A slice of the pie

Oct 20, 2009 (Agweek Magazine - McClatchy-Tribune Information Services via COMTEX) -- CXCHF | Quote | Chart | News | PowerRating -- If a carbon cap-and-trade policy is instituted as part of the climate change legislation now before Congress, those in the crop insurance industry may be able to develop some new business, according to Cole Gustafson of North Dakota State University's Department of Agribusiness and Applied Economics.

A national carbon cap-and-trade program likely would require companies that emit more greenhouse gases than the cap allows to reduce their emissions or purchase offsets from those who can store carbon. Farmers and ranchers could earn credits for the carbon they sequester from the atmosphere in their soil through reduced tillage practices, regulated grazing and conversion of cropland to grassland. The credits, in turn, are sold to the gas-emitting companies in the form of offsets, through an exchange market like the Chicago Climate Exchange. The companies then can use the offsets to reduce their greenhouse gas liability.

But the government and companies buying offsets will want proof that the carbon is being properly held in the soil.

"These credits have to be verified because the companies will only want to do it if they can actually go through and demonstrate to their clientele that they are making these adjustments," Gustafson says.

Current practice requires that each farmer's carbon sequestration management be verified through on-farm inspections. Farmers and ranchers must agree to have a third-party verifier inspect their property annually to confirm that their system of carbon sequestration has been fully implemented. In the case of no-till operations, this means verifying that post-harvest crop residues were left on the field. In grassland conversions, the verifier must see that grass is seeded and crops no longer are being raised.

These verifiers confirm project eligibility, ownership of environmental attributes and ongoing project performance and inspect data such as meter readings, fuel purchases and records.

Gustafson says crop insurance adjustors would be a good fit for this kind of work.

"The crop insurance agents are very good and prepared to do many of those tasks," he says. "They already work directly with producers and they monitor farm activity and programs like this to make sure that they are complying with farm program requirements, as well as specifications for the crop insurance policies."

According to Gustafson's information, many of the current verifiers originate from Soil and Water Conservation districts of the Natural Resources Conservation Service.

"While many are knowledgeable of farm and ranch operations, they are not as familiar with agricultural recordkeeping and systems of production," he says.

The verifiers also would have to be familiar with the realities of farming -- that climate, weather events, disease and insect outbreaks all can affect the final condition of crop fields.

"It's not always straightforward," Gustafson says. "For example, this year, we may have had a wet planting season and maybe the (farmer) didn't get much of a crop, so there isn't much residue that's left from the previous crop."

Crop insurance adjustors already understand these issues.

Carbon credit insurance also is becoming a hot topic with underwriters.

The carbon sequestered in a farm field represents value. That value may need protection, according to Gustafson.

If an energy company contracts to purchase carbon credits, for instance, it is dependant on farmers to supply those credits. But if Mother Nature delivers a severe drought one year, plant growth is severely impeded and very little plant matter is left behind to create more carbon in the soil.

"So the electric utility has already contracted, but the farmer isn't able to perform. So who picks up the shortfall?" he asks.

Also, because there is, in better years, value in the carbon-rich fields, pastures and grasslands, producers may want to insure the prospective value of the sequestered carbon. Current trends indicate that anywhere from one-tenth of a ton to one full ton of carbon can be sequestered in an acre of soil. Prices paid on the CCX now range from $1 to $7 per ton of carbon, but Gustafson expects that to change if a national policy is implemented.

"Under some scenarios, carbon could be $20, $30, $40 a ton," he says.

"That would be direct income to the producer. Producers are going to have some interest in financing that if they are strapped for cash or if they are unable to perform because of something beyond their control, like weather. They are going to want to insure it to make sure that they are not at risk after they sign these obligations."

The passage of the federal climate legislation is going to have a lot of bearing on the future of carbon cap-and-trade programs, but even if a national cap-and-trade policy is not instituted, some states are putting programs like this in place on a regional level.

"California, the New England states and Florida have already passed legislation that's very similar to the federal" legislation, Gustafson says. "So even if the national market doesn't develop, there still might be regional opportunities."

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