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Understanding Carbon Credits

published: September 15th 2009
by: Aubee Keesee

What is a carbon offset?
    A carbon offset is an emissions credit (also known as a “carbon credit”) earned by eligible projects that sequester, destroy or displace greenhouse gas (GHG) emissions.  So an offset represents a reduction in the amount of Carbon Dioxide (CO2) that is released into the atmosphere. Carbon is “sequestered,” or stored, in vegetation, soil, and underground. Any activity that releases carbon (e.g., burning fossil fuels) increases the amount of greenhouse gases in the atmosphere. Likewise, some activities reduce CO2.
    For example, trees draw CO2 from the air and store carbon in their trunks, roots and soil. Increasing the number of trees on your property should cause a reduction in atmospheric CO2. Similarly, grasslands and soils under no-till agriculture store more carbon than degraded lands or soils under conventional tillage. Carbon can also be stored deep underground in geologic formations.
Why is this important?
    Growing international concern over climate change has led companies across the U.S. to reduce or offset their greenhouse gas emissions. One popular way to reduce emissions is by purchasing carbon offsets. Like many other commodities, they are traded on an exchange – the Chicago Climate Exchange (CCX) in the U.S. The offsets are traded only in large bundles (over 10,000 metric tons per year), so “aggregators” bundle together the offsets from numerous landowners to sell them through CCX. In special cases, companies will also buy carbon offsets directly from aggregators.
How do I create an offset to sell?
    Certain agricultural and forest management practices remove carbon from the atmosphere and store it in vegetation and organic soil matter. By changing agricultural production practices (e.g., no-till) or planting trees and other more permanent vegetation, landowners are creating carbon offsets. The easiest way a landowner can get paid for their offsets is to contract with an aggregator to sell them. Carbon contracts are agreements between landowners and aggregators. They typically do the following:
    •Specify what specific actions the landowner will take to reduce carbon emissions;
    •Give the aggregator rights to the carbon sequestered or CO2 emissions reduced by the landowner;
    •Determine how the aggregator and landowner will split the revenue from carbon offset sales. The split is usually 90% to the landowner, 10% to the aggregator; and
    •Indicate how long the landowner must maintain the contracted changes. Contracts usually run for 5 – 7 years, but they can be much longer. For example, Ducks Unlimited has entered into 99-year long agreements in North Dakota that require permanent habitat restoration in exchange for carbon offset payments.
    According to the CCX, only one CCX approved aggregator, Farmers Union, currently operates in Oklahoma. Aggregators operating in neighboring states include Agragate, Delta Carbon and the Iowa Farm Bureau. Some aggregators offer different contract length and payment options to the landowner. For example, the Oklahoma Carbon Initiative (OCI) will function as the aggregator arm of the Oklahoma Association of Conservation Districts (OACD). They offer flexible contract lengths and will work with landowners to achieve carbon offset sales for some practices not eligible for CCX trading.
    For the offsets to have value to purchasers, “verifiers” make sure that the offsets are actually tied to reductions in CO2. All CCX projects are verified each year. Most of these are “desk audits” that ask landowners to confirm that they are fulfilling contract terms, but about 10% of projects are randomly selected for more exhaustive in-field verification. When offsets are sold directly to companies rather than through the CCX, other verification rules may apply.
    Limits to Chicago Climate Exchange eligibility. The CCX only accepts offsets related to certain carbon sequestration methods, mostly from agriculture. These are conservation farming (e.g., no-till or low-till practices) on lands not previously using these methods, seeded grass with up to one cutting per year allowed, tree plantings, native rangeland protection or restoration and anaerobic methane digesters. Because the CCX only allows trading of offsets generated by very specific types of practices, some companies are willing to buy offsets directly from aggregators rather than through the CCX. In 2008, the Oklahoma Carbon Initiative developed a program to sell agricultural carbon offsets directly to companies who want to offset their emissions.
What do carbon offsets mean for farmers and ranchers?
     Landowners may be able to receive carbon offset payments if they are willing to or are already following a land management or conservation plan that reduces CO2 emissions, and are willing to contract with an aggregator. The amount received depends on several factors and prices vary from time to time, for example in 2008, prices varied from about $3 to $7/per metric ton. Climate change legislation is coming and agriculture will be affected and understanding the carbon credit programs is important for landowners.
SLS