Ecosystem Service Markets in Agriculture (101) American Farmland Trust Ann Sorensen USDA: May 2007

Ecosystem Service MarketsEcosystem Service Marketsin Agriculturein Agriculture

(101)(101)

American Farmland Trust

Ann Sorensen

USDA: May 2007

Ecosystem Service Markets

• Who we are• Standing at the crossroads• Ecosystem service markets: carbon

credits; water quality trading• Synergies

American Farmland Trust

• Founded in 1980 to save farm and ranch land

• Bring farmers, communities, conservationists,

developers and government officials together

to work out solutions for the common good

American Farmland Trust

Saving the land that sustains us• Protecting the best land• Planning for growth with agriculture in mind• Keeping the land healthy

At the Crossroads

• Globalization: continuing pressure to reduce commodity subsidies and go “green”

• Threat of climate change:– Adapting to severe weather events– Mitigating greenhouse gases

• Need to address water quality • Funding trends

Globalization

Doha negotiations: U.S. policies distort trade Pressure from developing nations for

change U.S. has pledged to give up commodity

subsidies if other countries open up their agricultural markets to U.S, producers

Globalization

World Trade Organization cases: Brazil’s success against U.S. cotton Canada placing anti-dumping duties

against U.S. corn Potential others setting the stage for

“dying a death of 1000 cuts”

Climate Change

Need to Adapt: More severe weather may lead to:• Increases in soil erosion ranging from 4

percent to 95 percent• Increases in runoff from 6 percent to 100

percent in some locations

Need to employ more conservation practices

Climate Change

Could play significant role in mitigation: • Carbon captured and sequestered by U.S.

farmland offsets less than 1% of U.S. emissions (forests add 10%)

• BMPs to sequester C could offset 8 to 16% of total U.S. emissions in the future

• Biofuels can help replace fossil fuels

Water Quality

Funding Trends

Vision

• Farms provide ecosystem services along with food and fiber:

–Broad public support –Considered “green box” under WTO–Farmers “sell” environmental services

much like they sell agricultural products–Steady, reliable stream of revenue

Farm

Commodities

$ now $ in 20 yrs Client

Grain (corn) 95% 30% World market

Corn stover 20% Biofuel plant

Timber 5% 15% Pulp/paper

Electricity (wind) 5% Utility grid

Wetlands credits 5% Developers

Flood control credits

7% Water District

Water quality credits

8% Water supplier

Biodiversity credits 5% NGO

Carbon credits 5% Power plant

Ecosystem Services

Retiring cropland reduces soil erosion, decreases nutrient, pesticide and sediment loadings. Provides permanent grass/tree cover.

Decreased loadings improve water quality

and plantings provide wildlife habitat.

Services = Cleaner water, more wildlife

Wide Range of CreditsType Regulatory Driver

Wetland Federal & State

Stream Federal & State

Buffer State

Habitat Federal & State

Forest State

Carbon/GHG State & (possibly) Federal

Nutrients State

Misc. Water Quality Federal & State

Stormwater Federal & State

Renewable Energy State

Water Rights State

Aquifer Recharge State

Development Rights County

Ecosystem Services

Carbon markets:Sequestered carbon (timber and agriculture currently voluntary markets)

Water quality/Quantity:Nutrients, sediments, temperature, bacteria, heavy metals, storm water flows, GW withdrawals

Other Ecosystem Services

Stream Mitigation Banking:

Stream channel, banks, buffers, hydrology

Wetland Mitigation Banks:

Wetlands

Conservation banks

Endangered species habitat for pollinators; reptiles; birds; mammals

Why now?

• Conservation planning has matured• Millennium Ecosystem Assessment has

categorized ecosystem services• Economic valuation is helping set prices• Tools for decision-making emerging• Small scale efforts underway• www.ecosystemmarketplace.com

Carbon Credits

• Global carbon markets have doubled in size over the past year– Regulated markets = $21.5 billion– Voluntary markets = $100 million

• U.S. Companies entering voluntary market – Ford, Google, DuPont, American Electric

Power (15% of companies surveyed but an additional 40% are considering it)

Company Motivation

• Fulfill corporate greenhouse gas reduction targets

• Gain carbon market experience• Prepare for potential regulatory requirements• Enhance brands and/or differentiate products• Attract investors

Agricultural Offsets

• Sequester carbon in the soil• Reforestation or afforestation of native tree

species• Methane capture and destruction from

livestock

• Concerns: lack of permanence, science unclear on measuring and quantifying reductions

Universal Challenges

• Solid science (unit traded must be definable, measurable and verifiable)

• Appropriate length of contracts• Determining baselines and identifying

synergies• Creating transparent, credible, efficient,

economical, high confidence markets

Sequestering Carbon

• BMPs to sequester C could offset 8 to 16 percent of total U.S. emissions in the future

• Currently 2,000 producers in 15 states have sold carbon credits on 1 million acres.

Sequestering Carbon

Synergy: Carbon Credits and Climate Adaptation

• Practices to help adapt sequester carbon– Restoring wetlands, repairing stream

channels and enhancing riparian corridors – Building in redundancy by backing up

conservation tillage with grassed waterways, contour grass strips, filter strips, riparian buffers, etc.

Synergy: Carbon Credits and CAFOs

• New CAFO regulations may increase demand for land to apply manure as primary nutrient source

• Participation in EQIP, CSP or a carbon credit market can offset some or all of the costs of manure application

Watershed Scale Water Quality Trading Programs

Watershed Approach

Most effective and comprehensive approach– Builds a broad-based community of

understanding– Community-developed desired goals– Applies many tools to solve water quality

concerns such as nutrients and sediments

Watershed Approach

Regulatory Driver = Clean Water Act:– National Pollutant Discharge Elimination

System (NPDES)• Regulates discharges from municipal and

industrial point sources (including CAFOs)

– Total Maximum Daily Load (TMDL)• Sets water quality-based effluent limits

EPA Water Quality Trading Rule 1-03

Water Quality Trading Credits

• Can be one of the tools to achieve water quality in a watershed

• Introduces flexibility in the regulatory process– Allow point sources with high treatment

costs to pay someone else to make a voluntary and surplus pollutant reduction for a lower cost

Potential Tradable Pollutants

• Pollutants that:– Come from both point and nonpoint

sources– Transported through stream network

without assimilation– Have a water-quality based effluent limit

(TMDL)

Potential Tradable Pollutants

For Agriculture:• Phosphorus• Sediment• Nitrogen• Flows and temperature

Why Should Ag Participate?

• Potential revenue• Discussions influence stewardship goals• Agriculture knows what works best on the

farm• Recognition for what it has already done

Nutrient Credits

Surplus pollutant reductions (unit of mass over a period of time)– Can result in a pollutant load reduction >

than required by permit/TMDL allocation – Measurable– Generated within same watershed– Net improvement (trading ratio > 1:1)

(“discounting”)

Statewide Trading Programs

State WQT Rules

• Authority for WQT applications • Eligibility, timing, trading ratios (requiring

retirement of a portion of each trade)• Limits on the amount of credits that a source

can buy to avoid hot spots• Quantification methods for credits• Transaction framework and enforcement• Periodic program evaluation requirements

Types of Trading

• PS/PS: between permitted wastewater facilities

• PS/NPS: between permitted and nonpermitted sources with voluntary credits

• NPS/NPS: between regulated municipal stormwater permittees and unregulated agriculture

Why Allow for Trading?

• Cost• Ancillary environmental benefits• Additional funding for BMP implementation• Policy opportunities

Cost

• Agricultural BMPs can produce pollutant load reductions at a much lower cost

• Wastewater treatment plants face large capital costs to comply with NPDES permits and TMDLs

Environmental Benefits• Sediment load reductions• Reduced flood peaks (reconnect riparian

flood plains)• Wildlife habitat• Wetland restoration• Water temperature reductions• Assimilative capacity (flood plain storage)

Additional Funding for BMPs

• Point source polluters pay for conservation measures on farms– Nutrient management, buffer strips,

conservation tillage, animal exclusion, use of cover crops (but prefer structures)

• Point source polluters can offer higher cost-sharing rates

Policy Opportunities

• Can help maintain working lands• Often accelerates implementation of BMPs

(flexibility; revenue stream)• Can result in net benefits (extra reductions

required for each trade)• Allows for equitable decisions in future growth

management

Setting Up Trading

• Step 1: Farmer installs additional BMPs (above baseline requirements) from a selection of approved BMPs

• Baseline can be set by TMDL load allocation, state policy or formal rule, local stakeholder input or combination of all of these

Setting Up Trading

• Step 2: Pollutant load reductions from BMP calculated using standard methods such as RUSLE2 (soil erosion model)

• Requirements for credit generation include BMP selection, implementation period; BMP lifespan; quantification of BMP reductions, cost of installation

Setting Up Trading

• Step 3: Trading credits must factor in Trading Ratio calculation using approved ratio that accounts for uncertainties and provides net water quality benefits

• Trading ratios may contain factors to account for equivalency, margin of safety, bioavailability differences, etc.

Setting Up Trading

• Step 4: Connect credit sellers to buyers (aggregator, broker or individual contract)

• Third party verification of BMP credit, installation, maintenance and WQ monitoring; legally binding trading agreement between farmer and credit buyer; seller’s compliance with PS contract; possibility of middlemen

Setting Up Trading

• Step 5: Register credits with the state regulatory agency (MPCA or third party)

• Reporting requirements in PS permit; web-based registry (WRI’s NutrientNet includes location, contact and credit calculators); web facilitated reporting (contracts, reporting forms and lists current trades)

Obstacles to Trading

• Low demand – may need supporting regulation

• Difficulty in measuring may lead to high transaction costs (scientific uncertainty)

• Farmers may be reluctant to participate in program that is partly regulatory, even with compensation – afraid information shared could lead to regulations

Synergies: WQT and EQIP(Breetz & Fisher-Vanden, 2007)

• Both employ incentive payments for BMPs• Encouraging the same types of farmers to

implement the same types of BMPs

• Can WQT partner with EQIP?

EQIP Strengths

• Farmers know and trust EQIP• Interest in EQIP exceeds available funding• Established program with fewer sources of

transaction costs

EQIP Weaknesses

• Doesn’t explicitly target water• Ranks water quality projects against erosion,

forestry and habitat projects• Fuzzier calculation of environmental benefits• Less attention to cost-effectiveness• Slightly less monitoring and enforcement• Constrained by federally-appropriated funds

WQT Strengths

• Explicitly focused on water quality• More refined calculation of water quality

benefits• Greater attention to cost-effectiveness• More stringent monitoring and enforcement• Draws on private funds and builds local

partnerships• Allows farmers to be fully compensated and

even profit for project implementation

WQT Weaknesses

• Farmers lack familiarity with and trust in trading programs

• High transaction costs involved in recruiting farmers

Problems for WQT Recruiting• Farmers concerned about regulation (EQIP

helps farmers, NRCS, not EPA, fewer demands on monitoring and quantifying)

• WQT has no ties to agricultural community• Trading contracts may offer less autonomy in

choice of practices and monitoring• WQT prefers structural stream bank

management practices – permanent, easy to monitor but do not increase net returns

EQIP WQT Partnership

“Piggybacking”• EQIP advertises to farmers, ranks

applications, signs EQIP contract, administers funding, monitors BMP implementation and enforces contracts

• WQT provides funding to EQIP

(example = Tar-Pamlico River in NC)

EQIP WQT Partnership

“Brokering”

• EQIP advertises WQT opportunity, determines eligibility for WQT funding, ranks eligible projects, signs contract with farmers

• WQT provides funding to EQIP for individual projects; monitors BMP implementation; enforces contracts

EQIP WQT Partnership

“Screening”• EQIP advertises WQT opportunity;

determines eligibility for WQT funding; passes eligible farmers to WQT

• WQT ranks applications; signs WQT contract with farmers; monitors BMP implementation; enforces contracts

EQIP WQT Partnership

“Recruiting”• EQIP advertises WQT opportunity• WQT determines eligibility; evaluates

applications; negotiates with farmers for preferred BMPs; signs WQT contract with farmers; monitors BMP implementation; Enforces contracts

Success of Partnership

• Extent to which project selection tasks can be shared depends on:– the refinement of the local EQIP ranking

criteria – the willingness of NRCS staff to devote

time to WQT

Water Quality Trading “ The economic and environmental risks of climate change are

fairly well publicized. In contrast, … the Millennium Ecosystem Assessment flagged hypoxia as an even greater short-term threat to human livelihoods than climate change. There are now at least 150 human-induced hypoxic dead zones in global waters…. Given the urgency, nutrient trading is poised to become the next truly important market-based conservation tool. Just as the last decade witnessed the launch and the almost viral growth of carbon markets, the next decade could give rise to robust and, large scale regional schemes for nutrient trading.”

Forest Trends, NRCS, The Chesapeake Bay Foundation and The Ecosystem Marketplace May 2007

Other Considerations

• Consistent/standardized quantification• Recognizing common environmental

outcomes or metrics across all programs (quality/quantity)

• Overlapping environmental commodity markets (multiple ecosystem services)

• Markets take time to develop

Multiple Markets

Pennsylvania:

conservation tillage for nutrients, sediment; carbon

Great Miami River, Ohio:

BMPs for nutrients, in-stream habitat; carbon

Florida rangelands:

water storage; P; habitat enhancement

Multiple Markets

Vermillion River, Minnesota:

Water quality (flow; temperature; sediments;

riparian quality)

Great Lakes:

Water quality/quantity offsets (flow; nutrients; green space; wetland banks)

Oregon

Water temperature (riparian buffers; trees)

Promising Future

• Mentioned in AFBF MAAPP report as a “exciting” opportunity

• USDA 2007 Farm Bill recommendations include $50 million in mandatory funding to develop uniform standards for quantifying environmental services, establish credit registries, and offer credit audit and certification services

AFT’s Potential Role

Bringing agriculture to the table

• Pilot projects (ACIC risk management instruments help producers adopt BMPs; multiple credit markets)

• Outreach (listening to agriculture)• Policies (local, state, federal – working with

agriculture to develop and promote policies)

AFT’s Potential Role

• Link academics and agriculture• Link environmental community and

agriculture• Identify high priority land to protect: Protect

farmland to protect future environmental services (in addition to food and fiber)

Parting Words

"The most urgent priority, however, is to put into practice what we already know, with all the accompanying warts. We must learn by doing, and big mistakes will be made, but we cannot afford to wait for certainty or even a high level of comfort. We must embrace compromise because doing better today is more important than doing best tomorrow."

Craig Cox, Soil & Water Conservation Society, 2006

Source Materials for Ecosystem Services 101

www.ecosystemmarketplace.com

Mark Kieser & Associates: Environmental Trading Network www.envtn.org

James Salzman, Duke University (farm of the future)

Breetz & Fisher-Vanden, 2007: Review of Agricultural Economics 29(2): pp 201-215)