Response to the Government of Canada's "Offset System Discussion Paper"

July 31, 2003

Introduction

The Offset System Discussion Paper explores a system intended to accomplish the following objective: to provide a market mechanism by which carbon emitters and farmers who have the capacity to store carbon can deal with each other in order to maintain or reduce carbon in the atmosphere. Canadian farmers can make a large contribution to "filling the gap" of Canada's emission reduction target.

For such a system to work, it must motivate the initial storage of carbon and the maintenance of such storage. It also helps if the system is as simple as possible, and reduces participant game-playing and system manipulation.

The Saskatchewan Soil Conservation Association (SSCA) believes the options presented in the Offset System Discussion Paper have some weaknesses that will reduce their ability to accomplish the stated objective. The SSCA proposes a system with some simplifications and modifications that would be more effective and functional. The proposal will ensure the largest amount of new sink offsets available for Canada to meet its Kyoto targets at the lowest cost to the economy.

The strengths of the options presented

The offset system discussion paper correctly identifies the risk of permanence and the need to maintain agriculture soil sinks. Discussion paper also introduced the concept of pooling to help minimize system costs and ensure equal opportunity for participation.

The weaknesses of the options presented

The options presented have multiple pools of stored carbon, one from "Business As Usual" activities and another as a result of "New" activities. Under these options, farmers who have already adopted farming practices that store more carbon than standard farming methods are not credited with the carbon they are storing, while farmers who are using more traditional methods are rewarded for changing their practices at a later date. Offsets from some of these pools would return no value to the farmer while offsets from other pools would. Thus the proposals create, for farmers who are already contributing to reduce atmospheric carbon, a perverse incentive to return to methods that will release any stored carbon so they can subsequently readopt the Best Management Practise that sequesters carbon (BMP). In other words, in an effort to receive credit for the carbon that farmer's store, the proposals create a perverse incentive to move offsets from a valueless pool to the pool that receives value. This perverse incentive (perverse in that it motivates a reduction in stored carbon rather than the maintenance of stored carbon) is eliminated in the system the SSCA proposes. These multiple pool proposals are also an incentive to delay adoption and use of BMPs that create agricultural soil sinks and the associated offsets.

Any system must adequately motivate or reward the maintenance of carbon storage, an essential element in addressing atmospheric carbon. Unlike emission reductions, emission removals can be reversed, releasing the stored carbon. Agricultural soil sinks are maintained using the same BMPs that sequester carbon. The system proposed by the SSCA addresses this problem as well.

The SSCA Proposal

The Agricultural Sink Offset Market provides tremendous opportunity and risk to both the Canadian farmer, large industrial emitters (LIE) and to the Government of Canada. To ensure all parties are treated fairly and equitably, the system devised for the accounting of such offsets must be simple, ensure integrity and carry an acceptable level of risk for sellers, buyers and the government. It is farmers who have or will create the agricultural sinks and it will be the farmers who will maintain the sinks. In addition, there are about one-quarter of a million farmers managing millions of land parcels having different histories of production practices. Fully 37% of Canada's farmland is rented with potentially frequent changes in land managers over time. The farmers/landowners, therefore, should be the owners of the sinks. The resulting offset value must be distributed fairly all farmers who take action and must return value to the farmgate. In turn, an agricultural sink market must ensure atmospheric integrity capable of tracking CO2 fluxes (both removals and emissions). In the interest of integrity and simplicity, it would be prudent to create a single pool of carbon credits with sink creation and maintenance as a measure of value.

One way to ensure sink maintenance is with the issue of Temporary Emission Reduction Credits (TERC). The value for offsets represented by TERCs in the market place must be returned to the producer who creates them and is custodian of them. In order for the federal government to stimulate farmer participation in a national strategy to offset and reduce emissions, steps must be taken to reduce farmers' exposure to risk. Given the great uncertainties of climate fluctuation and commodity prices, asking farmers to commit to maintaining substantial carbon sinks in perpetuity is simply unreasonable. If, however, a lease arrangement were based on previous action (i.e., on carbon that has already been stored for a period of time), the risk could be reduced to a more manageable level. For a TERC market to be successful and beneficial to farmers, the farmers/landowners must clearly own the carbon offsets associated with the carbon stored on their farms.

In order to be eligible for a TERC, a farmer must have adopted and used a BMP for a minimum of 5 years. While the TERCs would have a life of 5 years, an annual review could be done of all new acres eligible for receiving a TERC. In this way, land that is deemed to have been storing carbon for 5 years but after the start of each 5 year commitment period would be given recognition immediately. There would be no delay in recognizing the removal of the carbon and subsequent storage after 5 years. A producer who adopts BMPs that create offsets at any point prior to five years before the first commitment period would be issued certified TERCs tradable during the first commitment period. This would create an incentive for BMP adoption and sink creation. Renewal of TERCs on a regular basis for subsequent commitment periods would produce an incentive to continue using the BMPs, which will create a larger sink while maintaining the existing sink.

In 2008 the government will issue certified TERCs for all sinks created and maintained from adopting BMPs prior to 2003. These certified TERCs will be tradable in domestic and international markets for a five-year period. At the end of the five years, these TERCs will be reissued for a further five years if the sink and the resulting offset are maintained. In 2009, the government will certify TERCs for sinks created from additional new activity in 2004. Regardless of the date of adoption, all producers will have equality in future TERCs offset markets.

To determine the number of TERCs, the annual rate of carbon gain for each BMP could be estimated using protocols from the National Inventory Modeling process. The TERCs generated by individual farmers would be aggregated by an agency. To keep administrative costs low, monitoring and verification could be done through the existing infrastructure such as Crop Insurance.

Leasing Carbon

Chart 1. Canada's Annual Soil Carbon Sequestration Over Several Commitment Periods

leasing carbon

The total amount of carbon sequestered in any particular year is determined by both the amount of land under BMPs and the annual sequestration rate. Regardless of when a BMP was first initiated it will sequester carbon for many years into the future and is counted under Canada's national inventory.

In Chart 1, the y-axis represents the amount of carbon sequestered in any given year shown in the x-axis. Sequestration begins with the creation of a sink with, for example, a switch to zero-tillage or direct seeding. The amount that is sequestered annually is determined by multiplying the area under BMPs by the annual sequestration rate. If, for example, there are 30 million hectares of direct seeding in 2008, there could be 45 million tonnes of CO2e sequestered in that year using an annual sequestration rate of 1.5 tonnes/ha/yr. Annual sequestration will continue to rise as BMP adoption increases. Carbon accumulates over the next number of years, until the sink reaches its saturation point, for the purpose of example, say around 2017. This level of carbon storage is maintained indefinitely or until the sink is "destroyed," say, with a return to conventional tillage, and the stored carbon begins to escape into the atmosphere as CO2.

A TERC is best understood as the removal and storage of an emission for a given period of time, say, for five years. With a temporary lease-based strategy, whatever storage space has already accrued could then be leased out on a five-year basis. It is important to remember only the units of storage that have already been stored for that period of time would be leasable. Under such a system, TERC availability could be predicted with confidence, reducing liability for the farmer to a much more manageable level and reduces risk to LIEs by ensuring delivery. The carbon sink added during the five-year lag would be a significant part of the Canada's emission reductions but not an offset for other emissions. Thus, the proposed system meets the requirements of the Climate Change Plan for Canada to have substantial baseline of agricultural soil sinks outside of the offset trading system. This will contribute directly to Canada's emission target while also incenting and maintaining the greatest amount of new agricultural soil sinks through the offset trading system.

The red bar (or dark gray) in the above graph represents the quantity of carbon that is sequestered but not eligible to be leased as a TERC. The light blue bar (or light gray) represents the quantity of carbon sequestered from practices that have been in place for five or more years, and is therefore available to lease. The carbon sequestered as a result of BMPs adopted by 2003, if maintained, will start generating TERCs in 2008. BMPs initiated after 2003 will start generating TERCs after a five-year delay. So for BMPs initiated in 2004, TERCs will be generated in 2009 and so on. TERCs for each of these vintages will provide emission storage until the end of a commitment period, after which they will expire. If the BMPs are still in place and the sink intact in 2012 (or the end of a commitment period) they will be reissued and potentially leased again for another five-year commitment period. Note that since no TERCs are issued prior to 2008, this does not constitute "credit for early action." For the purposes of Canada's inventory, starting in 2008, both the red (dark) and blue (light) bars will be counted. As well, note TERCs were shown to expire/reissue to match Canada's commitments. Individual lease terms could be negotiable.

The carbon that is sequestered between 2008 and 2012 will be added to the leasable pool available for the 2013 - 2017 period. Since TERCs are continually reissued from one commitment period to the next, the number of TERCs issued will continually increase until sink saturation. In other words, the total area in "blue" up until a particular year will be available for lease in that year. When the sink becomes saturated, no additional TERCs will be added to the pool, but the steady income generated by the periodic expiration and re-issue of credits will encourage a producer to maintain the carbon sink for as long as possible. When a sink is lost, no new TERC can be issued nor existing TERCs reissued, ensuring atmospheric integrity. TERCs already issued and have not expired will still be a valid compliance unit. The unique advantage of using expiring TERCs (or a leasing concept) is that the market creates incentives to both create and maintain sinks. Another advantage of this type of system is that the number of TERCs available for the first commitment period will be known before 2008 reducing risk to Large Industrial Emitters (LIE) and Canada.

Summary

  1. Create a single offset pool.
  2. Both Sink Creation and Maintenance are issues addressed in this proposal. TERCs represent maintenance while incenting sink creation.
  3. Liability for the farmer is reduced. Atmospheric integrity is ensured.
  4. Sequestration rates on individual farms will be determined through the National Inventory Modeling process. To minimize administrative cost, the verification/integrity of this program could be accomplished with existing infrastructure (i.e. Crop Insurance). Aggregators will ensure permanency.
  5. All farmers who have adopted BMPs for 5 years or more will be treated equitably. The 5-year lag gives Canadians a substantial amount of agriculture soil sinks to contribute directly to emissions reductions that do not offset other emissions.
  6. The early adopter has not forfeited anything in the market place.
  7. TERC delivery will be known at the beginning of the commitment period simplifying offsets for LIEs.
  8. The proposal ensures the largest amount of new sink offsets available for Canada to meet its Kyoto targets at the lowest cost to the economy.