1. Implementing Corn Belt Soil Carbon Projects
By:
Gordon Smith, Environmental Resources Trust
Forestry and Agriculture Modeling Forum
Workshop 3: Modeling to Support Policy
Shepardstown, WV, October 12-15, 2004

2. Presentation Outline
Assigned scenario: Implementation and effects of program design choices
Project experience
Pacific Northwest Direct Seed Association-Entergy
Existing Iowa soil carbon deals
Needed modeling
Selection bias and when we don’t need to know about uncertainty

3. Assigned Scenario Corn belt soil carbon sequestration
5 million tons C annual sink in 2015
Assume: soil carbon sequestration by switching from plowing to no-till

4. Assumed Program Design
Aggregator contracts with farmers to use no-till for a specified period
Aggregator promises to deliver tons by a schedule
Sequestration is measured
Farmers demand payment up-front

5. How Big is this Program? Assume sink 0.5 Mg C/ha/yr
10 million ha (25 million acres)
Over 40,000 farms
assuming 600 ac/farm

6. Baseline - Conceptual Approach
Principle: Set baseline by looking at behavior of others not in program
What is happening to soil C?
Gained 0.25 Mg/ha/yr, (Donigian et al. 1994)
What practices are used?
42.5% of acres in Midwest in conservation tillage in 2002 (CTIC)

7. Baseline - In Practice
Principle: Set baseline by looking at behavior of others not in program
1/4 to 1/2 of tons added to soil probably will not be beyond baseline
If proportional additionality, could double program size to 20 million ha (50 million ac) & 80,000 farms

8. Baseline - Alternative Concepts
Baseline is stock present on farm at enrollment in program
Would not increase program size
Current no-tillers would sequester little
Barriers approaches: Assess situation and motivation of individual farmers
Expensive
Not objectively verifiable

9. Measurement and Monitoring
Track locations of program lands
Confirm use of conservation practices
Annual farmer attestation (postcard)
Conservation District (windshield inspection)
Audit (sample field measurements)
Remote sensing? (not yet workable)
Quantify change in soil C stock
Program and baseline lands
Field sampling
Escrow $ for all monitoring

10. Verification Costs - Land Location
Track locations of program lands
Cheap to reference insurance or federal subsidy program records
Somewhat expensive to have farmer draw on ortho photo and digitize
Very expensive to GPS field boundaries
Future: download parcel boundaries from county assessor GIS
Would have to adjust to net field area

11. Verification Costs - Practices
Confirm use of conservation practices
Annual farmer attestation (postcard)
Conservation District (windshield inspection)
Audit (sample field measurements)
Remote sensing? (not yet workable)
Cost should be small

12. Verification Cost - C Stock Change
Sample program and baseline lands
Stratify by expected C stock change
Crop productivity/crop C input
Soil disturbance
Design must allow adding & deleting fields
Sampling & analysis cost of $100K for 5 million tons is $0.02 /ton

13. Uncertainty
Posit: Have 90% confidence that at least the claimed amount of offset has occurred
Could use mean estimate if no chance for adverse selection
Energy sector uses mean estimates
No performance uncertainty when measuring outcomes

14. Required Measurement Precision
Acceptable Error

15. Reversibility
All terrestrial and geologic stores can be released, including coal beds
Rental viable if offset price is constant or declining

16. Payments for Reversible Offsets
Example, assuming:
Constant value of permanent offset
Annual interest rate = 6%
Constant sequestration of 0.75 MgCO2/ac/yr
One time, up-front rental payment for all sequestration and storage for life of project
No discount for uncertainty, performance risk, leakage, or non-additionality

17. Rental Payment Calculation
Where: PR = price of rental
PP = price of permanent offset
r = annual discount rate
t = number of years of rental

18. Example Payments per Acre
$/ton CO2
5 year term
10 year term
15 year term
20 year term $5
$1.34
$2.34
$3.09
$3.65
$10
$2.68
$4.68
$6.18
$7.29
$15
$4.02
$7.02
$9.27
$10.94
$20
$5.36
$9.36
$12.35
$14.59

19. Payment for 600 ac. Farm $/ton CO2 5 year term 10 year term$5
$804
$1,404
$1,853
$2,188
$10
$1,607
$2,809
$3,706
$4,377
$15
$2,411
$4,213
$5,559
$6,565
$20
$3,215
$5,617
$7,412
$8,754

20. C Payment Relative to Land Value
At $10/ton CO2, undiscounted GHG payments can approach 10% of land value
Corn belt: 10 Mg C/ha = 15 Mg CO2/ac = $150/ac
Dry land: 2 Mg C/ha = 3 Mg CO2/ac = $30/ac
Will farmers choose permanent limit for this price?
Can soil C equalibrium level be raised, increasing C gain and revenue?

21. Fuel Emission Reductions
Assume 2 gallon/ac/yr reduction
Offset is permanent; no discounts
At $10/ton CO2 payment is $0.20/ac/yr
Present value of infinite stream: $3.33/ac at 6% discount rate
$2,000 payment for 600 ac farm

22. Leakage
Principle: If reduce production of a market good, must estimate displacement of production
Use price elasticities of supply and demand (Murray et al. 2004)
Large proportion leakage for commodities
Elsewhere may have lower emissions per unit of production

23. Transaction Costs Sources of transaction Cost
Contracting with farmers
Contracting with buyer
Calculating farmer payments
Distributing payments
Quantifying sequestration
Providing for sequestration shortfall
$100/farm likely to be 5-10% of revenue

24. Contracting Issues Easements on land substantially reduce its value
Landlords must sign any C contract lasting longer than the rental contract with the farm operator
44% US cropland rented (NASS)
Rental may have to be swap for buyer to retire offsets

25. Aggregators Aggregators required to:
Gather acres to spread measurement cost
Spread risk
Different contracts with farmer & buyer
Contract with farmer for practices
Contract with buyer for tons
Must have relationship with farmers to limit transaction costs

26. Pacific Northwest Direct Seed Association - Entergy
Contract established 2002
Generate offsets by direct seeding
Two products:
10 year lease of soil carbon sequestration
Permanent trade of fuel use reductions
30,000 tons traded
$75,000 payment
Implies $10.66 price of permanent offset

27. Pacific Northwest Direct Seed Association - Entergy
Assumed greenhouse benefit
0.15 ton C/ac/yr = 0.55 ton CO2/ac/yr
4 gallon/ac/yr fuel reduction
Benchmark greenhouse benefit
0.10 ton C/ac/yr = 0.37 ton CO2/ac/yr
2 gallon/ac/yr fuel reduction
Planned measurement/monitoring not yet done
Contract not assign responsibility or budget

28. Pacific Northwest Direct Seed Association - Entergy
PNDSA limited enrollment to 100 ac/farm
Limits risk to farmers
Transaction cost becomes large part of total revenue

29. Iowa Soil Carbon Deals GEMCo – IGF Insurance (1999)
No soil offsets delivered
Hog waste offsets delivered
Arizona Public Service – Sherwood Forestry (1999)
Options trade
Chicago Climate Exchange – Iowa Farm Bureau ( )

30. Needed Research: Confidence Intervals
Want certainty that getting claimed tons
Can accept large confidence intervals if multiple projects with unbiased estimates

31. Mean Estimates vs. Confidence Intervals
Mean estimate OK when no chance of selection bias (e.g. national inventories)
Selection bias likely to exist with voluntary project enrollment
Project participation limits other options
Enroll lands with least earning potential
Correlates to lower productivity
Correlates to lower sequestration

32. Proposed “Discount” by Quantification Method

33. Needed Modeling: Emissions Per Unit Harvest
Calculate volume of product displaced using elasticities of supply and demand
Example: displacement of timber harvest from PNW to SE US: SE has much lower emission/acre harvested but several times area is harvested; net small gain
Estimate “slippage” in afforestation
Estimate emissions per acre

34. Needed Modeling: Forest Sequestration Projection
COMET for forestry
Forest Service has been improving look up tables
Forest Service FVS model
Make user interface simpler
Improve less intensive harvest regimes
Test reliability for older forests

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