Fertilizer Canada Roundtable on Carbon Markets
On September 30, 2021, Biological Carbon Canada (BCC) participated in a Fertilizer Canada roundtable on carbon markets. During the discussion, Fertilizer Canada posed a series of questions, and here is how we answered.
Q: There is a lot of discussion around growers getting paid for new practices only, versus practices in place that we know reduce emissions but only for several years. In your opinion, what changes in agricultural production practices should qualify for credit and how long must they be in existence? How and when should the baseline be established so additional carbon sequestered is measured and compensated accurately?
A: The two questions need to be answered to be separate.
- Reward signals subsidy, and that is a separate discussion. Buyers do not reward the seller. The buyer buys a product or service to solve a problem they gave. A seller creates a product, and the customer chooses that product to solve a problem they have.
- Markets require certainty. The best answer is a go-forward system. In Alberta, we saw that the further one goes back in time, evidence no longer exists.
Q: Since carbon markets are still developing, price discovering is occurring, and payments for carbon credits may not cover the cost and risk of implementing new management practices or address the high cost of measuring and verifying soil carbon credits. What is your opinion on what price per tonne of carbon makes economic sense for the grower?
A: Revenue is both a price and volume system.
The price in a regulated market example is the levy, less the buyer’s risk basis, less the cost to serialize the offset, leaving a net farm price.
The other is protocol output.
Examples like the Conservation Cropping Protocol (CCP) have a conservative output of 0.11T/acre (0.065T/acre dryland), and the Nitrous Oxide Reduction Protocol (NERP) has an output of 0.2T/acre.
Ideas like soil organic matter changes in Western Canada are at an annual change of 0.12T/acre (discount for being conservative still needed). The same study showed eastern Canada is declining.
The second issue is the cost of abatement. Farms in Canada lack good on-farm net present value (NPV) cost data on removing a tonne of emissions.
Q: What key questions should farmers be asking?
Farmers’ should be asking two essential questions.
- What is the size of my GHG Footprint?
- Where can I save money?
Q: Quality control and verification are vital to ensure the buyer receives a carbon credit. What gaps or challenges does this verification pose for producers and what can be done to resolve them?
A: There is no gap in verification.
The verifier only examines the farm’s evidence (the basis of the claim) and tests that evidence against what the protocol says needs to exist. Verification does not recreate the protocol nor adds evidence.
The gap is in the protocol development process and designing a protocol consistent with the ISO process and defining evidence to represent the math in the model. Attestation is not sufficient, and proof of practices and other activities serve as proxies. The evidence is designed to be seen long after the action occurred.
The gap is the evidence required by the protocol. The evidence is not within normal paperwork or data collection system used as part of a farm’s continuous profit improvement process.
It is important to observe the CCP currently being used to register offsets in the voluntary market. The crop plan evidence being presented where crop insurance (a sworn document) is not purchased is beyond what is written in the protocol. The protocol needs a revision to account for new evidence available. As a reminder, the crop insurance or crop plan is intended to show that a perennial crop does not exist.
Q: What issues do you see arising on the data privacy front – how could these be addressed?
A: The business data is covered by PIPEDA (Personal Information Protection and Electronic Documents Act).
Q: While credit for offsetting activities is the main reason producers would begin an offset project, can you speak to some of the co-benefits that might be realized from certain activities?
A: The co-benefits are both revenue opportunities and cost savings.
The co-benefits are the reason for the on-farm activity. The soil building processes like zero tillage came from things like costs of fuel and eradication of soil erosion.
Q: Carbon markets have operated around the globe for a long time but have mostly excluded agricultural projects. Are farmers viewing this new focus on carbon as a commodity crop positively?
A: No. Their organizations’ stakeholders have concentrated on the levy impacts on their fossil fuel consumption.
The studies do try to define the Scope 1 and 2 costs of the levy, and do not show up on the income statement or are so embedded the data is useless to make decisions.
The carbon markets exist to solve an issue for an emitter. The access to voluntary emission reductions is a cash flow safety value for the emitter.
Q: The carbon offset market that the federal government is developing is distinct from different private sector offset trading schemes in terms of price setting, permanence, and additionality requirements. How do you believe this will impact the availability of carbon offset credits in these separate markets into the future?
A: The price is set differently in all four markets:
Regulated – The levy sets the price ceiling. Emitter buyers in the past have applied a risk discount to their price offer. All trades are bilateral, and all risks and costs are born in the price.
Voluntary – There is finally, in 2021, a futures price. The price arrives through a willing buyer and seller.
Supply Chain In-setting – Prices are settling into two camps. These two camps are market access and data purchase.
Personal Services – The price for GHG reductions is bundled into other environmental benefits. Foundations are meeting their requirements to disburse money, and the favorable tax treatment of the sale does adjust the price settlement.
Imbedded in an offset is the concept of the permanence of the GHG removal. The protocol and market systems currently do not have a process to deal with a temporary removal. It also does not have a methodology for the farm to repay or buy back the temporary reduction.
A go-forward system based on additionality is fundamental to a marketplace.
Biological systems can reach a steady state of equilibrium, and additionality may not be possible.
Q: Compared to crop-based emissions reductions, the development of offset protocols is more complicated in livestock production due to the complexity of the ecosystems and management systems involved. What can farmers and their associations do to overcome this challenge and leverage the co-benefits taking place on their farms and ranches?
A: Observations are:
- Protocols already exist in the commercial feeding of slaughter animals.
- Protocol development opportunities failed on the dairy farm due to the lack of heifer data.
- The swine industry has examined barn operations for GHG reductions.
- Annual cropping farms should expand their soil sampling efforts to understanding their soil carbon sinks.
- Perennial grass and grazing farms should start soil sampling to understanding their soil carbon sinks.
- A farm or ranch needs to inventory its N2O and CH4 emissions to begin a management process.
Q: Over the last few years companies including General Mills, Cargill, McDonald's, McCains, etc. have announced plans to advance regenerative agriculture – how will growers work to meet these targets, and can carbon markets play a role?
A: These companies have made promises to their bankers and investors on the size of their Scope 1, 2, and 3 emissions (upstream, factory and downstream emissions) and what reductions to these emissions over time are being promised. As an example, Maple Leaf received a 1% discount on their interest rate for a $2 billion credit facility based on an ESG promise.
The size of these ESG promises is reaching $4 Billion. Offsets play a role in meeting their needs.
Read the fine print. With the lack of any sustainability certification on an annual crop farm, the farm community will need to address and pay the cost to enter any, and all supply chain requirements.
Q: What is the biggest barrier for farmers in Canada to transition into a carbon market? What is the biggest opportunity?
A: The biggest opportunity is to start using GHG emissions as a place to examine farm cost structure.
The biggest barrier is farmers believe in their own advertising. The second is relying on government money to build protocols.
Q: Sometimes models are used instead of field-level science to determine emissions reductions. Are there any areas of research in agriculture where we are finding our emissions reductions are greater than previously modeled?
A: Yes. Our models and then the protocols need constant revisions. CCP and NERP as examples need updating. However, science papers do study enteric fermentation CH4 reductions and report the additives do work.
Q: The government of Canada has been discussing and consulting on its proposed offset framework for nearly 5 years. This past spring, they released draft regulations for that framework. Where do you believe those conversations are headed as we move into the fall?
- The timeframe on approving protocols previously approved in other jurisdictions needs certainty.
- The regulatory certainty is submitting a new protocol.
- The weights and measure issues: like contract standards and contract performance, trading between a buyer in one province and a seller in another, pricing consistency between jurisdictions as examples.
Q: It’s 2030 – what does an ideal carbon market look like for Canada?
A: In 2030, the four carbon markets will be fully functional.