Federal legislation addressing concerns over climate change passed the House on June 26. The bill, formally called the American Clean Energy and Security Act of 2009, establishes a series of “caps” intended to reduce greenhouse-gas emissions beginning in 2012, with continuously higher reductions through 2050. The bill also provides a key role for domestic and international offsets, which can be used to account for up to 2 billion metric tons of greenhouse-gas emissions every year. Considering that annual U.S. greenhouse-gas emissions total about 7 billion metric tons, the importance that off sets could have is unmistakable. Of particular interest to pork producers is Title V of the bill — agriculture- and forestry- related off sets.

What are Offsets?

In a cap-and-trade program, an emissions source that is covered by the cap is issued a number of allowances, which allows the source to emit a certain amount of greenhouse gas — typically one allowance for each metric ton of carbon dioxide gas or its equivalent. If, during a given compliance period, the source’s emissions threaten to exceed its allowances, the options are:

  • First, the source can go to the marketplace and buy additional allowances to match the excess emissions.
  • Second, as an alternative, the source could purchase off sets matching those additional amounts.

Why are Offsets Important?

Off sets are important to a cap-and-trade program for two primary reasons. First, they serve to increase the total amount of “permission” available in the marketplace to achieve compliance. This increase in supply lowers the overall program cost to the covered sources. All things being equal, the more off sets that a program allows, the cheaper it will be.

Second, off sets present an important opportunity for a wide variety of businesses, landowners and others outside of the cap to participate in the carbon markets.

The worldwide carbon market was estimated to exceed $100 billion in 2008, and the value of a U.S. involuntary market could well exceed that.

The Environmental Protection Agency initially was to regulate the offset program. However, an amendment was added requiring USDA to establish a second offset program specific to domestic agriculture and forestry sources. Under this program, USDA must ensure that off sets are verifiable, additional and permanent, in accordance with requirements similar to those governing EPA. Unlike the EPA program, however, USDA must include a list of specific project types that fall into three basic categories:

  • Agricultural, grassland and rangeland sequestration and management practices.
  • Land-use change and forestry activities.
  • Manure management and disposal.

Many of the voluntary protocols may not require a radical alteration of land-management practices so much as a modification of and commitment to existing practices. However, whether any of these projects will qualify under a federal program depends upon what Congress and the agencies ultimately do.

How Might Offset Projects Affect Ag Producers and Landowners?

Cap-and-trade programs have the potential to provide economic opportunities for producers, yet there’s also the potential for increased production costs. Debate now centers on which way this balance will tip. Although many organizations are skeptical of the alleged positive effects of offsets on the agricultural community, USDA has released a study called “A Preliminary Analysis of the Effects of HR 2454 on U.S. Agriculture.” It was prepared by the Office of the Chief Economist and attempts to document such benefits. The study shows that farmers, ranchers and other landowners can obtain economic benefits under the House bill that outweigh potential costs. In particular, the study suggests that in the short and long term, offset projects will result in significant income for landowners.

Some early commentary criticizes the study’s assumptions and disputes the findings of an overall net benefit. But it seems clear that even if economic benefits will not outweigh the costs, the prospect of any benefits merits a landowner’s attention.

How Can Landowners and Others Benefit From Offset Projects?

In a briefing of the Senate Agriculture Committee about the newly released study, USDA Secretary Tom Vilsack gave this example: “What does this mean for the individual farmer? A Northern Plains wheat producer, for example, might see an increase of 80 cents per acre in production costs by 2020 due to higher fuel prices.

Based on a soil-carbon-sequestration rate of 0.4 tons per acre and a carbon price of $16 per ton, a producer could mitigate those expenses by adopting no-till practices and earning $6.40 per acre. So, this wheat farmer does better under the House-passed climate legislation than without it.”

While this example relates to crop production, many opportunities exist for livestock producers. Vilsack suggests that higher fuel, energy, fertilizer and feed costs can be outweighed by benefits a farmer can gain by adopting new practices that qualify as off set projects. For example, producers can work to implement emission-reducing technologies and production practices that may in turn let them receive offset payments for reduced methane emissions.

Whether farmers and other landowners adopt new practices will depend on individual circumstances, but all can benefit greatly now by becoming versed on how management changes could qualify as offset projects under the bill and the protocols involved. Additionally, it’s critical at any time for a landowner to include specific language in any contract, lease, easement or other legal agreement related to the land that reserves the rights to any potential offsets. Failure to include language stating who has the right to off sets could result in a dispute or even litigation over the ownership and use of available off sets.

The spotlight now moves to the Senate as it addresses climate-change legislation. Even though off sets appear inevitable in any cap-and-trade legislation adopted, the character and kind of offsets remain the subject of debate. So, it is important to be aware of the potential impact on your operation as you make management decisions over the coming months and years.

Melinda Beck and Jonathan Dettmann are members of Faegre & Benson’s food,
agriculture and biofuels group. Beck is based in Denver and can be reached at
mbeck@faegre.com; Dettmann is in Minneapolis and can be reached at jdettmann@faegre.com.