Thursday, January 31, 2008

Ag Needs to Weigh in on "Offsets vs Allowances" Issue

One of the big brewing issues of an ag offset market within climate legislation is whether to set up the program as an offset market as we have discussed here briefly (a free market where emitters of GHG emissions can buy reductions of those emissions from the agriculture industry and others) OR to get a portion of the overall emission allowances (or rights to pollute) to sell on the market and use as funding for a USDA carbon program.

Both of these options have pros and cons -- agriculture should have the ability to CHOOSE EITHER OPTION which is what the Lieberman-Warner bill allows. But be wary of the allowances only option -- which is what most of the environmental groups want for agriculture!!

For example -- take a look at an excerpt from a fact sheet that is being circulated by the Natural Resources Defense Council and World Resources Institute.
"The Chairman’s Mark directs the U.S.D.A. to allocate 5 percent of allowances to achieve the maximum amount of permanent and additional emission reductions and sequestration possible. If biological sequestration and emission reductions from programs supported by the U.S.D.A. are less expensive than the market price of allowances, the U.S.D.A. could be expected to require more than one ton of emission benefits for every allowance allocated. Modeling by the Nicholas Institute of Duke University and the U.S. EPA indicates that such a situation could arise after 2025.4 While this scenario would be contingent on several other factors including the demand for biofuels, the value of agricultural land for other purposes and in what way states include terrestrial sequestration in their own climate change programs, additional reductions beyond those reported here could be achieved. For example, if set aside recipients were able to sell allowances in 2050 for $100/ton and obtained reductions for $35/ton then 160 MMTCO2e of additional net emission reductions would be achieved, bringing the 2050 reduction to as much as 69% from 2005 levels."
-- Natural Resources Defense Council& World Resources Institute fact sheet
I know this is rather confusing -- but the bottom line is that these organizations want you farmers to do the work and not get the full market value for it because it will be a government program RATHER THAN A MARKET.

See the full NRDC/WRI fact sheet by clicking here

To help make sense of this -- and offer some talking points for those of you who want to engage on this topic, I and some friends have come up with a response fact sheet below.

Offsets Versus Allowances:

What do these provisions mean for the Agricultural Sector?


  • Allows free-market participation for agriculture
  • Income opportunities for agriculture are only limited by the amount of offsets allowed by the policy: a cap on offsets limits income potential for agriculture
  • Agriculture receives market value for each ton of carbon sequestered or reduced: buyers will pay whatever price the market will bear


  • Not a free market opportunity for agriculture
  • This is a government-administered (USDA) program
  • The value and payment for tons sequestered or reduced by agriculture will not be determined by market value, but will be determined by the government (USDA)
  • Consider this language from NRDC and WRI[1], regarding what they consider the function of the allowances provision to be:

If biological sequestration and emissions reductions from programs supported by the USDA are less expensive than the market price of allowances, the USDA could be expected to require more than one ton of emissions benefits for every allowance allocated.”

In other words, if it costs a producer $25 to sequester a ton of carbon, but the market price for carbon is $100, the producer will have to sequester 4 tons of C to receive an allowance from USDA that is equivalent to one ton.

· This would prevent agricultural producers from getting market price for their emissions reductions.

· This treatment is not being considered for any other sector.

A comparison of payments received by agricultural producers under the offset system, and under the allowances system, as proposed by the NRDC/WRI analysis:


Costs to agricultural producer to sequester 1 ton C = $25.00

Market price of carbon allowances per ton of C = $100.00

Offsets Provision: Allowance Provision

Ag payment received for 1 ton C = $100[2] Ag payment received for 1 ton C = $25.00

[1] Greenhouse Gas Emission Reductions under the Lieberman-Warner Bill (S.2191): Full Committee Chairman’s Mark with Boxer 1st Degree Amendment, by Daniel Lashof, Climate Center Science Director, NRDC, John Larson, Associate (WRI), and Robert Heilmayr, Research Assistant, Climate and Energy Program, World Resources Institute. December 4, 2007.

[2] Note that this does not include discounts that may be applied for measurement uncertainty or leakage, which are being considered as part of both offsets and allowance provisions in cap-and-trade policies.

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