental certainty. As the economy grows, sources must find ways to keep emissions under the cap.
Clear, consistent rules that emphasize transparency and market performance create investor confidence.
The flexibility under the cap and trade system encourages sources to consider how to reduce emissions at the lowest cost and not to question whether to reduce emissions.
There are no “grandfathered” sources. Older, “dirtier” sources are among those that have reduced their emissions the most.
Limiting allowances creates economic value and incentive.
Lower compliance costs allow higher environmental goals to be set.
Trading, in addition to creating incentives to reduce emissions below allowable levels, also spurs technological innovation and efficiency. In the 1990’s, scrubber costs dropped by 40 percent and scrubber efficiency improved more than 90 percent.
The ability to save unused allowances for future use creates an economic incentive to decrease emissions beyond allowable levels and to reduce emissions early.
Accurate monitoring and reporting insures the integrity of the cap.
State and local authorities may impose stricter limits to control specific local air quality problems.

Water Quality Trading – A New Device for Watershed Management

America has been striving to achieve a national goal established in the Clean Water Act of swimmable, fishable water for the past 30 years. Yet, EPA’s National Water Quality Inventory for 2000 assessed one third of the nation’s waters and determined that 40 percent of rivers, 45 percent of lakes and 50 percent of estuaries are still impaired. The initial focus was on point sources of pollution and significant progress has been made in reducing the pollutant loads contributed by municipal and industrial sources. As progress grew with point source pollution reduction, increasing attention has been paid to the more elusive nonpoint sources, conveyed from diverse origins and delivered to water bodies via polluted runoff.

The Clean Water Act contains a provision to address pollution on a watershed basis through the establishment of total maximum daily loads (TMDLs) of pollutants impacting water bodies. The TMDL process comprehensively assesses point and nonpoint pollution occurring within a watershed, determines how much the receiving waters can accept without degrading the water quality and establishes an implementation plan to install measures to reduce pollutant loads down to or below the maximum level.

But whether through a mandated TMDL process or a general watershed restoration project, planning and implementation are costly enterprises. EPA issued a national study on TMDL costs in August 2001. For the 36,000 TMDLs that would serve 20,000 water bodies, EPA estimated that as much as $69 million per year for the next 15 years would be needed to prepare plans and as much as $3.4 billion per year for 15 years to implement those plans. However, the report also estimates that flexible approaches to improving water quality could save $900 million dollars annually compared to the least flexible approach. Water quality trading, under certain conditions, could be an option to provide flexibility in implementing watershed management or TMDL projects.

How Does Water Quality Trading Work?

Water quality trading allows one source to meet its regulatory obligations by using pollutant reductions created by another source within the same watershed that has lower pollution control costs. For trading to occur, those who have water quality credits to sell have to provide greater pollution reductions than required by regulations.

A typical situation could exist for a regulated point source such as a wastewater treatment plant that is facing a new, higher water quality standard to achieve, one that would require expensive facility upgrades. Under specific conditions, water quality trading would allow the regulated entity to seek less expensive options to meet the new standard by a trading arrangement with either other point sources or nonpoint sources, located within the watershed upstream of the point of compliance, that will voluntarily achieve water quality benefits above that which they are required to provide.

This arrangement will allow the regulated entity to be in compliance at a cost significantly less than the facility upgrade and provide time to make an orderly transition to eventually meet the new standard on its own. If, for example, the wastewater treatment plant was already scheduled to be upgraded in five years, trading would allow it to stay in compliance until then as growth in its service area would increase the difficulty of maintaining water quality standards on its own.

Trading seeks the lowest compliance costs among eligible sources. A study in Michigan by the World Resources Institute (WRI) found that the cost to industrial and municipal dischargers to achieve a 20 percent reduction in phosphorus would cost $20 per pound on their own, but through trading with farmers to install agricultural BMPs, the cost would not be more than $10 per pound. WRI found even greater reductions in compliance costs, from 63 to 82 percent, in their analysis of projects in Michigan, Wisconsin and Minnesota.

The most common pollutants in water quality trading are nitrogen, phosphorus and sediment, although other pollutants would be allowed on a case-by-case basis. All aspects of trading mechanisms must be consistent with the Clean Water Act. Trading can never be used as an opportunity for a regulated entity to increase its pollutant loading by offsetting it from other sources; it can only be used to improve water quality.

Typically, the buyer of water quality credits will be regulated point sources, but they are not required to be the exclusive buyers. Anyone could buy credits and the establishment of a trading program could inspire environmental groups, civic groups, even individuals to buy credits to help accelerate the restoration process in their watershed. For many small organizations, such an opportunity would allow them to participate directly at any level their budget would allow.

A Tool for TMDLs

The number of TMDLs that have been approved or established has steadily increased from 500 in 1999 to nearly 3,000 in 2002. Water quality trading can be an option to help achieve total maximum daily loads in a watershed that could begin before the TMDL process has officially started and continue during the implementation of the final TMDL plan. Implementation costs can be less expensive and more efficient through the added flexibility that trading would allow.

EPA supports pre-TMDL trading that achieves a net reduction of the pollutant(s) as a water quality benefit and progress towards achieving water quality standards. Once the TMDL is established, it can contain trading provisions and a pollutant cap, which will not exceed the maximum amount of a pollutant that the receiving waters can assimilate and attain the applicable water quality standards. The cap is allocated between the point and nonpoint sources throughout the watershed in order to set their respective trading baselines. Only those extra, voluntary reductions achieved under the limit established by the cap can be traded as a surplus or unused allowance.

Different Types of Trading Mechanisms

The trading programs that currently exist were developed with a framework of state and federal regulations but with details that addressed the unique problems in the impaired watershed. A program can be designed to allow trading only among the point sources in the watershed. Others allow a point source to buy credits from nonpoint sources on an individual negotiation basis. At least one program allows trading in both cash and services among only nonpoint sources.

In some programs, an entity is designated as the banker, who accepts credit payments from buyers and allocates it to sellers. One of the earliest trading programs was established to reduce nitrogen, phosphorus and sediment loadings in the Tar-Pamlico River Basin in North Carolina. The thirteen largest contributors of the excess pollutants are wastewater treatment plants that formed an association and created the trading program with state officials that would allow them to pay at a pre-determined price into a special fund in the state Agricultural Cost-Share Program to be used for installing agricultural BMPs in the watershed. In this mechanism, there are no free market negotiations on the price of credits.

Carbon Trading – A Market to Reduce Greenhouse Gases

Man’s need to generate energy by the combustion of fossil fuel – petroleum products, natural gas and coal – has resulted in an ever-increasing amount of carbon dioxide (CO2) being released into the atmosphere. Excessive amounts of CO2, methane (CH4), and nitrous oxide (N2O), the so-called greenhouse gases, are largely responsible for global climate change. Evidence of climate change already occurring include: unprecedented melting of glaciers, Arctic and Antarctic ice shelves and Arctic permafrost; rising sea levels; changing plant and animal migration patterns; and, more weather extremes such as droughts, floods and storms.

The United States is responsible for 25 percent of the world’s contribution of greenhouse gases. The U.S. decided to disengage from the Kyoto Protocol, an international agreement for the major nations of the world to reduce their greenhouse gas emissions back to less than their 1990 emission level. In its place, the Administration announced its Global Climate Change Initiatives, a series of voluntary actions, research and tax credits with a general goal of reducing the greenhouse gas intensity of the U.S. economy by 18 percent over the next ten years.

Several actions in the President’s plan lay the groundwork for a greenhouse gas emission reduction credit system. One is to improve a voluntary reporting system of reducing emissions as originally established in Section 1605(b) of the 1992 Energy Policy Act that will “enhance measurement accuracy, reliability and verifiability, working with and taking into account emerging domestic and international approaches”. Another is to protect and provide a system of transferable credits to ensure that businesses and individuals that voluntarily register reductions are not penalized under a future climate policy, and to give transferable credits to companies that can show real emissions reductions.

A market-driven approach is one of the ways being considered to significantly reduce greenhouse gases without devastating impact to national fiscal growth and employment. It may also ease the transition away from fossil fuel and toward a cleaner, renewable energy source. Utilizing the acid rain model, those industries that agree to reduce carbon dioxide from fossil fuel could offset the excess amount by buying credits from those who would sequester or store an equivalent amount of carbon, thereby preventing it from transforming into carbon dioxide. American farmers could have credits to sell by employing conservation practices such as no-till planting, conservation buffers, entering land into the Conservation Reserve Program, capturing methane from manure and converting it to electricity and reducing the amount and the methods of applying nitrogen fertilizer.

Carbon sequestration is the long-term storage of carbon in the soil and in living and dead vegetation as a way to offset CO2 emissions. If steps are taken to prevent carbon in vegetation and the soil from transforming into carbon dioxide through the rapid decomposition of organic material, it offsets CO2 being released elsewhere. Conventional tillage speeds up the decomposition of organic matter by adding oxygen as it turns the soil and residue over. Conservation tillage, conservation buffers, and permanent vegetation established on land in the Conservation Reserve Program (CRP), woodlots or agroforestry practices such as windbreaks, shelterbelts, alley cropping all sequester carbon through living vegetation, increasing crop residues and minimizing soil disturbance. The BMPs promoted by the conservation community for decades receive added endorsement and recognition through a carbon trading market for their newly recognized ability to sequester carbon and help to solve a worldwide environmental problem.

Scientists use CO2 as a base to measure the intensity of the other greenhouse gases. Methane is determined to be twenty-one times more potent than CO2 and nitrous oxide is 310 times more potent. A carbon trading market is really a carbon dioxide-equivalent (CO2e) trading market so reductions in methane and nitrous oxide can also be traded. This presents even more opportunities for agriculture to participate. Methane capture and conversion to electricity not only allows a livestock operation (above a certain threshold level) to provide all the power needs of the farm and home, but to also sell excess power to the local utility. In addition, it simultaneously provides water quality improvements by the containment of manure and odor control, which in some cases is more highly valued than the electricity generated. Methane conversion provides a direct reduction (not an offset) of a potent greenhouse gas and one that can be precisely measured, both of which would add value in a carbon dioxide-equivalent market.

The largest agricultural source of nitrous oxide is commercial fertilizer. More efficient farm management could result in significant reductions of fertilizer application with frequent soil testing, subsurface placement rather than broadcasting and precision agricultural techniques. In some cases, current commercial fertilizer use could be reduced by replacement with manure. There may be many farms that could generate income by selling CO2 e credits and significantly reduce operating expenses by reducing fertilizer use without sacrificing yields.

Although there has been some carbon trading in the United States, it is limited and the terms of one deal can vary widely from another. A much more serious attempt is underway in several countries that have signed the Kyoto Protocol. A multi-year demonstration project called the Chicago Climate Exchange will allow several major local, national and international companies to trade both internally and with each other. NACD and Environmental Defense signed a memorandum of understanding in February 2003 to work cooperatively on carbon sequestration projects. Because carbon dioxide is not regulated in the U.S., there is no cap to impose on entities to provide the incentive to reduce emissions and trade if necessary. There are other components that need clarification and improvement before widespread trading can take place in America:

Establishing standards, specifications and procedures that define units of trade, registration of buyers and sellers, ability to track credits and minimum levels of independent verification to ensure the environmental integrity of a credit is sustained for the life of the agreement. The Energy Information Agency (EIA) of the U.S. Department of Energy (DOE) houses a registry of voluntary greenhouse gas emission reductions as specified in section 1605(b) of the Energy Policy Act of 1992. Procedures for voluntary reporting are in the process of being revised after a large body of work on corporate and project level emissions reduction accounting has been developed during its tenure so far.
The development of protocols for managing uncertainty in the measurement of credits. USDA and DOE scientists are currently working on improvements in carbon estimation tools, computer models and equipment. It is difficult to measure how much additional carbon has been sequestered per year in a no-till field, for example, when weather will affect yield and the amount of residue that is left in the field after harvest. The prices being offered to farmers for carbon credits are heavily discounted because of the risk of inaccurate measurements. However, the development of a commercial version of a laser probe is being finalized that can give instant readings of the level of carbon in the soil and is one example of new methods that could revolutionize carbon measurement, thereby reducing risk to investors and perhaps raising the sales price of credits.
Carbon credits need to be covered by a third party insurer against losses from acts of God or mismanagement. If a woodlot was under contract for 30 years and a wild fire burned it to the ground in year 15, all the sequestered carbon has been lost. To maintain environmental integrity in the market, such losses must be accounted for in carbon.
Determine accurate transaction costs, including adequate verification, reporting, evaluations and administrative costs. There is a role for an “accumulator”, an organization that acts as a broker between thousands of individual farmers and large utilities that would be interested in buying credits for thousands of tons of CO2 e. Some organizations have already posted trading web sites that will process transactions.

One voluntary action that is gaining popularity in the United States is the offer by some utilities to provide their customers with “green energy”. For a modest increase in their utility bill, the power company will acquire their energy usage through wind, solar, geothermal sources or may offset their own fossil fuel emissions with carbon sequestration. Through such a program, individual consumers can feel gratification in the ability to control the impact of their personal energy consumption and it helps to support fledgling renewable energy companies.

Conservation Opportunities of Market-Driven Approaches

Market-driven approaches provide powerful new incentives and endorsement for voluntary action by private landowners to install the same BMPs that the conservation community has been promoting for decades. The addition of innovative market forces and non-governmental funding increases strength and leverage to the traditional government conservation programs.

Conservation leaders need to be the first in their communities to understand and appreciate that they have not been promoting the full environmental value of traditional BMPs. With national focus turning more towards nutrient management and greenhouse gas reduction, conservation leaders need to align with new partners and adopt a new tact in convincing landowners to install conservation practices. Having credits to sell on top of cost-sharing may finally convince those more reticent individuals to take another step in stewardship of their natural resources.

Conservation leaders have a great opportunity to be the catalyst that gathers together a cross-section of stakeholders in a community or watershed and provide the vision and leadership to plan a project that adds trading as a new and powerful option to achieve higher conservation goals.

Written by Gerald F. Talbert, independent consultant, through a NACD grant from EPA.