Date of this Version
If carbon sequestration concerns are to be addressed through markets, the cap and trade mechanism is perhaps the most likely approach that will be taken in solving the carbon problem. This is based in part on experience with the sulfur allowances market that is being implemented starting with the 1990 Clean Air Act Amendments. It is recognized, however, that a great deal of uncertainty surrounds the matter of whether we might see emission allowance markets and the related carbon storage markets anytime soon. As a result, the bulk of the report is devoted to highlighting the major parameters that will have to be considered, especially in designing markets for carbon offsets in stock (COIS) certificates.
Emission limits would need to be set before emission allowance markets could be formed. Carbon storage markets would likely appear next. It may well also be the case that farmers and ranchers would be faced with covering emissions of carbon and other greenhouse gases, while also being able to sell carbon offsets in stock for the carbon stored in land. Also, the report highlights problems with green payments or markets in flows and in promises to apply best management practices. Neither of these two approaches seemingly make a close enough connection to the scarcity 1) in the atmospheric capacity to hold more carbon dioxide, or 2) in the agricultural soil and land capacity to store more carbon. Emissions allowances and carbon offsets in stock make these connections, and, as a result, are more likely to produce jointly equitable and efficient outcomes in both payment programs and markets.
The report also takes the reader through an exercise in understanding how flows of carbon into a tract of land relate to the stocks of carbon in storage. A hypothetical set of numbers relating stocks and flows are presented in two figures, one showing the kind of time path one might expect for the level of carbon stored and the other showing the accretions, or the rates and flows of change in the carbon stock for each unit of time. The flows are affected by how much carbon is already in the soil at any point in time. It is demonstrated that as we approach the capacity of the soil to hold more carbon it becomes increasingly difficult to add more carbon to storage. This leads to the contention that the additional costs of increasing the flows into the soil will only be incurred by farmers and ranchers if payments and prices also increase over time, and as we reach full storage capacity.
The report then turns to addressing the nature of a property right in carbon stored, the carbon offsets in stock (COIS) certificate. Various dimensions of COIS property rights are explored including the right to possess/exclusive control; right to use; right to manage; right to the income; right to the capital; right to the security; right to transfer; right of term/duration; right to prohibit harmful use; right to execution; and, right to residuary character. It is clarified that a COIS is somewhat unusual in that even though it is sold, the seller is still in charge of managing the carbon in place such that the relationship between the buyer and seller has to be maintained during the time of contract. Also, it is suggested that perhaps the seller be given the option of buying COIS certificates associated with other land and providing same to the buyer if for some reason it is necessary to reduce the carbon stored in stock on the land in question. Rather than providing penalties for carbon stores being reduced, it is suggested to provide flexibility to the seller on how the contract can be satisfied.
In terms of progress toward carbon storage markets, it is pointed out that after the Title IV Amendments to the 1990 Clean Air Act resulted in actions to set national emission limits and to create a sulfur allowance market, it took about 3-years to introduce a market. Some 7-years after introduction, the market is now functioning quite effectively. Perhaps a 10-year horizon on setting emission limits leading to emission allowance and perhaps carbon storage markets is realistic for carbon as well. It is also highlighted, however, that recent moves in the U.S. Congress to introduce somewhat opposing pieces of legislation in terms of eventual outcomes bears watching. If the Conservation Security Act of 2001 passes, green payments may substitute for market prices in carbon stores, flows and/or for best management practices. If the Clean Power Act of 2001 passes, emission limits will be set on carbon emissions, which could then lead to carbon emission allowance markets. There seems to be a potential for disconnect here, using standard subsidy/payment programs in one case and the new cap and trade market mechanism in the other, placing the two approaches somewhat at odds.
The report emphasizes the need to focus on carbon offsets in stock, i.e., focus on carbon stored in land rather than on flows into the land or on best management practices, no matter whether we face green payments or market prices. Nebraskans may wish to develop a simulation exercise to help in experimenting with such a market on a case study, or special project basis. A Nebraska Coalition, modeled after the Montana Coalition, might be formed to work with farmers and ranchers in putting together aggregates of carbon stored for possible sale. It also is noted that perhaps the Nebraska Natural Resource Districts and the Nebraska Department of Natural Resources could play a role in certification and as a central point for data on transactions and features of the trade in offset certificates. Nebraska based private sector firms also could be encouraged to consider providing certification and aggregation as well as brokerage and financial services in the new carbon markets.
Fortunately, Nebraskans are a step ahead of most in other parts of the U.S. with respect to proactive involvement on carbon issues. The State could continue taking the lead on this front, with the plan to further influence the conversation about the nature of the payment or market mechanisms that eventually evolve in carbon. Designing and testing a simulated and perhaps even a test market in carbon offsets in stock in a selected project area might be considered.