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Title: Ecosystem Service Markets in Agriculture (101)


1
Ecosystem Service Marketsin Agriculture(101)
  • American Farmland Trust
  • Ann Sorensen
  • USDA May 2007

2
Ecosystem Service Markets
  • Who we are
  • Standing at the crossroads
  • Ecosystem service markets carbon credits water
    quality trading
  • Synergies

3
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

4
American Farmland Trust
  • Saving the land that sustains us
  • Protecting the best land
  • Planning for growth with agriculture in mind
  • Keeping the land healthy

5
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

6
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

7
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

8
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

9
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

10
Water Quality
11
Funding Trends
12
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

13
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
14
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

15
Wide Range of Credits
Type 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
16
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

17
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

18
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

19
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)

20
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

21
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

22
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

23
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.

24
Sequestering Carbon
25
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.

26
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

27
Watershed Scale Water Quality Trading Programs
28
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

29
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

30
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

31
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)

32
Potential Tradable Pollutants
  • For Agriculture
  • Phosphorus
  • Sediment
  • Nitrogen
  • Flows and temperature

33
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

34
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)

35
Statewide Trading Programs
36
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

37
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

38
Why Allow for Trading?
  • Cost
  • Ancillary environmental benefits
  • Additional funding for BMP implementation
  • Policy opportunities

39
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

40
Environmental Benefits
  • Sediment load reductions
  • Reduced flood peaks (reconnect riparian flood
    plains)
  • Wildlife habitat
  • Wetland restoration
  • Water temperature reductions
  • Assimilative capacity (flood plain storage)

41
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

42
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

43
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

44
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

45
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.

46
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

47
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)

48
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

49
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?

50
EQIP Strengths
  • Farmers know and trust EQIP
  • Interest in EQIP exceeds available funding
  • Established program with fewer sources of
    transaction costs

51
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

52
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

53
WQT Weaknesses
  • Farmers lack familiarity with and trust in
    trading programs
  • High transaction costs involved in recruiting
    farmers

54
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

55
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)

56
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

57
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

58
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

59
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

60
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

61
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

62
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

63
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)

64
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

65
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)

66
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)

67
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

68
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)
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