The Clark Group, LLC

1. Not your Father’s Carbon Market: An Update from Agriculture’s Point of View The Clark Group, LLC Laura Sands

2. How would a carbon market work?

3. What agricultural practices would qualify? No or low till Methane capture or flaring from dairies Reductions in nitrous oxide emissions from use of precision agriculture or split application of fertilizers Grassland management or forestry

4. Overview • Legislation to Watch • Politics & Process • Measurement • Market Potential—A very different scenario

5. Legislation to watch

7. Why Congress is interested in Ag? • Ag can play a role in climate reductions because it can store carbon in soils and biofuels are low carbon solution

8. Each “De-carbonizing Wedge” represents 25 billion tons of carbon avoided or reduced. 7 wedges needed to reach stable carbon emissions. Source: Robert Socolow & Stephen Pacala; Scientific American, Sept. 2006

9. Cap-and-Trade: Is Climate Legislation Coming? • 110th Congress: 165 climate change bills, resolutions, amendments introduced by July, 2007* • Some bills -- not all --would allow a role for agricultural sinks, other agricultural emissions reductions • 11 major bills in Senate, 10 in House, would/might provide some credit to agriculture for emissions reductions activities *Pew Center on Global Climate Change, www.pewclimate.org

10. Key emerging forces • House Dingell draft bill—includes some role for ag • President Elect Obama is committed despite economy (as was Senator McCain) • The Supreme Court has opened the door to regulation of GHGs, which could have an adverse impact on ag. Cap and trade would override court decision.

11. Lieberman-Warner Bill (Environment Committee) • Allows GHG emitters to meet up to 15% of their required reductions by purchasing agriculture offsets • Provides 5% of emissions allowance for the agriculture industry (through USDA) to establish government program to reward carbon-friendly practices

12. Tale of two proposals: Cap-and-Trade: WhatRole for Agriculture? S.2191 – The Lieberman-Warner Climate Security Act of 2007 • Offset projects include ag and forestry sinks • Rigorous project plans, incl. procedures to monitor, quantify and discount ag and forestry offset projects • Discount protocols for MMV, leakage, additionality • Ensure permanence by mitigating and compensating for reversals; annual certification • Procedures for 3rd party verifiers/verification

13. Bingaman-Specter Bill (Energy Committee) • No agriculture offset market • Provides agriculture industry with 5% of emissions allowances to establish government program to reward carbon-friendly agriculture practices • Contains an economic “safety valve” which caps the price of carbon at $12/MTC02e • Allows companies to pay a government fund rather than offset market or make reductions

14. Cap-and-Trade: Is Climate Legislation Coming? • House Energy and Commerce Committee, led by Chairman John D. Dingell, introduced the 1st white paper on Climate Change October 3, 2007, “…as we move towards development and eventual passage of comprehensive climate legislation.” • Conclusions: “The US should reduce GHG emissions 60-80% by 2050.” • “The central component of this program should be a cap-and-trade program.”

15. Cap-and-Trade: Is Climate Legislation Coming? Dingell/Boucher White Paper: • “The agricultural sector’s direct emissions generally should not be included in the cap-and-trade program because of difficulties monitoring emissions and large number of sources with low emissions.” • “This sector may present opportunities for emission reductions that would be measurable and might then provide offset or credit opportunities.”

16. Climate Politics changing

17. Major confluence of events • Democratic Congress • Business is supportive • Agriculture sees opportunity for major revenue stream • Court decision is key

18. “USCAP urges policy makers to enact a policy framework for mandatory reductions of GHG emissions from major emitting sectors . . . The cornerstone of this approach would be a cap-and-trade program.”

19. www.us-cap.org/

20. Cap-and-Trade: Is Climate Legislation Coming? Relevant US-CAP Principles: • Congress should immediately enact cap-and-trade legislation to reduce emissions 60-80% below current levels by 2050 • Capped entities should be permitted to meet part of obligations through purchase of verified emissions offsets from a range of domestic sinks and emissions sources

21. What do (or should) we want? • Ag should argue for unlimited agricultural offsets. This would bring down the cost of compliance—support from utilities • Generate potential for billions of revenue for ag-based GHG reductions • Combination of allowance and offset may be best option—especially for early adopter protections

22. Stabenow amendment • Called for 1 billion ton carbon limit—higher than Lieberman Warner • Had support of coalition of ag groups and utilities • Supported by Lieberman and Warner • Bipartisan co-sponsorship • Framework for moving forward • Workable and verifiable offsets

23. The science of sequestration

24. Kansas State University Colorado State University Iowa State University Michigan State University Montana State University University of Nebraska Ohio State University Purdue University Texas A&M University Pacific NW National Labs Consortium for Agricultural Soils Mitigation of Greenhouse Gases

25. “Duke Standard” Measurement Guide Authors/Advisory Committee from: Texas A&M University Colorado State University University of New Hampshire Institute for Lifecycle Environmental Assessment Rice University Holland & Hart LLP Environmental Resources Trust Princeton University Kansas State University Stanford University Brown University Duke University

26. What’s different this time around? We will have a market—

27. Carbon per acre prices of $1.50/acre No incentives to buy from ag Protocols not transparent No significant money for aggregators, price is low Carbon prices that could generate between $15-$25 an acre—for practices Ag is best low-cost solution for rapid reductions Publicly traded commodity Potential for ag groups to aggregate and make $ A real market is not business as usual

28. Market potential

29. Illustrative Ranking of Carbon as a Crop in U.S. Per Proposed GHG Limits in Senate Bill 280 (Lieberman-McCain) 1/12/07 Carbon at $10/MT CO2e, [Crop Source: USDA - National Agricultural Statistics Service – US Crop Rankings - 1997 Production Year Ranking Based on Value of Production]

30. Estimates for a mandatory carbon market Mandatory carbon market price estimate = $10-20/MMTC. To get a more realistic picture of potential market value, let’s assume $15 MMTC

32. Will any of this be easy? No. • Major opponents are energy industry • Some utilities • Competing policy ideas which would exclude agriculture • Some pressure on the left which would also exclude ag

33. A little information is not a good thing • Coal and railroad alliance has amassed a $30 billion war chest • Junk studies (CRA, Searchinger) • Serious pushback from oil interests who want a carbon tax (keeps them on top); or safety valve • Alignment against ag offsets continues on the left • SOMEONE will want to sell offsets-if not ag, others are looking to cut them out. Splitting ag makes sense from a strategic point of view

34. Myth: Energycosts, especially in Rural America, will skyrocket • Overall, there is no significant increase nationwide • In some places, electricity costs will actually go down…. • Rural Co-ops have extra allowances and funding, a free ride not given to other utilities • States will get billions of dollars for assistance for low or middle income energy users

35. Gas prices will go through the roof • Gasoline prices gradually go up under S. 2191, tracking the CO2 allowance price (i.e. 10$ a ton CO2= @ 10 cents on a gallon). • However, some models show increasing efficiency will reduce gas demand, taking pressure off • Other factors will have more impact, MidEast politics, China etc.

36. If you are not at the Table You ARE on the Menu!