Carbon Credits Program Offers Extra Income For Farmers

By Crystal McNett, Assistant Editor
Thursday, February 7, 2008 1:21 PM CST

The Chicago Climate Exchange and carbon credits are a relatively new aspect of agriculture. The Wisconsin Farm Bureau has held meetings across the state to inform farmers of the advantages of taking part in the Chicago Climate Exchange.

Chad Martin, soil aggregation specialist with AgraGate Climate Credits Corporation in West Des Moines, Iowa, took the helm to explain the carbon credits system.

AgraGate Climate Credits Corporation was launched in July of last year and is owned by the Iowa Farm Bureau. AgraGate was the first licensed aggregator on the Chicago Climate Exchange in 2003. The company employs four aggregation specialists and has worked to build a nationwide network of contract facilitators. The company has enrolled 3.4 million carbon credits from 1.5 million acres in 25 states. They are known as the “country elevator of carbon credits,” said Martin.

The Chicago Climate Exchange gives landowners the opportunity to get a few extra dollars per acre, Martin began. The carbon credits program has two main focus areas: soils and forestry.

The Chicago Climate Exchange (CCX) is a pilot project from 2003 to 2010 and is likely to continue, Martin explained. There are currently over 380 members of the CCX; about 100 are emitter members. The Exchange is based on supply and demand. Credits are purchased by carbon emitters, who create the demand. Aggregators provide the supply with credits from agricultural and forested land, said Martin.

The CCX works to reduce carbon emissions. From 2003 to 2006 carbon emitters must reduce emissions by 1, 2, 3 and 4 percent respectively each year below the 1998-2001 baseline. From 2006 to 2010 emissions must be reduced to 6 percent below that same baseline.

However, no more than 50 percent of the reduction requirement may come from offsets, explained Martin. This means that these companies who emit carbon into the atmosphere can achieve 50 percent of their emission reduction by purchasing offsets from land owners. Other emission reductions must be achieved by changing production methods.

As aggregators, carbon credits from land owners must be sold by the end of the contract period in 2012.

The basics

In order to trade carbon credits on the Chicago Climate Exchange, one must be a member. The Chicago Climate Exchange was designed to reduce the greenhouse effect and avoid global warming.

One carbon credit is equal to one metric ton of CO2, Martin explained. The value of each acre is broken down by county. Exchange offsets or XOs, which are purchased by companies who emit carbon into the atmosphere, are obtained through soil, methane and forestry.

Currently over 35 states qualify for no-till and strip-till carbon credit enrollment and all states qualify for new grass seedings, Martin noted.

Carbon sequestration is the capture and storage of carbon that would otherwise be emitted into the atmosphere, he explained. Multiple agricultural practices can emit carbon into the atmosphere, including plowing, cultivation, removing crop residue (greater than 40 percent), shifting land use and soil erosion.

How acres qualify

Carbon can be returned to the soil with continuous no-till or strip-till farming practices as well as seeding perennial vegetation. It is important to note that carbon credits can be obtained after removing crop residue if a cover crop is planted afterwards.

Replenishing soil carbon will overall improve crop yields and soil management, Martin explained.

Exchangeable soil offsets can be incorporated into a five or six year contract, beginning in either 2007 or 2008. In order to redeem carbon credits for the 2007 crop year, farmers must sign a contract before September this year so that the crop residues can be visually verified.

Grass seedings qualify for carbon credits if they were converted from cropland to grasses after Jan. 1, 1999. Grasses are allotted one XO per acre per year. New grass acres can receive credits back to 2003 with an approved CRP contract.

Alfalfa does not qualify for this rate. Alfalfa is allotted the same rate as no-til and strip-till ground.

No-till and strip-till acres are worth 0.4 or 0.6 XOs per year. Fourteen counties along the western side of Wisconsin are eligible for the higher rate. More information is available at the Chicago Climate Exchange website, www.chicagoclimatex.com.

No carbon credits are earned for the crop year if residue is removed, unless a cover crop is planted. However, removing crop residue does not put a farmer out of compliance with their contract. They simply won’t get credits for those acres.

The system also allows for a 3 percent variance for fixing washouts, ruts and other unavoidable circumstances, Martin added.

The Chicago Climate Exchange employs verifiers who visit acreage enrolled in the carbon credits program. About 10 percent of contracts are audited.

The value of a carbon credit began at about $0.85 in the CCX’s infancy. They have traded as high as $4.85 and are currently trading at about $2.35. Martin noted that if certain government regulations pass, the value of a carbon credit could go to the $15 range.

Contract details

The contracted acres are to be in the assigned tillage practice until 2012 when the contract expires, Martin explained. Credits must be sold by the end of the contract period. Credits are transferred to the aggregator on Jan. 1 of the year following the crop year. For example, if a farmer has enrolled his 2008 acreage, the credits will be transferred to the aggregator (a company such as AgraGate) on Jan. 1, 2009.

Year to year credits can be banked if the farmer does not wish to sell them at the price offered. However, credits must still be sold by the end of the contract period, he noted.

The first time farmers are eligible for payments is July 2009. That is if they do not bank their credits.

As sort of an insurance policy, 20 percent of enrolled/earned credits are held in a reserve until the end of the contract in case the farmer comes out of compliance with the contract. If a farmer does come out of compliance with any of the acres enrolled, he is responsible for replacing those credits back to the beginning of the contract. The reserve bank will be used to replace those credits and any remaining lost credits must be purchased by the farmer. If all acres remain in compliance with the contract, the reserve bank will be sold and paid out at the end of the contract.

Contracts are transferable without penalty if the new landowner carries on compliance with the contract, said Martin. After a contract is transferred, the previous landowner holds on to the credits he/she earned while owning the land. It is very important to transfer the contract with the sale of the land, otherwise the previous landowner can be charged as out of compliance and be responsible for replacing lost credits.

Leased ground can be enrolled by a tenant, Martin said. But he cautioned that land can be sold or leased to another tenant and have the land practices changed. The contract must be transferred or the person who enrolled the acres would be responsible for replacing those credits.

Documents needed to enroll acres include:

- Signed sales contract for XOs

- Aggregator/CCX enrollment worksheets

- FSA maps of enrolled land

- A copy of FSA 578 reports

- A copy of CRP contracts if CRP new grass acres are being enrolled

- A voided check from a checking account so payments may be directly deposited

Payments

The carbon credit price will be the price as determined by sale through the Chicago Climate Exchange, Martin explained. Payments are gross revenue less a 10 percent service fee, exchange fees and verification fees. There are no enrollment fees.

Payments can be calculated fairly simply. For example, if a farmer enrolls 250 acres of no-till at a rate of 0.6 carbon credits per acre per year, that would equal 150 carbon credits. Twenty percent of that acreage would go into the reserve pool, or 30 carbon credits. This would leave 120 carbon credits to sell each year. If the futures price of a carbon credit were $4, the value able to be sold each year is $480. This $480 is gross annual income before CCX and aggregator charges are taken out. The aggregator charge is 10 percent, equaling $48. The new total of $432 is then charged with a $0.20 per carbon credit exchange fee from the CCX. At 150 carbon credits, that fee totals $30. The final dollar amount coming to the farmer on an annual basis if the price per credit remains $4 is $402 per year. With the total sales from each year and the sale of the reserve pool at the end of the contract (pending full compliance of all acres), those 250 acres would yield $3,024, or about $12.10 per acre.

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