Featured Articles: Carbon Becomes a Crop for Some; But a Cash Crop?

Among other things, Midwest farmers grow corn and soybeans and raise beef and dairy cattle. But their crop portfolio for the future might also include carbon.

 

Here in Arizona, our main agriculture commodities include beef, dairy, hay, cotton, grains, citrus, vegetables, pork and leafy greens. And, of course, we certainly have “much more” in our agriculture portfolio too (after all we have desert shrimp). But carbon won’t likely become our next major cash crop anytime soon.

 

Driven by adherents to global warming, a new system for managing greenhouse gases (GHGs) is emerging that includes agriculture and forestry. Since carbon dioxide is one element of several GHGs, advocates suggest we help control carbon emissions through agriculture and forestry. Farming, in particular, is seen as a major frontier for carbon sequestration management.

 

Though it gets vilified in the press, the gas carbon dioxide (C02) and other GHGs are critical parts of the earth’s atmosphere. In simple terms, the earth absorbs heat energy from the sun, some of which is radiated back to the atmosphere in the form of gases. These gases form a blanket, holding a certain amount of that heat at the earth’s surface and keeping the temperatures warm enough to support life.

 

That layer of heat is actually necessary to sustain life on planet earth. However, the current concern is that man is helping hold too much heat at the earth’s surface, warming up the earth at too fast a rate.

 

Most discussion addressing the global warming issue centers on carbon or C02 because it’s the most abundant greenhouse gas, but the impacts of methane and nitrous oxide are also considered important by the global warmists.

 

Enter agriculture and forestry. Beyond energy efficiency and renewables, many contend that agriculture can help mitigate global warming by storing carbon in the soil in what are called carbon sinks. The soil is the largest terrestrial “sink” or storage place for carbon. The ocean also stores large quantities of carbon.

 

For those already in the game -- such as AgraGate Climate Credits Corporation, a subsidiary of the Iowa Farm Bureau Federation -- a carbon credit market creates a new revenue opportunity for producers. The experts identify continuously low or no-tilled fields and newly established grasslands; rangeland that’s been committed to an improvement program; managed reforestation or new plantings on forested land; and on-farm methane digesters as the main strategies for carbon capture -- basically carbon management.

 

The actual business of creating credits in the market is a bit more complicated. But suffice it to say that carbon credits -- also called offsets -- are already being traded on the Chicago Climate Exchange (CCX). The exchange launched trading in October 2003 in a pilot program to allow companies to purchase carbon credits to offset greenhouse gas emissions. Today, more than a dozen climate exchanges across the globe are trading approximately a billion dollars annually in carbon credits. So, even before any cap-and-trade legislation emerges in the United States, a very robust trading market already exists that includes 20% of FORTUNE 500 companies.

Globally, controlling carbon emissions is going to cost money. Changes to electricity and other energy production systems will not be free, and most advocates stress that the cost of carbon emission reductions is proportional to the amount of reduction that is being sought. In Europe, carbon emission allowances have been trading for $20 to $30 per ton, but offsets are very limited and few alternative energy production systems have been launched. In the U.S., the voluntary carbon market has traded between $1 and $7.50 per ton during the past year.

 

For farmers and ranchers and private forest owners, it could be one way to tap into a new revenue stream – the sale of carbon credits from their land. USDA has estimated that nearly 15 percent of the U.S. GHG emissions could be offset by wide-scale adoption of carbon sequestering production and land management practices. The big question for individual farmers and ranchers, though, is whether carbon management really pays off in the long run or will the costs of controlling greenhouse gases exceed any revenue gains.

If you’re Rex Woollen, who grows corn and soybeans in Wilcox, Nebraska, you’ve already tapped the market.

 

In a recent Bloomberg article, Woollen eliminated tilling on his 800 acres and keeps 470 tons of carbon per year in the ground and out of the atmosphere. Because of this, he gets carbon credits he can sell on the Chicago Climate Exchange. At the average price for 2008, that amounted to about $2100 of additional revenue for Woolen.

 

So far, Arizona Agriculture has not uncovered an Arizona farmer or rancher earning carbon credits from adjusted agriculture practices to keep carbon out of the atmosphere. This is a bit telling as many experts on this topic suggest the opportunities in our state are limited.

 

Arizona opportunities where crop agriculture is involved are restricted because of our desert climate, suggests Ed de Steiguer, professor of Natural Resources with the University of Arizona. With research focused on semi-arid rangelands, professor de Steiguer points to fewer opportunities to market carbon credits than do land managers in "wetter" states. “The reason, of course, is related to the lower carbon sequestration potential of our arid Arizona soils.”

 

Furthermore, carbon exchanges such as the Chicago Climate Exchange are not totally convinced of the possibilities in the semi-arid Southwest. “Currently, CCX won't accept Arizona's semi arid rangelands as carbon emissions traders,” says de Steiguer. “Convincing them that Arizona has the potential will take more scientific and economic studies such as the one I published. CCX is still ‘from Missouri’ so to speak; we're going to have to show them with scientific proof that Arizona soils can store carbon in an economical manner.”

 

U of A’s de Steiguer continues. “C-trading could very well represent new business opportunities for Arizona landowners as well as state trust lands.”

 

Unlike semi-arid rangelands, land in Arizona that is converted from crop land to permanent grass is eligible for carbon credits under the CCX “grassland establishment” protocol. “Qualifying lands can earn 0.4 credits per acre per year,” says David Miller, Chief Science Officer for AgraGate Climate Credits. The grass had to be established after January 1, 1999 and must enter into a 5-year contract to maintain the grass stand. “Extension of other carbon credit protocols to desert soils and farming practices will occur as the scientific evidence is developed and published,” according to Miller.

 

To compare, if an Iowa farmer converted from crop land to permanent grass, he earns 1.0 credit per acre per year. “This reflects the increased root and plant growth that occurs in wetter areas like Iowa,” says Miller.

 

Rick Krause, American Farm Bureau’s (AFBF) senior director for Congressional Relations, confirms the climate challenges of carbon management opportunities in Arizona. “Water issues create the limiting factor. The rule of thumb is that more sequestration occurs when more cover crops are present (an alfalfa crop does not count because the field is not in alfalfa long enough). Carbon needs plants on the top of the dirt to bring it in and hold it. So an agriculturalist will have greater no-till or low-till opportunities in wetter states.”

 

 

While Arizona crop agriculture appears to have the least opportunity, livestock -- specifically dairy -- shows more promise. Methane is 21 times more potent as a greenhouse gas than carbon dioxide. Thus, the destruction of a ton of methane earns a net credit of approximately 18 tons after deducting for the small amount of C02 that is released upon burning of the methane.

 

A handful of Arizona dairies have been looking into methane digesters, a method for methane capture that keeps GHGs from the atmosphere and can allow for electricity production if the captured methane is used to run an electrical generator.

 

“In the future all large, modern dairies will be doing some sort of methane digester capture as part of the business practice,” says Paul Rovey, owner of Arizona’s Rovey Dairy and chair of Dairy Management, Inc. “I’m not completely sold on it today, but once some of the problems are solved I do believe it becomes part of the dairy system for large operations.”

 

Also president of United Dairymen of Arizona, Rovey has looked into methane digesters and expects opportunities in this area to improve.

 

And while capital investment and weak support by Arizona’s utilities currently prohibit a rush to sign up, other options are emerging.

 

One organization, Environmental Capital Management (ECM), sees opportunities everywhere. A company that manages a hedge fund that invests in GHG reduction and renewable energy products, ECM is based in Arizona and suggests early adopters may benefit the most. “Historically, government has tried to take care of early adopters,” says Curt Kaminer, chief operating officer.

 

Benefits for Arizona dairies beyond carbon credits might include futuristic environmental stewardship that can play well to various interest groups including highlighting the importance of large dairies to capture C02; something that could potentially push back the anti-large agriculture coalitions.

 

Additionally, second and third generation methane capture systems might really appeal to Arizona’s utility companies as they search for more and more opportunities to add to the renewable energy percentages as required by Arizona’s Corporation Commission.

 

Adds ECM’s Kaminer, “Most see carbon capture as too expensive. I’m one of the few that believes it won’t be as expensive as anticipated.”

Not everyone is convinced that this brave new world will be inexpensive.

 

If Congress passes some kind of cap-and-trade legislation, it’s estimated that the increased carbon credits needed to run the largest coal-fired generating station in the U.S., the Four Corners Power Plant that powers the pumps for the Central Arizona Project (CAP) canal, “could raise the cost of agriculture water and all CAP water by $22-per-acre-foot,” says Dan Thelander, cotton, wheat and alfalfa farmer in the Maricopa and Pinal County area.

 

“Farmers in the west especially will pay huge amounts for everything if this goes through,” he adds.  “Congressman John Shadegg (R) said it could raise the cost by 10 to 20%.”

 

Consumers will feel it too. As experts try to put numbers to cap-and-trade systems, some estimate per household energy costs could go up anywhere from $300 to $800 per year, while others simply suggest it will double our annual utility costs. “President Obama said during his campaign that he would not raise taxes on the average American earning less than $250,000 a year. Cap and trade will be a huge tax paid by utilities and then in turn passed on to all electrical customers,” says Thelander.

 

A recent Arizona Republic editorial by the three largest Arizona utilities highlighted the dramatic rise in utility costs for the average Arizona family if cap and trade becomes law.

 

Another cost not yet discussed at length is the cost of shifting traditional agriculture production to carbon sequestration management. Does carbon management promote removal of traditional crop and cow/calf agriculture practices from current agriculture and multi-use lands?

 

This happens to be an underlying concern for the industry and for AFBF. If carbon is like another crop and the market sends the price sky-high, an agriculturalist will be forced to look at the business opportunity. “If the price for carbon gets high enough then producers will have to make business decisions related to profitability,” says Krause. “For them the decision becomes, do I continue producing a food crop or is it more profitable to put land in pasture or trees. These are issues that underlie the entire issue. I could see if the price of carbon was high enough a farmer making a business decision on his private land to choose carbon over production and you couldn’t fault them for that.”

 

Krause describes the tremendous efficiency of American agriculture producers’ per acre production compared to other countries. We’re number one in this area as year after year producers have reduced costs, improved energy efficiencies per acre and actually reduced carbon emissions with modern agriculture. “We emit less ag-related GHG than any other nation in the world,” he says. “So if we take agriculture production out for carbon management and transfer more agriculture production overseas, we’re actually adding greenhouse gases to our global bank. We’ll wind up increasing global emissions.”

 

And, at the same time, we reduce food production. This is a cost that no one appears to have put a pencil and spreadsheet to.

 

The undercurrent in Washington, D.C. and elsewhere says cap and trade is coming -- or cap and tax as some are known to call it. What any kind of bill from Congress looks like is still up in the air. AFBF says the benefits or the costs imposed as a result of this should not be greater than the benefits that might be gained as a result of a carbon management program in agriculture. “We recognize that not every part of the country is going to be able to participate equally in any kind of program,” says Krause. “Legislation needs to address the interests of everybody. That means Arizona agriculturalists won’t be able to benefit as much as Midwest agriculturalists. And some Arizona agriculturalists could be penalized even further since their carbon offset opportunities are non-existent.”

 

The irony of all this is that a trading market for carbon already exists (remember the $1 billion already trading out there). An unregulated, non-taxed market could potentially help manage C02 levels without cap-and-trade interference as organizations are marketing their “green” practices and gaining customers as a result.

 

Regardless, agriculture production costs appear to be on the increase. We know that. Will carbon credits or offsets pay for it? That’s the $64,000 question.