General Information
What is meant by “Cap and Trade”?
Cap and trade is one method for regulating and ultimately reducing the amount of pollution emitted into the atmosphere. It is viewed as a more democratic solution to regulating Greenhouse Gasses (GHGs) than a carbon tax as it creates a commodity out of the right to emit carbon and allows the commodity to be traded on the free market.
The basic concept involves two parties, the governing body and the regulated companies or units emitting pollution. The government sets a cap on pollution, limiting the amount of carbon dioxide and other harmful output that companies, or other groups, are allowed to release. The government then issues credits which allow companies to pollute a certain amount, as long as the aggregate pollution equals less than the set cap.
Since some companies can reduce polluting emissions more inexpensively than other companies, they may engage in trading any extra permits. Companies that can more efficiently reduce pollution sell permits to companies that cannot easily afford to reduce pollution. The companies that sell the permits are rewarded while those that purchase permits must pay for their negative impact. Applied to climate change, this system would theoretically reduce carbon emissions at the lowest total cost.
To further lower costs of greenhouse gas reduction, additional activities or projects can be sold into the market from non-capped industries which sequester greenhouse gases or reduce emissions of greenhouse gases. These projects, based on science, are referred to as “offsets” and specifically in agriculture are sometimes referred to as “carbon credits”. A carbon credit is defined as one metric ton of carbon dioxide equivalent durably sequestered away from the atmosphere or prevented from being emitted into the atmosphere.
What is the Chicago Climate Exchange?
The Chicago Climate Exchange (CCX) is North America’s only, and the world’s first, greenhouse gas (GHG) emission registry, reduction and trading system for all six greenhouse gases (GHGs) – carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, perfluorocarbons, and sulfur hexafluoride. CCX is a self-regulatory, rules-based exchange designed and governed by CCX Members. Members make a voluntary but legally binding commitment to reduce GHG emissions. Likewise, producers will make a voluntary, but legally binding commitment to use approved land management practices to fulfill their carbon credit contracts.
Is this a government program?
No. This is money from private industry, corporations, utilities, manufacturers, non-profit groups, advocacy groups and anyone else who has purchased carbon credits (sometimes called offsets) through the Chicago Climate Exchange. These firms may purchase credits to reduce emissions, but in most cases, at least half of the required emission reductions must come from technological advances, energy efficiencies, or other reductions, and purchased offsets can be used to help meet the reductions. Carbon offsets, allowances, or other emission reductions are truly market-based commodities.
Who buys carbon credits and why, especially if the U.S. never signed the Kyoto Treaty, and emitters are not required to reduce greenhouse gas emissions?
Many Fortune 500 companies, multi-national corporations, utilities, power generation companies, and others have bought carbon offsets for a number of reasons. Some companies have subsidiaries based in foreign countries that have signed on to the Kyoto treaty and are required to either reduce emissions or buy offsetting credits. Some companies are buying credits as part of a good “corporate citizen” public relations campaign and many are genuinely concerned about reducing greenhouse gas emissions. Finally, from a business standpoint, the entrepreneurial spirit would say to buy credits early if they are likely to increase in price. Credits can be bought and sold easily by brokers much as other commodities are traded in other exchanges.
How will the carbon credits be priced and when does the producer receive the proceeds?
After the end of the pool verification, the credits will be placed in the NDFU trading account and they will be sold as the market allows. NDFU or its marketing affiliates are responsible for marketing the offsets for the most advantageous return for contract-holders. The individual producer will receive a share of the sale proceeds (less a 10% administrative fee to NDFU) after the credits are sold. The concept of carbon credits trading is similar to dealing with any other agricultural commodity exchange such as the Minneapolis Grain Exchange or the Chicago Board of Trade.
What if the price of carbon changes in future years?
Carbon credits are priced each year during the life of the contract, so the price received will be different each year. If carbon prices increase, the value of the annual payments would increase as well. Likewise, there would also be a chance that stored carbon could be worth less in future years, depending on the supply and demand of carbon offsets in domestic and international markets. A producer signing a five-year agreement would have the price set at least five times during the contract period.
What is the future for carbon credits?
If the U.S. and other countries of the world adopt greenhouse gas reduction programs, there will be an increasing interest in reducing greenhouse gas emissions or offsetting those emissions.
In the debate over acid rain years ago, a similar cap and trade market developed regarding sulfur dioxide emissions. Over time, the cost of the credits or offsets became high enough to force companies to place scrubbers on smokestacks, replace the highest emission plants and build newer low-emission facilities. Lowered emissions resulted from the market-based sulfur dioxide allowances trading, and acid rain and its damage were lessened. It is estimated that the cap and trade system for sulfur dioxide emissions achieved the desired reductions in about ¼ of the time estimated, and at about ¼ of the cost. That model is the basis for cap and trade systems planned for greenhouse gases.
In the greenhouse gas debate, the concept of emissions caps and higher costs of carbon offsets may eventually provide the incentives to more efficiently use energy. In the meantime, if agricultural producers can adopt economically successful and environmentally sound land management practices that reduce or offset carbon emissions, and can get paid for it, it creates a win-win for all involved.