Potential for Market Systems/Carbon Trading

If carbon sequestration concerns are to be addressed through markets, the cap and trade mechanism is perhaps the most likely approach that will be taken in solving the carbon problem. This is based in part on experience with the sulfur allowances market that is being implemented starting with the 1990 Clean Air Act Amendments. It is recognized, however, that a great deal of uncertainty surrounds the matter of whether we might see emission allowance markets and the related carbon storage markets anytime soon. As a result, the bulk of the report is devoted to highlighting the major parameters that will have to be considered, especially in designing markets for carbon offsets in stock (COIS) certificates. Emission limits would need to be set before emission allowance markets could be formed. Carbon storage markets would likely appear next. It may well also be the case that farmers and ranchers would be faced with covering emissions of carbon and other greenhouse gases, while also being able to sell carbon offsets in stock for the carbon stored in land. Also, the report highlights problems with green payments or markets in flows and in promises to apply best management practices. Neither of these two approaches seemingly make a close enough connection to the scarcity 1) in the atmospheric capacity to hold more carbon dioxide, or 2) in the agricultural soil and land capacity to store more carbon. Emissions allowances and carbon offsets in stock make these connections, and, as a result, are more likely to produce jointly equitable and efficient outcomes in both payment programs and markets. The report also takes the reader through an exercise in understanding how flows of carbon into a tract of land relate to the stocks of carbon in storage. A hypothetical set of numbers relating stocks and flows are presented in two figures, one showing the kind of time path one might expect for the level of carbon stored and the other showing the accretions, or the rates and flows of change in the carbon stock for each unit of time. The flows are affected by how much carbon is already in the soil at any point in time. It is demonstrated that as we approach the capacity of the soil to hold more carbon it becomes increasingly difficult to add more carbon to storage. This leads to the contention that the additional costs of increasing the flows into the soil will only be incurred by farmers and ranchers if payments and prices also increase over time, and as we reach full storage capacity. The report then turns to addressing the nature of a property right in carbon stored, the carbon offsets in stock (COIS) certificate. Various dimensions of COIS property rights are explored including the right to possess/exclusive control; right to use; right to manage; right to the income; right to the capital; right to the security; right to transfer; right of term/duration; right to prohibit harmful use; right to execution; and, right to residuary character. It is clarified that a COIS is somewhat unusual in that even though it is sold, the seller is still in charge of managing the carbon in place such that the relationship between the buyer and seller has to be maintained during the time of contract. Also, it is suggested that perhaps the seller be given the option of buying COIS certificates associated with other land and providing same to the buyer if for some reason it is necessary to reduce the carbon stored in stock on the land in question. Rather than providing penalties for carbon stores being reduced, it is suggested to provide flexibility to the seller on how the contract can be satisfied. In terms of progress toward carbon storage markets, it is pointed out that after the Title IV Amendments to the 1990 Clean Air Act resulted in actions to set national emission limits and to create a sulfur allowance market, it took about 3-years to introduce a market. Some 7-years after introduction, the market is now functioning quite effectively. Perhaps a 10-year horizon on setting emission limits leading to emission allowance and perhaps carbon storage markets is realistic for carbon as well. It is also highlighted, however, that recent moves in the U.S. Congress to introduce somewhat opposing pieces of legislation in terms of eventual outcomes bears watching. If the Conservation Security Act of 2001 passes, green payments may substitute for market prices in carbon stores, flows and/or for best management practices. If the Clean Power Act of 2001 passes, emission limits will be set on carbon emissions, which could then lead to carbon emission allowance markets. There seems to be a potential for disconnect here, using standard subsidy/payment programs in one case and the new cap and trade market mechanism in the other, placing the two approaches somewhat at odds. The report emphasizes the need to focus on carbon offsets in stock, i.e., focus on carbon stored in land rather than on flows into the land or on best management practices, no matter whether we face green payments or market prices. Nebraskans may wish to develop a simulation exercise to help in experimenting with such a market on a case study, or special project basis. A Nebraska Coalition, modeled after the Montana Coalition, might be formed to work with farmers and ranchers in putting together aggregates of carbon stored for possible sale. It also is noted that perhaps the Nebraska Natural Resource Districts and the Nebraska Department of Natural Resources could play a role in certification and as a central point for data on transactions and features of the trade in offset certificates. Nebraska based private sector firms also could be encouraged to consider providing certification and aggregation as well as brokerage and financial services in the new carbon markets. Fortunately, Nebraskans are a step ahead of most in other parts of the U.S. with respect to proactive involvement on carbon issues. The State could continue taking the lead on this front, with the plan to further influence the conversation about the nature of the payment or market mechanisms that eventually evolve in carbon. Designing and testing a simulated and perhaps even a test market in carbon offsets in stock in a selected project area might be considered

Potential for Market Systems/Carbon Trading

If carbon sequestration concerns are to be addressed through markets, the cap and trade mechanism is perhaps the most likely approach that will be taken in solving the carbon problem. This is based in part on experience with the sulfur allowances market that is being implemented starting with the 1990 Clean Air Act Amendments. It is recognized, however, that a great deal of uncertainty surrounds the matter of whether we might see emission allowance markets and the related carbon storage markets anytime soon. As a result, the bulk of the report is devoted to highlighting the major parameters that will have to be considered, especially in designing markets for carbon offsets in stock (COIS) certificates. Emission limits would need to be set before emission allowance markets could be formed. Carbon storage markets would likely appear next. It may well also be the case that farmers and ranchers would be faced with covering emissions of carbon and other greenhouse gases, while also being able to sell carbon offsets in stock for the carbon stored in land. Also, the report highlights problems with green payments or markets in flows and in promises to apply best management practices. Neither of these two approaches seemingly make a close enough connection to the scarcity 1) in the atmospheric capacity to hold more carbon dioxide, or 2) in the agricultural soil and land capacity to store more carbon. Emissions allowances and carbon offsets in stock make these connections, and, as a result, are more likely to produce jointly equitable and efficient outcomes in both payment programs and markets. The report also takes the reader through an exercise in understanding how flows of carbon into a tract of land relate to the stocks of carbon in storage. A hypothetical set of numbers relating stocks and flows are presented in two figures, one showing the kind of time path one might expect for the level of carbon stored and the other showing the accretions, or the rates and flows of change in the carbon stock for each unit of time. The flows are affected by how much carbon is already in the soil at any point in time. It is demonstrated that as we approach the capacity of the soil to hold more carbon it becomes increasingly difficult to add more carbon to storage. This leads to the contention that the additional costs of increasing the flows into the soil will only be incurred by farmers and ranchers if payments and prices also increase over time, and as we reach full storage capacity. The report then turns to addressing the nature of a property right in carbon stored, the carbon offsets in stock (COIS) certificate. Various dimensions of COIS property rights are explored including the right to possess/exclusive control; right to use; right to manage; right to the income; right to the capital; right to the security; right to transfer; right of term/duration; right to prohibit harmful use; right to execution; and, right to residuary character. It is clarified that a COIS is somewhat unusual in that even though it is sold, the seller is still in charge of managing the carbon in place such that the relationship between the buyer and seller has to be maintained during the time of contract. Also, it is suggested that perhaps the seller be given the option of buying COIS certificates associated with other land and providing same to the buyer if for some reason it is necessary to reduce the carbon stored in stock on the land in question. Rather than providing penalties for carbon stores being reduced, it is suggested to provide flexibility to the seller on how the contract can be satisfied. In terms of progress toward carbon storage markets, it is pointed out that after the Title IV Amendments to the 1990 Clean Air Act resulted in actions to set national emission limits and to create a sulfur allowance market, it took about 3-years to introduce a market. Some 7-years after introduction, the market is now functioning quite effectively. Perhaps a 10-year horizon on setting emission limits leading to emission allowance and perhaps carbon storage markets is realistic for carbon as well. It is also highlighted, however, that recent moves in the U.S. Congress to introduce somewhat opposing pieces of legislation in terms of eventual outcomes bears watching. If the Conservation Security Act of 2001 passes, green payments may substitute for market prices in carbon stores, flows and/or for best management practices. If the Clean Power Act of 2001 passes, emission limits will be set on carbon emissions, which could then lead to carbon emission allowance markets. There seems to be a potential for disconnect here, using standard subsidy/payment programs in one case and the new cap and trade market mechanism in the other, placing the two approaches somewhat at odds. The report emphasizes the need to focus on carbon offsets in stock, i.e., focus on carbon stored in land rather than on flows into the land or on best management practices, no matter whether we face green payments or market prices. Nebraskans may wish to develop a simulation exercise to help in experimenting with such a market on a case study, or special project basis. A Nebraska Coalition, modeled after the Montana Coalition, might be formed to work with farmers and ranchers in putting together aggregates of carbon stored for possible sale. It also is noted that perhaps the Nebraska Natural Resource Districts and the Nebraska Department of Natural Resources could play a role in certification and as a central point for data on transactions and features of the trade in offset certificates. Nebraska based private sector firms also could be encouraged to consider providing certification and aggregation as well as brokerage and financial services in the new carbon markets. Fortunately, Nebraskans are a step ahead of most in other parts of the U.S. with respect to proactive involvement on carbon issues. The State could continue taking the lead on this front, with the plan to further influence the conversation about the nature of the payment or market mechanisms that eventually evolve in carbon. Designing and testing a simulated and perhaps even a test market in carbon offsets in stock in a selected project area might be considered

Conceptual Framework for Greenhouse Gas Sequestration Alternatives

The earth has a limited atmospheric capacity to absorb more greenhouse gases generally, and carbon dioxide in particular. It also has a limited capacity for agricultural lands to store a stock of carbon that might be drawn from the atmosphere and thus help alleviate the global warming problem. There are alternative mechanisms and mixes of mechanisms that might be used to address both scarcities and to work within the atmospheric limits on emissions and agricultural limits represented the capacity of soil and land to store carbon. These include a) government regulation, b) tax and subsidy programs, c) spontaneous evolution of markets, and d) cap and trade mechanisms. An overview of each type of mechanism highlights the problems they incur. While subsidy and regulation programs have helped address a variety of natural resources conservation problems, some level of these problems generally persists and may be affected by changes in funding levels. Also, while a number of new activities have been stirred by the Kyoto Protocol, including carbon banks, international carbon certification firms and environmental product financial and brokerage firms, and unique public-private sector partnerships, perhaps none of this will produce much of substance unless governments first set carbon dioxide emission limits. It has become clear that in order to solve such public good problems, i.e., where there is little individual incentive to invest in solving the problem, that government approaches and markets must be jointly designed and implemented. The public policy experiment with sulfur provides an example of how a market system might work if emission caps were in place. Government set emission limits in 1990. During the last 10 years or so, we have experienced the emergence of an active and quite effective sulfur allowances market. The market is helping firms find the least cost way to meet the emissions limits set through governmental action. Lessons learned in setting caps, distributing initial allowances, and facilitating sulfur allowances trading suggest that marketing can work; politics may play a lesser role than we might anticipate; markets where no markets existed before can develop; trading is surprisingly adaptive and can handle surprises; and, care must be taken to not give away too many allowances at the outset. Generally, the sulfur market has been deemed by most observers to be a success, reflecting a joint legitimization of both the government and the market. It is worth exploring the degree to which factors involved in carbon markets may be similar to or different from those involved in the sulfur market. In regards to carbon sequestration the direction most often discussed in the U.S. and on the global scene moves away from direct regulations; green payment and subsidy, as well as programs that tax pollutants. The direction, rather, seems in part toward the baseline and credit systems that are largely spontaneous responses by the private sector to governmental emissions caps or the prospect of those caps. The latter involves both proactive government and equally proactive private parties to the market,.. A case study approach could be taken wherein a carbon storage market mechanism could be designed and tested in Nebraska. A simulated market might be developed as a case study and perhaps tested with actual trades in carbon offsets in stock (COIS) certificates representing carbon stored in Nebraska land. During the interim, and while such a test case is demonstrated, Nebraskans need to carefully watch the progress of two pieces of legislation moving through the U.S. congress, one titled the “Conservation Security Act of 2001” and the other “The Clean Power Act of 2001.” The former proposes green payments to farmers and ranchers for applying certain kinds of conservation practices and technologies that, among other things, lead to more carbon being sequestered and stored in agricultural land. The latter set carbon emission limits on U.S. power plants at the level of emissions in 1990, which could well lead to emission allowance markets in carbon. Intriguingly, the two acts run somewhat counter to each other, in that the former does not propose to use market forces to solve the carbon problem while the latter does so. It remains an open question as to where the U. S. Congress will move on these two fronts, with the outcome having substantive implications for the next steps that Nebraskans might take to be a part of the solution to the carbon and global warming problem