John Bennett, Biggar, SK

The answer is yes. The real question is who will profit and who assumes the maintenance liability?

To help you blitz through this there are three sections. First a brief background of some of the politics and the history behind Carbon Offsets. The second section explains some of the past deals that have been proposed, deals that failed, some that were near misses and one small success. The last section speculates on what the future might look like.

There is little doubt that Organic Matter will have value. It is less certain that that value will be returned to the farm gate by the market place. Under the worst case scenario the market will transfer the value from the farm to the emitter and the emission liability will move from the emitter to the farm. The potential is huge but the risk could be enormous.

Part one: The Background

The global science community has had serious concerns about "Anthropogenic influence" (human activity) on climate. Simply put burning fossil fuels, deforesting the planet and creating other GHG (green House Gases) are affecting the climate. A series of international meetings starting in Montreal in 1988 (year of the major drought in North America) resulted in the Kyoto Protocol. This was signed by most industrial nations with the object to slow greenhouse gas (GHG) accumulations in the atmosphere.

Both Canada and the U.S. signed Kyoto and worked together to include carbon sinks and emission trading as Kyoto mechanisms to reach the emission reduction targets.

The Bush Administration "Greener than Gore" during the presidential campaign did an about face before the Bonn round of talks. The Administration challenged that the international science work done to date failed to prove a link between increased GHG levels and climate change. Bush's administration referred the matter to the U.S. National Academy of sciences for review. The U.S, National Academy of Sciences came out strongly in support of the work of their international colleagues and stated that the administration's position to withdraw from Kyoto on scientific grounds, would have little or no support from the science community.

The President then made a speech from the Rose Garden stating that the U.S. would honor the intent of Kyoto in a parallel process to reduce GHG emissions. By stepping out of the Kyoto process the U.S. may have forfeited the opportunity to trade GHG emissions internationally, but the U.S. will have a domestic offset market. After September 11 the Administration and the public focus has shifted to other issues.

Meanwhile Canada continued in the international process. At the talks in Marrakesh they succeeded in having Agricultural soils included and the trading process recognizing both ERUs (Emission Reduction Units) and RMUs (Removal Units or sink offsets) tradable internationally. Canada later ratified the Kyoto accord which will come into force when or if Russia ratifies. Apparently the U.S., is pressuring Russia not to sign (presumably to deflect criticism) but the EU is pressuring Russia to ratify. Many observers hold the view that the Russians are holding out for the best offer. The Russians have until 2008 to decide.

Where does this leave farmers in the market place? U.S. firms are suggesting that as a result of trade agreements such as NAFTA and GATT the U.S. can't be excluded from potentially profitable emission offset markets. Some U.S. firms are pursuing ag. carbon offsets in South America and have ag representatives in Canada as well.

North of the 49^th the Federal government is working on the rules for a domestic carbon offset market. Emitters on both sides of the border are speculative buyers and are willing to buy offsets if they are cheap enough before formal market mechanisms are in place. Carbon offsets are listed on both the Winnipeg Commodity Exchange and Chicago Climate Exchange (likely not associated with the Chicago Commodity Exchange) I don't think that Winnipeg has seen any activity and the Chicago Climate Exchange had a low volume of approximately 30,000 tonnes @ $1.00 a tonne as of December 2003. Neither the volume or price are anything to get excited about.

In Canada a carbon lease contract was discussed between a consortium representing ManDak, ACTS (Alberta Conservation Tillage) SSCA(Saskatchewan Soil Conservation Association) and the IFAO (Innovative Farmers of Ontario) and two different emitters. The first discussion was brief when the buyer was only interested in purchasing offsets and in leaving the maintenance liability with the producer. The second discussion was on a lease concept and seemed promising. That is until the Canadian government grudgingly revealed the plan to divide Canadian ag sink offsets into two pools. One called BAUs (business as usual) which would be appropriated by the federal government, returning no value to farmers. The other pool would be tradable and the value returned to the farmer. Since there was no definition about what offsets would be property of the farmer and tradable and what offsets would be property of the government the discussions were halted. The Alberta government attempted to facilitate a sink trade between the farmers and emitters. At least three sessions took place but the discussions were dominated by buyers and traders and again failed to address the permanency and liability issues. It was suggested that farmers had nothing to worry about since federal regulators would not likely pursue or penalize a farmer if the sink was lost. It is unlikely any further trading will take place until the federal government establishes the rules for offset trading and abandons or clarifies the two-pool system. As a side bar: one emitter that once funded SSCA is claiming 19.8 million tonnes of offsets because their support provided the incentive that changed farming practices on the Canadian Prairies. On a similar note the Canadian Government intends to claim the offsets resulting from a green cover program they are supporting. This is all a bit disconcerting and will likely result in some sort of litigation.

In the U.S. there was a flurry of press releases announcing a trade between GEMCO (a Canadian consortium of large emitters) and IGF ( a crop insurance company) in Iowa several years ago. The press releases included Cantor-Fitzgerald ( a prestigious Wall Street brokerage firm). This deal fell apart when growers in Iowa got to take a look at the contract offered by IGF. I was privy to some versions of the various contracts that offered little value to farmers and required them to take unreasonable risks with carbon easements against land titles were referred to in some of the contracts I saw.

The sole small success was when an Ag sink carbon lease was concluded between the PNWDSA (Pacific Northwest Direct Seed Assoc.) and ENTERGY (a U.S. based energy consortium). The EDF (Environment Defense Fund) a U.S. based environmental group helped broker the deal. MAN-DAC and other Canadian conservation groups worked closely with PNWDSA. This was a cooperative effort that all farm groups agreed on before it was consummated. There was not a large tonnage involved or a lot of money trading hands but the risks returned to the farmers was minimized. Hopefully the precedents of this carbon lease will transfer to future agreements.

The latest development in the U.S. is currently taking place in Iowa. There was a press release in late October regarding an initiative with the Chicago Climate exchange and the Iowa Farm Bureau. There have been a series of meetings in Iowa put on by the Bureau. At the time of this submission I am not aware of the details. Hopefully there will be more information by conference time.

There is no doubt in my mind that organic matter and carbon sinks will have value in the market place. It may be Kyoto, Son of Kyoto or some parallel process but some type of offset market will be established.

Responsible governments all acknowledge that greenhouse gas levels must be addressed. Sinks will be a significant part of the solution and have value. The challenge for farmers is to see that the value is returned to the farm gate. Agricultural producers on both sides of the border must be vigilant or the value will transfer from the farm and only maintenance liability will remain.

Hopefully this background information and the lessons learned by past deals and failed deals will be useful. With luck we will not become "low hanging fruit" in the market place. I hope in the U.S. the government will treat agriculture with more respect than the Canadian government with their two pools of offsets which basically appropriate ag sink offsets from farmers.

It is in both Nation's interests that a large as possible ag sink is created and maintained. Markets can provide the incentives (perverse or favorable) that affect the contribution that sinks can make. Success will depend on how the creators and custodians of the ag sinks are treated. Properly designed market should add value far into the future.