Carbon credits and markets: Cap and trade comes to Washington
Cap and trade comes to Washington
Our newly elected president has publicly embraced the establishment of a government-mandated "cap and trade" system to help combat global warming. "Cap and trade" refers to the government establishing greenhouse gas (GHG) emission levels for certain industries. An entity can comply with its limits by either reducing emissions or buying "carbon offsets" from someone else.
There are a couple of items to keep in mind as I go through the presentation. First, we commonly think of GHGs as carbon dioxide, but they are, in addition, whatever the government says they are. Second, carbon offsets are created when an entity emits fewer GHGs than it is allowed—it can sell the "extra" as a credit. Also, activities that have an overall increase in sequestered carbon may be eligible to sell this increase as a credit. Carbon sequestration commonly occurs in agriculture via an increase in vegetation, which uses carbon dioxide in photosynthesis, or via an increase in dead plants, e.g., organic matter, in the soil.
"Cap and Trade" – Can you say Kyoto?
Cap and Trade systems are the reason we are discussing carbon credits and markets at a meeting of the Washington State fruit industry. The "Kyoto Treaty" is basically a cap and trade system on a global scale.
Here is how a Cap and Trade system would work:
- Government entity sets a limit (cap) on the amount of a "pollutant" – a very political process. In this case, the pollutant is carbon dioxide and other GHGs.
- Companies are issued permits allowing them to emit a certain amount of a pollutant. Any amounts emitted must be offset by a carbon allowance or credit.
- The total amount of allowances and credits cannot exceed the cap—limiting total emissions to that level.
- However, if companies need to increase their emissions further, they can buy additional credits from those who pollute less. This transfer of allowances is referred to as a "trade."
- In theory, those that can easily reduce emissions or increase sequestration most cheaply will do so, achieving pollution reduction at the lowest possible cost to the company and to society as a whole.
Many environmental groups strongly oppose the use of offsets and credits because it does not create harsh enough disincentives for "polluters" to clean up their act. These groups would ask simply that emissions be capped, with no opportunity to mitigate such a draconian measure via a "trade."
I oppose cap and trade for several reasons. These systems are, of necessity, creatures of the political processes. With so much in the hands of lawmakers, industries looking for favorable treatment are going to spend tremendous amounts on lobbyists to make sure they aren't disadvantaged. The consumer is going to bear the burden via increases in taxes to fund the program, and increases in the price of goods as industries pass their extra costs on.
UN Framework Convention on Climate Change
Most of the current cap and trade proposals involve a long-term reduction of GHG emissions to a completely arbitrary, prior existing level. The infamous UN Framework Convention on Climate Change ratified at Kyoto, Japan, in 1997, also know as the "Kyoto Treaty," used 1990 as its date. Why not 1989 or 1991? Was the climate "better" or "best" in 1990? Nobody knows. Moreover, the concept was not to halt expansion of GHG emissions, but to roll it back to levels well below those that existed in 1990. Specifically, by the end of 2012, it was to decrease GHG emissions in the aggregate by 5.2% compared to 1990. It is worthwhile to note, also, that the only GHG emissions covered are those created via combustion of fossil fuels.
We all know that President Bush refused to be part of the Kyoto Treaty. But what kind of success have the signers of the Kyoto Treaty experienced since the treaty took effect in February of 2005? In a word: abysmal. Emission levels have continued to climb despite the well-intentioned efforts of the signers. Only two countries that signed the treaty in the European Union are on track to meet their emissions goals: the United Kingdom and Sweden. However, the ways in which they met the goals are partly coincidence, very expensive, and not completely environmentally friendly.
The 1990 date was a critical one for the UK—and, by coincidence, it gave them a huge leg up in meeting their emissions goals. In 1990, the UK switched from the almost exclusive use of highly polluting coal-fired power plants to more environmentally friendly forms of electrical production. This change was not driven by concerns over global warming because nobody had heard of global warming in 1990. It was a result of air pollution problems and decades of coal industry labor issues – the propensity for British coal miners to strike. Hard to run your laptop when the coal-fired power plant runs out of fuel.
In Sweden, the push for biofuels has been an important part of its efforts. Sweden has passed a resolution declaring that the country will be oil independent by 2020. With more forestland per capita than anybody else in the European Union, Sweden has switched from heating with oil to heating with wood and forest byproducts. In addition, cars are almost entirely using ethanol. Why? The Swedish government annually provides millions of dollars in tax incentives that make Brazilian ethanol a third cheaper to buy than their petroleum-based competition, even though it costs 40% more to produce. So, Sweden has fixed its GHG emission problems by burning its own forests (and destroying carbon-sequestering trees), subsidizing ethanol—very expensive for taxpayers, and increasing incentives for Brazilians to further destroy their rainforests by clearing land for ethanol production. A small country like Sweden can transfer their GHG problem to Brazil, and the world will still have enough food to eat. I doubt that would be the case should the U.S. choose to implement a similarly self-righteous plan.
"Kyoto" Crosses the Pacific: The "Western Climate Initiative"
The Western Climate Initiative is the West Coast's answer to Kyoto. It is a regional effort by eight western states and four Canadian provinces to reduce emissions of global warming "pollution" to achieve the desired levels by the year 2020. According to their Web site, "The recommended design contains costs through emission trading, allowance banking, and inclusion of an offsets component that will provide opportunities to obtain low-cost emission reductions."
If your business emits 25,000 metric tons of carbon dioxide equivalents annually, you would have a regulatory compliance obligation under the cap and trade program. In other words, if the government analyzed your emissions and determined that your total emissions of all GHGs exceeded this amount, your participation is mandatory. If your annual emissions are between 10,000 and 25,000 metric tons of carbon dioxide equivalents, you are subject to reporting, but have no regulatory compliance obligation. Mandatory measurement and monitoring for all six greenhouse gases will commence in January of 2010 for all entities and facilities subject to either "compliance" or "reporting." This may require third-party verification or a government audit.
"Carbon dioxide equivalents" is an important term. The WCI covers not only carbon dioxide, but also methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Carbon dioxide is used as the standard, and the other GHGs listed are converted into carbon dioxide equivalents. For instance, one ton of nitrous oxide emissions are considered to be equivalent to 467 tons of carbon dioxide emissions, so about 21 tons of nitrous oxide gets you to the 10,000 ton reporting requirement. The reason we as farmers care is that nitrous oxide is commonly released by soils as part of a natural process. When "excessive" nitrate nitrogen exists, temperature, tillage, and moisture levels may separately or in combination result in its conversion and release back into the atmosphere as nitrous oxide.
What this means is that if, in the future, the government decides your farm is releasing just 21 metric tons of nitrous oxide per year or any combination of the six gases that would get you to the 10,000 threshold, you will probably be required to monitor for all six greenhouse gases, get audited, and report your results back to the government on an annual basis. Could these releases be partially offset by carbon credits from sequestration by plant residues and growing trees? Yes, but you would have to be able to prove that it was actually happening. Soil organic matter levels would have to be sampled and increases in organic matter noted. Research would be required to demonstrate how much carbon dioxide a tree sequesters each year depending upon size, rate of growth, etc. As usual when dealing with the government, the burden of proof will be on you. The easiest solution may be to use less nitrogen fertilizer to grow the same crop.
Now for the good news: none of agriculture, including CAFOs (confined animal feeding operations such as dairies, feedlots, large-scale poultry production, etc.), is under a "cap". At present, we will not be required to meet any of the requirements described above. For this reason, we may voluntarily provide carbon offsets or credits to those industries that are unfortunate enough to have to live by the rules described above for "capped" industries and companies.
Cow- or cattle-based CAFOs are not very popular with many environmental groups because of the methane production associated with these animals. I have no idea if one cow in a pasture releases more or less methane than one cow in a CAFO. I do know that it is a great deal easier to reach 25,000 metric tons of carbon dioxide equivalents if you have thousands of cows in one place. Here is the important thing to remember: this is largely a political process, and it is not necessarily science based. he Western Climate Initiative and the Washington State law it spawned may both be modified in the future to include agriculture as part of the problem, not part of the solution. Today's exemption could be tomorrow's cap.
The "Western Climate Initiative" comes to Washington: ESSHB2815
As previously mentioned, emission reductions were enacted as law through the passage of ESSHB2815, which was named the "2008 Climate and Green Jobs Bill." In doing so, your governor and the legislature have codified the existence of manmade global warming. In fact, when I joined the Ag Sector Carbon Market Workgroup (ASCMW), we were emphatically reminded that there was to be no debating of whether or not human activities were causing irreversible climate change. The answer was yes, and the discussion was over.
The Climate Action Team (CAT) was formed in 2007, and it is now charged with developing a greenhouse gas reduction plan to be delivered to the legislature in December of this year. The CAT is responsible for determining those actions needed to achieve the new emissions standards for GHGs mandated by ESSHB2815. The CAT is made up of individuals representing various groups and government agencies or entities, which included the Department of Ecology and the Department of Community, Trade and Economic Development (better known as CTED), which provided the team co-chairs. Other team participants are environmental groups, legislators, cities, Boeing, Indian tribes, and closer to home, Alcoa and the Chelan County PUD. The ASCMW delivered its final report to the DOE and CTED.
The ASCMW was allotted five meetings, two overworked, but very competent and professional state employees as co-chairs (Kirk Cook with WSDA and Chad Kruger from WSU-CSANR), one paid facilitator, and $50,000. Our job was to develop very specific recommendations on how agriculture in Washington State could voluntarily participate in a regionally based cap and trade system as a provider of carbon offsets. Carbon offsets or credits can be specifically described as terms associated with mitigating a carbon emission in one location by implementing an emission reduction or carbon sequestration project (or practice) in another location.
Over the course of the summer and early fall, the ASCMW was able to identify four categories that had potential for providing legitimate carbon offset projects. The four listed below all have available scientific research to support their inclusion. These included precision farming, anaerobic digesters, conservation grazing lands, and agricultural carbon management. Agricultural carbon management involves practices that increase the stored pool of carbon in soils and vegetation. This is the category where orchards and orchard practices may participate in the carbon credit marketplace.
Under "Policy and Technical Recommendations" in the Agricultural Carbon Management section, it states "Ag Carbon offset projects should be allowable for any set of practices/technologies that lead to the actual storage of carbon in soils or long-term vegetation, given that they are additional, measurable and verifiable. Practices / technologies include, but are not limited to: "Direct-seeding" (no-till, reduced till, high-residue), use of cover crops and/or perennials, improved residue management, and the application of organic residuals (such as compost, biosolids, manure, and biochar)." With this language as a guide, it is easy to see how orchards might be able to participate in the not-too-distant future. However, adequate research into quantifying carbon sequestration from various orchard practices is required.
It has been estimated that agriculture and grazing lands could provide up to 6.97 million metric tons of carbon dioxide equivalents annually as greenhouse gas emissions offsets. This relative abundance explains why carbon credits have traded for as little as $2 to $7 per ton on the Chicago Climate Exchange. Once again, our ability to provide emission offsets is because we do not have to use them ourselves to meet an "ag cap." Therefore, companies who do operate under a cap may wish to use whatever carbon credit projects we are able to certify. "Certification," and I use the term loosely since we do not know exactly what this will entail, must at the minimum involve measuring, monitoring, and verifying carbon credit projects to provide proof that carbon is being sequestered or carbon emissions are being reduced. When carbon credits are fairly cheap, are "polluters" going to fix their emissions problems or buy credits? It seems likely that economics will drive their decision-making, and the lowest-cost solution will be chosen.
In the state of Washington, we have a fairly unique situation when it comes to greenhouse gas emissions. Here are two important facts to keep in mind. Fact one: power generation is an insignificant contributor to GHG emissions. Fact two: almost half (45%) of our GHG emissions are related to transportation. Transportation includes cars, trucks, trains, planes, and boats, but does not include tractors – which are exempt because of their inclusion in "agriculture." I am always thankful I live in a state with abundant hydropower even if a majority of the voters in the state didn't choose to recognize it as "renewable." Electricity from hydropower will remain renewable as long as it continues to rain and snow on the West Coast mountain ranges.
"A Ton is a Ton"
The declaration that "a ton is a ton" is a very important one when it comes discussions concerning cap and trade systems specifically and of global warming solutions in general.
What it means is that a ton of carbon dioxide in one part of the world is equivalent to a ton of carbon dioxide anywhere else in the world. For example, a ton of carbon dioxide released at a Beijing coal-fired power plant is no different than a ton of carbon dioxide released from the tail pipe of a Prius. From the perspective of a cap and trade system, a ton of carbon dioxide sequestered in the wheat stubble of a farm in Whitman County offsets a ton of carbon dioxide emitted from a diesel truck in King County. Although the ton of carbon dioxide may be the same, the costs associated with sequestering it or, conversely, of emissions reduction technology, varies wildly. If carbon credits can be purchased from a group of farmers (like the Pacific Northwest Direct Seeders Association) at a relatively low cost per ton, the comparable technology to remove that same ton from current emissions sources must be of a similar cost per ton or face limited utilization.
It has been calculated that the state of Idaho is a net sequester of carbon dioxide emissions. With abundant hydropower, relatively few people, and large tracts of forest, farms, and rangeland, this should not really come as a surprise. In effect, Idaho's carbon footprint is invisible. At Purdue University, NASA and the Dept. of Energy sponsored the "Vulcan Project," whose purpose was to make carbon footprints visible. This project was a new high-resolution interactive map of the United States carbon dioxide emissions from fossil fuel. It had 100 times more detail than before because it was based on a grid structure in which each square represented just 100 square kilometers (roughly six miles by six miles). When it was completed, it was able to quantify the U.S. fossil fuel carbon dioxide emissions at the scale of individual factories, power plants, roadways, and neighborhoods. It showed areas of high emissions as orange, red, and yellow, and areas of low emissions as blues and greens. It showed them in real time on a daily basis. You can find the video on U-Tube. I highly recommend you go take a look. It is, to say the least, illuminating.
When you view the map of Washington State, you can see the I-5 corridor, Seattle and Tacoma, Spokane as a much smaller area, and, finally, tiny dots that represent Yakima and the Tri-Cities. It has high enough resolution that you can see a fossil-fuel–burning power plant in eastern Oregon near Boardman as a small glowing dot.
What is even more fascinating is what you see east of the Mississippi. It looks like it is a giant undulating fireball! Apparently, huge numbers of people and power derived mainly from coal and natural gas creates quite the carbon footprint. It begs the question, when can we expect the Eastern Climate Initiative? My guess is when the federal government mandates such a program for the entire United States. From the Vulcan Project map, it is easy to see who will get hit the hardest under a cap and trade program – the same states that you need to win to be elected president. So, why would we engage in such a program when we live on the same planet as the Chinese, who are more interested in prosperity for their impoverished citizens than in saving the planet? After all, a ton is a ton, no matter from whence it comes. A part of the answer can be found in the budget deficits facing various states as well as the country as a whole.
"It's Not About the Money"
It is clear to everyone involved that a government-mandated cap and trade program would generate tax revenue through one of several methods. It is possible that industries would pay a fee for each ton of carbon dioxide equivalent pollutants they are allowed to emit. It is also conceivable that the auctioning of carbon credits could also generate "fees," if this was the method used for establishing a market for carbon credits. At the federal level, this could amount to between $100 and $300 billion dollars every year. In effect, it would be a "stealth tax" of about a $1,000 per United States citizen, on average. The bottom line is this: Tax dollars will be generated for government bodies, and this enormous increase in taxes will be paid by the citizenry as the cost of these mandates are passed on by affected companies. It will all be done in the name of saving the planet.
I believe that the infamous tobacco company settlement extorted from the tobacco products companies by the attorneys general of various states (including Washington) is instructive when considering what will happen with cap-and-trade–generated tax dollars. In the tobacco settlement, the states went after the money from the tobacco companies at the source of production. Companies involved in providing fuel for transportation will be similarly "taxed." It doesn't show up in the gas taxes the state has to own up to. Instead, it is passed on in the cost of the fuel. The state can then claim that they haven't raised taxes on fuel. It is just those greedy oil companies wanting to maintain their profit margins that caused fuel prices to climb.
Do you remember what the state said it was going to do with the tobacco settlement checks that were going to be paid every year? They were going to spend lots of money on antismoking campaigns and public health projects. Instead, they took their structured settlement and sold the stream of future payments for a one-time lump of cash – which was spent years ago when the governor and legislature had a similar, but much smaller, budget problem. Don't expect it to be any different with the tax dollars generated by any form of a cap and trade system. Creating "green jobs" is going to have to wait until the state has more money to spend.
Is There a Cure for Global Warming?
In the United States, our annual tons per capita carbon-dioxide emissions from fossil-fuel combustion are 19.0. Compare this with France, whose number is a paltry 5.97, or the world average of 4.28. To understand the disparity between the United States's emissions and other countries, it is important to look at some of the contributing factors. France is using nuclear power to supply 80 percent of their electrical needs. The United States uses natural-gas– and coal–fired plants to produce enormous amounts of energy – fossil-fuel–driven power production found throughout the eastern states. France is a small country relative to the United States, and gasoline is a great deal more expensive in Europe as a whole. Finally, poor countries (such as India at a mere 1.13 tons per capita of annual emissions) use a lot less fossil fuel per capita and end up averaging out the developed world's emissions down to the planetary average of 4.28. Of course, China and India are very large emitters of GHGs, but when you divide all those tons by billions of people, it averages out to a fairly small "carbon footprint" per capita. Is "averaging" all that is going on in India, or are they showing a way to a cure?
I have a saying that I like that I think is relevant to this discussion: Starvation cures diabetes. In essence, not eating over a long period of time sure does wonders for blood sugar levels. True, it leads to death, but it does "cure" diabetes. I have developed a similar saying along these same lines for global warming: Poverty cures global warming. If the United States cut carbon emissions by half over the next 20 years, our current "standard of living," as most of us define it, would plunge to a "poverty" level. Global warming wouldn't be "cured," but it might show signs of remission. Does a collective will exist for this kind of a cure?
If global warming is being hastened or promoted by human activities, we are not going to fix it unless technologies are expanded, discovered, or created that are not at our disposal today. The problem is too great, and the available cure is going to prove to be both unpopular and insufficient.
If you need further proof, consider this: The total number of cars on the planet is estimated to increase from the 700 million that exist today to 3 billion by 2050. The increase will not take place in the developed world, but in the poorer countries like China and India where pollution control equipment generally takes a back seat to cost containment. This will be especially true in the near term. Without enormous advances in automotive or power-generating technology, the atmosphere is going to be getting a tremendous new dose of carbon dioxide every year regardless of the United States implementing all manner of cap and trade systems.
If human-related activities are driving climate change, then I don't believe it is reasonable to expect cap and trade systems to "save the planet." If individual citizens want to do something about global warming related to carbon emissions, then use less of everything. Fewer trips, fewer vacations, smaller and colder/hotter homes, etc. All of that works. What I like about sustainable farming practices is the concept of using fewer inputs to grow similar numbers and quality of apples. It should be where the environment and the best available science meet. I don't need a government-mandated cap and trade program to help me decide to try to reduce my GHG emissions. Financially, it is in my best interest. Our industry has a history of seeking out innovative solutions to the problems that confront us. I feel confident that the fruit growers in Washington State are going to do their part to help reduce GHG emissions with or without government intervention. We are lucky: We can be a small part of the "solution." How many others can say that?