Environmental credit trading: can farming benefit?

Farmers may also be reluctant to participate in a program that is partly regulatory, even with compensation. Some have suggested that farmers are afraid that information about their contributions to water quality and costs of pollution abatement on farms could eventually be used to develop regulations for agricultural pollution. In addition to farmer reluctance to participate in a regulatory program, uncertainty over the number of credits farmers produce and lack of enforcement of the environmental regulation have proved to be deterrents to trades.

Another supply-side issue is the treatment of credits generated on farms through publicly funded conservation programs such as the Conservation Reserve Program (CRP) and Environmental Quality Incentives Program (EQIP). Since credits from conservation programs are already partly or fully funded, some trading programs do not allow them to be traded. A farmer participating in a conservation program would have to implement additional conservation measures to participate in a trading program. This would raise the cost of credits, making them less attractive to those wishing to purchase credits.

USDA Can Facilitate Market-Based Stewardship

Under its new policy on market-based stewardship, USDA has committed to encourage participation by farmers in environmental credit markets. USDA has outlined three sets of actions that can help overcome some of the demand and supply side problems facing farmers' participation in trading programs. One action is to develop and evaluate the necessary tools and methods for estimating the environmental credits a farmer can produce. Accounting procedures for quantifying the environmental benefits of conservation practices are necessary in order to establish the environmental equivalence of credits and to reduce uncertainty.

USDA recently implemented the Conservation Effects Assessment Program to quantify the impact of conservation practices on water quality and other resources at the watershed scale. This program will standardize approaches for estimating the value of environmental goods and services generated by conservation systems. In addition, USDA's Agricultural Research Service has implemented a national program on global climate change and is conducting research on carbon sequestration of different cropping systems. USDA has also developed new accounting rules and guidelines for reporting greenhouse gas emissions and carbon sequestration as part of the U.S. Department of Energy Section 1605(b) Voluntary Greenhouse Gas Reporting Registry. The revised program enables agricultural and forest landowners to quantify and maintain records of actions that reduce greenhouse gas.

Another action is to educate farmers on the potential benefits of participating in trading programs. USDA's promotion of trading could alleviate farmer uneasiness about dealing with regulatory agencies. USDA's Conservation Innovation Grants were initiated as a component of the 2002 Farm Act provisions for the Environmental Quality Incentives Program. In 2004 and 2005, seven different projects received over $4.1 million to establish credit trading programs to improve water quality, establish wildlife habitat and sequester carbon. Information developed by these programs could help USDA provide outreach, education, technology transfer, and partnership-building activities to facilitate credit markets. This information, coupled with education of farmers about the economic opportunities of selling credits and technical/financial assistance for establishing credit generating activities, could reduce farmer concerns about trading with regulated sources and alleviate some of agriculture's own environmental impacts.

USDA's credit trading policy also calls for cooperation with other agencies to remove programmatic barriers to farmer participation. One such barrier is the treatment of credits produced through conservation programs such as EQIP, CRP, or the Grassland Reserve Program. Creating synergies between program-generated credits and newly tradable credits could benefit both agriculture and regulated sources.

Marc Ribaudo

Robert Johansson

Carol Jones

Reprinted from Amber Waves, May 2007

http://www.ers.usda.gov/AmberWaves/May-07Speciallssue/Features/Environmental.htm

Farmers as Suppliers of Environmental Credits

By adopting certain types of conservation practices, farmers can become suppliers of environmental credits while reducing the negative environmental impacts of farming. Specifically, farmers can generate credits by undertaking measures to reduce pollutant runoff into water bodies, reduce greenhouse gas emissions, or restore wetland functions.

Reduce Pollutant Runoff

Point sources regulated by the Clean Water Act (CWA) discharge directly into water bodies from an identifiable location (e.g., end of pipe). Nonpoint sources, such as agricultural fields, generally do not discharge directly into water bodies from an identifiable location; runoff occurs in a more disperse manner above and below ground, Water quality trading allows point-source discharger to meet CWA obligations by acquiring "credits" from the other sources (point or nonpoint) that take measures or reduce the regulated pollutant. The Total Maximum Daily Load (TMDL) provision of the CWA prompted a recent surge in interest in point/nonpoint trading. Nutrients (nitrogen and phosphorus) are the predominant pollutants in point/nonpoint markets, since both point and nonpoint sources are major sources. Forty water quality trading programs have been started in the United States to date, Twenty-two allow trades with agricultural nonpoint sources. Most of these trading programs are for nutrient reductions, but others address selenium discharge, sedimentation and water flow.

Reduce Greenhouse Gas Emissions

Most proposed strategies to mitigate global climate change focus on reducing the dominant source of greenhouse gas (GHG) emissions to the atmosphere-combustion of fossil fuels, which releases carbon dioxide (about 80 percent of U.S. GHG emissions in 2001). But the agricultural and forestry sectors can provide low-cost alternatives to energy reductions by shifting land use to forestry or wetlands, or adopting best management practices such as conservation tillage. At this point, GHG trading is limited because the federal regulatory program does not impose mandatory restrictions on GHG emissions.

Restore Wetland Functions

Wetlands are complex ecosystems, providing ecological, biological, and hydrologic goods and services, In the U.S., an estimated 100 million acres of wetlands (45 percent of the initial base) were converted between 1780 and 1990, mostly for agricultural production. Farmers can contribute to the "no-net-loss" goal by restoring some chemical and biological wetland functions on agricultural land.