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Ecosystem Service Markets in Agriculture (101) American Farmland Trust Ann Sorensen USDA: May 2007.

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Presentation on theme: "Ecosystem Service Markets in Agriculture (101) American Farmland Trust Ann Sorensen USDA: May 2007."— Presentation transcript:

1 Ecosystem Service Markets in Agriculture (101) American Farmland Trust Ann Sorensen USDA: May 2007

2 Ecosystem Service Markets Who we are Standing at the crossroads Ecosystem service markets: carbon credits; water quality trading Synergies

3 American Farmland Trust Founded in 1980 to save farm and ranch land Bring farmers, communities, conservationists, developers and government officials together to work out solutions for the common good

4 American Farmland Trust Saving the land that sustains us Protecting the best land Planning for growth with agriculture in mind Keeping the land healthy

5 At the Crossroads Globalization: continuing pressure to reduce commodity subsidies and go “green” Threat of climate change: –Adapting to severe weather events –Mitigating greenhouse gases Need to address water quality Funding trends

6 Globalization Doha negotiations: U.S. policies distort trade Pressure from developing nations for change U.S. has pledged to give up commodity subsidies if other countries open up their agricultural markets to U.S, producers

7 Globalization World Trade Organization cases: Brazil’s success against U.S. cotton Canada placing anti-dumping duties against U.S. corn Potential others setting the stage for “dying a death of 1000 cuts”

8 Climate Change Need to Adapt: More severe weather may lead to: Increases in soil erosion ranging from 4 percent to 95 percent Increases in runoff from 6 percent to 100 percent in some locations Need to employ more conservation practices

9 Climate Change Could play significant role in mitigation: Carbon captured and sequestered by U.S. farmland offsets less than 1% of U.S. emissions (forests add 10%) BMPs to sequester C could offset 8 to 16% of total U.S. emissions in the future Biofuels can help replace fossil fuels

10 Water Quality

11 Funding Trends

12 Vision Farms provide ecosystem services along with food and fiber: –Broad public support –Considered “green box” under WTO –Farmers “sell” environmental services much like they sell agricultural products –Steady, reliable stream of revenue

13 Farm Commodities $ now$ in 20 yrs Client Grain (corn) 95% 30%World market Corn stover20%Biofuel plant Timber5%15%Pulp/paper Electricity (wind)5%Utility grid Wetlands credits5%Developers Flood control credits 7%Water District Water quality credits 8%Water supplier Biodiversity credits5%NGO Carbon credits5%Power plant

14 Ecosystem Services Retiring cropland reduces soil erosion, decreases nutrient, pesticide and sediment loadings. Provides permanent grass/tree cover. Decreased loadings improve water quality and plantings provide wildlife habitat. Services = Cleaner water, more wildlife

15 Wide Range of Credits TypeRegulatory Driver WetlandFederal & State StreamFederal & State BufferState HabitatFederal & State ForestState Carbon/GHGState & (possibly) Federal NutrientsState Misc. Water QualityFederal & State StormwaterFederal & State Renewable EnergyState Water RightsState Aquifer RechargeState Development RightsCounty

16 Ecosystem Services Carbon markets: Sequestered carbon (timber and agriculture currently voluntary markets) Water quality/Quantity : Nutrients, sediments, temperature, bacteria, heavy metals, storm water flows, GW withdrawals

17 Other Ecosystem Services Stream Mitigation Banking : Stream channel, banks, buffers, hydrology Wetland Mitigation Banks : Wetlands Conservation banks Endangered species habitat for pollinators; reptiles; birds; mammals

18 Why now? Conservation planning has matured Millennium Ecosystem Assessment has categorized ecosystem services Economic valuation is helping set prices Tools for decision-making emerging Small scale efforts underway

19 Carbon Credits Global carbon markets have doubled in size over the past year –Regulated markets = $21.5 billion –Voluntary markets = $100 million U.S. Companies entering voluntary market –Ford, Google, DuPont, American Electric Power (15% of companies surveyed but an additional 40% are considering it)

20 Company Motivation Fulfill corporate greenhouse gas reduction targets Gain carbon market experience Prepare for potential regulatory requirements Enhance brands and/or differentiate products Attract investors

21 Agricultural Offsets Sequester carbon in the soil Reforestation or afforestation of native tree species Methane capture and destruction from livestock Concerns: lack of permanence, science unclear on measuring and quantifying reductions

22 Universal Challenges Solid science (unit traded must be definable, measurable and verifiable) Appropriate length of contracts Determining baselines and identifying synergies Creating transparent, credible, efficient, economical, high confidence markets

23 Sequestering Carbon BMPs to sequester C could offset 8 to 16 percent of total U.S. emissions in the future Currently 2,000 producers in 15 states have sold carbon credits on 1 million acres.

24 Sequestering Carbon

25 Synergy: Carbon Credits and Climate Adaptation Practices to help adapt sequester carbon –Restoring wetlands, repairing stream channels and enhancing riparian corridors –Building in redundancy by backing up conservation tillage with grassed waterways, contour grass strips, filter strips, riparian buffers, etc.

26 Synergy: Carbon Credits and CAFOs New CAFO regulations may increase demand for land to apply manure as primary nutrient source Participation in EQIP, CSP or a carbon credit market can offset some or all of the costs of manure application

27 Watershed Scale Water Quality Trading Programs

28 Watershed Approach Most effective and comprehensive approach –Builds a broad-based community of understanding –Community-developed desired goals –Applies many tools to solve water quality concerns such as nutrients and sediments

29 Watershed Approach Regulatory Driver = Clean Water Act: –National Pollutant Discharge Elimination System (NPDES) Regulates discharges from municipal and industrial point sources (including CAFOs) –Total Maximum Daily Load (TMDL) Sets water quality-based effluent limits EPA Water Quality Trading Rule 1-03

30 Water Quality Trading Credits Can be one of the tools to achieve water quality in a watershed Introduces flexibility in the regulatory process –Allow point sources with high treatment costs to pay someone else to make a voluntary and surplus pollutant reduction for a lower cost

31 Potential Tradable Pollutants Pollutants that: –Come from both point and nonpoint sources –Transported through stream network without assimilation –Have a water-quality based effluent limit (TMDL)

32 Potential Tradable Pollutants For Agriculture : Phosphorus Sediment Nitrogen Flows and temperature

33 Why Should Ag Participate? Potential revenue Discussions influence stewardship goals Agriculture knows what works best on the farm Recognition for what it has already done

34 Nutrient Credits Surplus pollutant reductions (unit of mass over a period of time) –Can result in a pollutant load reduction > than required by permit/TMDL allocation –Measurable –Generated within same watershed –Net improvement (trading ratio > 1:1) (“discounting”)

35 Statewide Trading Programs

36 State WQT Rules Authority for WQT applications Eligibility, timing, trading ratios (requiring retirement of a portion of each trade) Limits on the amount of credits that a source can buy to avoid hot spots Quantification methods for credits Transaction framework and enforcement Periodic program evaluation requirements

37 Types of Trading PS/PS: between permitted wastewater facilities PS/NPS: between permitted and nonpermitted sources with voluntary credits NPS/NPS: between regulated municipal stormwater permittees and unregulated agriculture

38 Why Allow for Trading? Cost Ancillary environmental benefits Additional funding for BMP implementation Policy opportunities

39 Cost Agricultural BMPs can produce pollutant load reductions at a much lower cost Wastewater treatment plants face large capital costs to comply with NPDES permits and TMDLs

40 Environmental Benefits Sediment load reductions Reduced flood peaks (reconnect riparian flood plains) Wildlife habitat Wetland restoration Water temperature reductions Assimilative capacity (flood plain storage)

41 Additional Funding for BMPs Point source polluters pay for conservation measures on farms –Nutrient management, buffer strips, conservation tillage, animal exclusion, use of cover crops (but prefer structures) Point source polluters can offer higher cost- sharing rates

42 Policy Opportunities Can help maintain working lands Often accelerates implementation of BMPs (flexibility; revenue stream) Can result in net benefits (extra reductions required for each trade) Allows for equitable decisions in future growth management

43 Setting Up Trading Step 1: Farmer installs additional BMPs (above baseline requirements) from a selection of approved BMPs Baseline can be set by TMDL load allocation, state policy or formal rule, local stakeholder input or combination of all of these

44 Setting Up Trading Step 2: Pollutant load reductions from BMP calculated using standard methods such as RUSLE2 (soil erosion model) Requirements for credit generation include BMP selection, implementation period; BMP lifespan; quantification of BMP reductions, cost of installation

45 Setting Up Trading Step 3: Trading credits must factor in Trading Ratio calculation using approved ratio that accounts for uncertainties and provides net water quality benefits Trading ratios may contain factors to account for equivalency, margin of safety, bioavailability differences, etc.

46 Setting Up Trading Step 4: Connect credit sellers to buyers (aggregator, broker or individual contract) Third party verification of BMP credit, installation, maintenance and WQ monitoring; legally binding trading agreement between farmer and credit buyer; seller’s compliance with PS contract; possibility of middlemen

47 Setting Up Trading Step 5: Register credits with the state regulatory agency (MPCA or third party) Reporting requirements in PS permit; web- based registry (WRI’s NutrientNet includes location, contact and credit calculators); web facilitated reporting (contracts, reporting forms and lists current trades)

48 Obstacles to Trading Low demand – may need supporting regulation Difficulty in measuring may lead to high transaction costs (scientific uncertainty) Farmers may be reluctant to participate in program that is partly regulatory, even with compensation – afraid information shared could lead to regulations

49 Synergies: WQT and EQIP (Breetz & Fisher-Vanden, 2007) Both employ incentive payments for BMPs Encouraging the same types of farmers to implement the same types of BMPs Can WQT partner with EQIP?

50 EQIP Strengths Farmers know and trust EQIP Interest in EQIP exceeds available funding Established program with fewer sources of transaction costs

51 EQIP Weaknesses Doesn’t explicitly target water Ranks water quality projects against erosion, forestry and habitat projects Fuzzier calculation of environmental benefits Less attention to cost-effectiveness Slightly less monitoring and enforcement Constrained by federally-appropriated funds

52 WQT Strengths Explicitly focused on water quality More refined calculation of water quality benefits Greater attention to cost-effectiveness More stringent monitoring and enforcement Draws on private funds and builds local partnerships Allows farmers to be fully compensated and even profit for project implementation

53 WQT Weaknesses Farmers lack familiarity with and trust in trading programs High transaction costs involved in recruiting farmers

54 Problems for WQT Recruiting Farmers concerned about regulation (EQIP helps farmers, NRCS, not EPA, fewer demands on monitoring and quantifying) WQT has no ties to agricultural community Trading contracts may offer less autonomy in choice of practices and monitoring WQT prefers structural stream bank management practices – permanent, easy to monitor but do not increase net returns

55 EQIP WQT Partnership “Piggybacking” EQIP advertises to farmers, ranks applications, signs EQIP contract, administers funding, monitors BMP implementation and enforces contracts WQT provides funding to EQIP (example = Tar-Pamlico River in NC)

56 EQIP WQT Partnership “ Brokering” EQIP advertises WQT opportunity, determines eligibility for WQT funding, ranks eligible projects, signs contract with farmers WQT provides funding to EQIP for individual projects; monitors BMP implementation; enforces contracts

57 EQIP WQT Partnership “Screening” EQIP advertises WQT opportunity; determines eligibility for WQT funding; passes eligible farmers to WQT WQT ranks applications; signs WQT contract with farmers; monitors BMP implementation; enforces contracts

58 EQIP WQT Partnership “Recruiting” EQIP advertises WQT opportunity WQT determines eligibility; evaluates applications; negotiates with farmers for preferred BMPs; signs WQT contract with farmers; monitors BMP implementation; Enforces contracts

59 Success of Partnership Extent to which project selection tasks can be shared depends on: – the refinement of the local EQIP ranking criteria –the willingness of NRCS staff to devote time to WQT

60 Water Quality Trading “ The economic and environmental risks of climate change are fairly well publicized. In contrast, … the Millennium Ecosystem Assessment flagged hypoxia as an even greater short-term threat to human livelihoods than climate change. There are now at least 150 human-induced hypoxic dead zones in global waters…. Given the urgency, nutrient trading is poised to become the next truly important market-based conservation tool. Just as the last decade witnessed the launch and the almost viral growth of carbon markets, the next decade could give rise to robust and, large scale regional schemes for nutrient trading.” Forest Trends, NRCS, The Chesapeake Bay Foundation and The Ecosystem Marketplace May 2007

61 Other Considerations Consistent/standardized quantification Recognizing common environmental outcomes or metrics across all programs (quality/quantity) Overlapping environmental commodity markets (multiple ecosystem services) Markets take time to develop

62 Multiple Markets Pennsylvania: conservation tillage for nutrients, sediment; carbon Great Miami River, Ohio : BMPs for nutrients, in-stream habitat; carbon Florida rangelands: water storage; P; habitat enhancement

63 Multiple Markets Vermillion River, Minnesota: Water quality (flow; temperature; sediments; riparian quality) Great Lakes: Water quality/quantity offsets (flow; nutrients; green space; wetland banks) Oregon Water temperature (riparian buffers; trees)

64 Promising Future Mentioned in AFBF MAAPP report as a “exciting” opportunity USDA 2007 Farm Bill recommendations include $50 million in mandatory funding to develop uniform standards for quantifying environmental services, establish credit registries, and offer credit audit and certification services

65 AFT’s Potential Role Bringing agriculture to the table Pilot projects (ACIC risk management instruments help producers adopt BMPs; multiple credit markets) Outreach (listening to agriculture) Policies (local, state, federal – working with agriculture to develop and promote policies)

66 AFT’s Potential Role Link academics and agriculture Link environmental community and agriculture Identify high priority land to protect: Protect farmland to protect future environmental services (in addition to food and fiber)

67 Parting Words "The most urgent priority, however, is to put into practice what we already know, with all the accompanying warts. We must learn by doing, and big mistakes will be made, but we cannot afford to wait for certainty or even a high level of comfort. We must embrace compromise because doing better today is more important than doing best tomorrow." Craig Cox, Soil & Water Conservation Society, 2006

68 Source Materials for Ecosystem Services 101 Mark Kieser & Associates: Environmental Trading Network James Salzman, Duke University (farm of the future) Breetz & Fisher-Vanden, 2007: Review of Agricultural Economics 29(2): pp 201-215)

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