NEW RULES, NEW PLAYERS, AND NEW RISKS
Roadmap
THE BOTTOM LINE
Carbon is a new business commodity. Carbon includes data, offsets, emission reductions, and soil sink improvements.
All businesses, including agricultural, currently need to and are addressing carbon footprinting, scoping their supply chain emissions (including data from ag commodity suppliers), and meeting the non-uniform demands of customers and investors.
The World Trade Organization (WTO) was stood up in 1995. The signatories build rules to facilitate trade in goods and financial instruments every five years. Before that, there was GATT, the General Agreement on Tariffs and Trade. From 1947 until the WTO, GATT addressed anti-dumping and tariff (market access and protection) issues.
On top of this, we have the United Nations Climate Change Conference, also known as COP##. The last one was COP26 in Glasgow.
At its base is an agreement to limit greenhouse gas emissions. Each country shall determine the limits for emissions and policy mechanisms to reduce the emissions down to these limits.
Out of Glasgow came both new and revised initiatives. A quick summary includes1:
- Revisit and change national emission reduction plans.
- Phase down coal use.
- Climate finance.
- Plus a who series of national pledges on net zero.
Climate markets are essential.
“If we don’t have a market, maybe for some places it will be really hard to get to zero…” Sha Yu, Pacific Northwest National Laboratories
Final emitters paying a levy or buying an offset only covers a portion of the total emission map. Climate markets mean the buying and selling of actual reduction. The approval of Article 6 in Glasgow makes this now a reality. Emissions now go beyond a zero-sum game (Kyoto), and markets offer a cheaper and easier method to reach emission limits2.
This stuff is 4D spaghetti.
When a farm wants to know about selling into a carbon market, there is not just one. Instead, the farm is entering a new commodity market with new rules, players, and risks.
AGRICULTURAL MARKET OVERVIEW
Many factors impact the supply of agricultural credits.
The farm emissions are dispersed over extensive timelines and large landscapes. There are also inexact outputs and less than homogenous biological processes.3
The second issue is the sector is not a reporting emitter. This leaves policymaking making decisions in the absence of good farm-based data.
MARKET CONFIDENCE
The relationship between a buyer and seller is key. The distance between the two adds price risk.
Well-functioning markets meet five confidence tests.
- The process is transparent.
- The credit is an actual reduction with no political adjustments.
- Buyers and investors accept the offset for their intended purpose.
- Offsets move seamlessly across borders.
- Market integrity and transparency to see equity and well-being outcomes.
Country to Country
ARTICLE 6 – COUNTRY TO COUNTRY TRADING
In short, Article 6 is the rules for trading carbon between Countries. The rules include country-to-country exchanges and business exchanges across borders. It allows for a known set of rules for the private business sector to move from a zero-sum game to a path making positive emission changes.4
IETA5 recent 20-21 Greenhouse Gas Market Report stated the following;
Core to Article 6 is a requirement for all post-2020 internationally-transferred mitigation outcomes (ITMOs) to require corresponding adjustments (CAs) in national inventories for NDCs or other global GHG abatement purposes. This effectively means airlines will need to buy adjusted units to comply with their CORSIA offsetting mechanism for global air travel. So far only Japan, Switzerland, South Korea, New Zealand, and Australia have indicated interest in buying ITMOs to help meet their NDCs, with dozens of developing nations interested in selling.
“Carbon markets give businesses flexibility to change, and to change in the ways that fit their unique circumstances.” IETA CEO Dirk Forrister
Protocols & Serial Numbers
CANADIAN MARKET OVERVIEW
Protocol Based Markets
What is a Protocol?
A protocol is a methodology that applies the current state of science to measuring a change in greenhouse gasses that result from a change in practice. It outlines the acceptable project evidence and outputs the number of tonnes per output unit when successful.
Two examines of this are 1) the Conservation Cropping Protocol output was tonnes per acre, and 2) the Nitrous Oxide Emissions Reduction Protocol output was tonnes per dry matter crop yield.
What is Verification?
Verification is a process that compares the project and all the evidence to the protocol. The verifier is a third party to both the project and the registry.
Both Alberta and Canada have set standards on the qualifications of a verifier.
Regulated Markets
Alberta
Alberta continues to have an offset market. Final emitters are subject to a carbon levy, and they can choose to pay the levy or purchase an offset.
Federal Backstop
Approved agricultural protocols for 2022 are:
- Aerobic Composting
- Nitrous Oxide Emissions Reduction
- Reducing Greenhouse Gas Emissions from Fed Cattle
- Selection for Low Residual Feed Intake Markers in Beef Cattle
Alberta has set a standard for Protocol design, project verification, and serialization registry.
The Federal Backstop
The Federal Backstop legislation was passed in 2019, and offset regulations will be final in 2022. In addition, the Ministry has put teams together for soil carbon and a livestock protocol. These protocols may be out for public comment late in 2022.
Canada has set a standard for Protocol design, project verification, and serialization registry.
Enforcement
Both Alberta and Canada have enforcement systems to ensure the certificate submitted for compliance is true.
There is no regulatory body to ensure transaction certainty.
What is being sold?
The seller is creating and selling a compliance certificate. Each serial number represents a tonne of greenhouse gas reduction and sink improvement.
An offset created in a backstop province is eligible to be used by a regulated emitter in another backstop province.
The price is bilateral. There is no price discovery and historically traded with a basis to the levy.
Voluntary Markets Protocols
Protocols
Approved agricultural protocols for 2022 are:
- Canadian Grassland Protocol
Repurposed Protocols
Two companies in Canada are repurposing the protocols below for the volunteer market and registering voluntary registry projects.
- Nitrous Oxide Emissions Reduction
- Conservation Cropping Protocol
Protocol Standards
There are several approaches to protocol design. Based on the ISO 14064, the Verified Carbon Standard (65-70% of the project) and the Gold Standard are the most known approaches to protocol design.
Verification
The voluntary marketplace has not set uniform performance standards for verifiers.
Registries
Registries are a system to register a project, force transparency, track verification, and track sale and retirement.
Canada has a voluntary registry delivered through the CSA.
Enforcement
There is no regulating body to ensure buyer and seller protections.
What is being sold?
The seller is creating and selling a certificate. Each serial number represents a tonne of greenhouse gas reduction and sink improvement.
No Protocols & Serial Numbers
Non-Protocol Markets
Insetting
Based on the private business use of scope one, two, and three emission calculations, these supply chains understand and report on their current greenhouse emissions and make commitments to markets and shareholders on their plans to lower their footprint.
Sustainability now equates to ESG reporting.6
What is being sold?
The seller is both a hard commodity and a data package.
Access to a supply chain and the marketplace.
Preferred access to third-party money.
Foundations and Charites
Canada has a strong group of foundations and charities building pools of capital and making investments in the agricultural community.
The investments are by:
- Purchasing management agreements.
- Purchasing easements with management conditions.
- Purchasing land trusts.
- Purchasing lands.
Foundations and charities must put back a portion of their capital into their community each year.
Carbon is part of these arrangements.
What is being sold?
This agreement defines this issue.
Private Placement
Corporations are attempting to package carbon change data into a sellable product. To date, they are not using an approved protocol. They are looking to remove additionality and permanence from the transaction. The corporation may also own the registry and conduct the verification in- house.
What is being sold?
The seller is selling a data package.
Advertising
Agriculture and other industries are taking emissions data and packaging it with increasing production performance data. As a result, the green news story is the ‘emissions per output is improving’.
What is being sold?
The seller currently sells nothing.
The sector is creating an atmosphere of customer goodwill.
Cash Derivative and Bonds
In the financial markets, bonds exist with environmental attributes.
The credit purchasers are bound to environmental performance attached to the credit facility. There is a market interest rate discount for performance.
Other instruments are now being secured with high secure data movement (i.e., blockchain) backed by a greenhouse gas reduction. Like the mortgage derivative market, the instrument is derived from a reduction.
What is being sold?
The seller currently sells a reduction into a derivative market. There may be an agreement for performance.
Environment Good and Service
There is work in Alberta on a payment for a biodiversity index scheme. The project bundles both private rights and public rights into an index.
What is being sold?
The buyer pays to maintain or improve a biodiversity index based on the available information.
Carbon-backed Utility Tokens
Utility tokens provide token holders with privileged services. The tokens are not investments7 as they are speculative and act more like promotional tools for the issuing company.
What is being sold?
A company investing in a GHG project will issue an initial coin offering (ICOs), designed to garner the funds necessary to develop a project.
Others
Across Canada, there are a variety of offsets connected to wetlands, urban development, and other specific targeted development instruments designed to raise the cost of urban and energy development.
What is being sold?
A regulatory document.
How Does a Farm Examine a Quality Offset Offer to Purchase
- Are you selling into a highly transparent market?
You can see the offset you are selling. The process is transparent, and the emission tracking is visible. - Is the offset serialized on a public registry?
A public registry enables you to see and track the offset through all market participants. The tracking includes offset creation, holding, cancellation, and retirement. - Is the process of creating your offset comparable to other offsets? The protocol uses a known standard.
Conclusion
When a farm wants to know about selling into a carbon market, there is not just one.
For more information
Please contact Biological Carbon Canada.
1https://en.wikipedia.org/wiki/Glasgow_Climate_Pact
2 Carbon Brief
3IETA
4Attributed to Chirag Gajjar, World Resources Institute in a GreenBiz article.
5https://www.ieta.org/ International Emissions Trading Association
6Canadian Securities Administrators Staff Notice 81-334
