Ecosystem Service Markets in Agriculture 101

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Ecosystem Service Marketsin Agriculture(101)

• American Farmland Trust
• Ann Sorensen
• USDA May 2007

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Ecosystem Service Markets

• Who we are
• Standing at the crossroads
• Ecosystem service markets carbon credits water
  quality trading
• Synergies

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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

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American Farmland Trust

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

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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

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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

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Globalization

• World Trade Organization cases
• Brazils 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

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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

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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

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Water Quality
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Funding Trends
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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

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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

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Wide Range of Credits
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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

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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

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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

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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)

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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

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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

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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

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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.

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Sequestering Carbon
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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.

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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

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Watershed Scale Water Quality Trading Programs
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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

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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

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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

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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)

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Potential Tradable Pollutants

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

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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

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Nutrient Credits

• Surplus pollutant reductions (unit of mass over a
  period of time)
• Can result in a pollutant load reduction gt than
  required by permit/TMDL allocation
• Measurable
• Generated within same watershed
• Net improvement (trading ratio gt 11)
  (discounting)

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Statewide Trading Programs
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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

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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

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Why Allow for Trading?

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

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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

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Environmental Benefits

• Sediment load reductions
• Reduced flood peaks (reconnect riparian flood
  plains)
• Wildlife habitat
• Wetland restoration
• Water temperature reductions
• Assimilative capacity (flood plain storage)

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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

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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

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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

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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

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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.

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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 sellers compliance with PS
  contract possibility of middlemen

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Setting Up Trading

• Step 5 Register credits with the state
  regulatory agency (MPCA or third party)
• Reporting requirements in PS permit web-based
  registry (WRIs NutrientNet includes location,
  contact and credit calculators) web facilitated
  reporting (contracts, reporting forms and lists
  current trades)

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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

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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?

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EQIP Strengths

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

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EQIP Weaknesses

• Doesnt 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

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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

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WQT Weaknesses

• Farmers lack familiarity with and trust in
  trading programs
• High transaction costs involved in recruiting
  farmers

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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AFTs 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)

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AFTs 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)

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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

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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)