Wall Street Journal

October 20, 1999

NEW YORK—Frank Lewis may have tilled his 160-acre farm in Madison

County, Iowa, for the last time. He still expects to plant corn and

soybeans next spring, but the seeds may be injected directly into the

soil without tilling, thanks strangely to the international treaty on

global warming, which still hasn't been ratified by the U.S.

Tilling one acre of soil, according to new studies, releases somewhere

between a quarter of a ton and four tons of carbon dioxide, the main

cause of global warming, into the atmosphere every year. If Mr. Lewis

agrees to stop tilling, a group of Canada's 10 largest energy companies

will pay him and as many as 400 other Midwest farmers for as much as

2.8 million tons of CO2 reduction.

Under an agreement announced Tuesday, Mr. Lewis could get $3 to $5

dollars per acre per year for not tilling, which isn't bad motivation

given the currently depressed grain markets. Some of the money will be

paid up front so farmers can invest in the necessary machinery to

switch to no till. The rest will be paid six years later based on

verification and future research to define how much carbon is

sequestered by not tilling.

Largest Deal So Far

The deal, announced by the environment brokerage services division of

Cantor Fitzgerald LP, is the largest announced so far in the new market

for credits on reducing greenhouse gas emissions. IGF Insurance Co. is

the seller in Tuesday's deal, and it is now signing up Midwestern

farmers like Mr. Lewis. IGF hopes to replicate the transaction with

other utilities as buyers, and the company said that its crop insurance

customers have the ability to cut CO2 emissions by 100 million tons a

year if they stop tilling their soil. IGF has already completed a

similar transaction with a southwest U.S. utility.

The market, though still in the experimental stage, is racing ahead of

both international negotiations and the stalled U.S. domestic debate on

global warming. President Clinton signed the international treaty known

as the "Kyoto Protocol" last year. The U.S. Senate has stated that it

has no interest in endorsing the treaty (which requires the U.S. to

reduce its greenhouse gas emissions by 600 million tons by 2012)

because compliance would be too expensive. Most greenhouse gases from

human activity come from burning fossil fuels in generating

electricity, heating homes, and running cars.

But, the participants in Tuesday's deal say, there are many ways to

reduce greenhouse gas emissions, and the new market—not government

mandate— will turn up the cheapest means, often in unexpected places.

Although machine tilling has been accepted practice on U.S. farms for

decades, a handful of U.S. farmers have stopped tilling because it

causes soil erosion and increases costs. Farmers who sign up for the

carbon credit deal will be also be able to sell credits for burning

less diesel fuel in their tractors and for reductions in their use of

high-nitrogen fertilizer. Nitrogen oxide is another major greenhouse

gas, and tilling increases the need for high-nitrogen fertilizer.

On the downside, not tilling requires more herbicide and, some farmers

argue, reduces crop yield.

The Ultimate Price?

"Assuming that the price is right, I'll switch," Mr. Lewis said in a

phone interview from Iowa. "That reflects many of the farmers' views—

what the ultimate price is. The return on a farm at this time is very

marginal."

Canadian energy companies operating as the Greenhouse Emissions

Management Consortium, or GEMCo, include Ontario Power Generation Inc.,

TransAlta Corp., TransCanada Pipelines Ltd., BC Gas Inc. and BC Hydro.

GEMCo has been looking for this kind of project for two years. Such

early trading of carbon credits could help formulate workable policies,

GEMCo hopes, and put the participants ahead on the learning curve if

the global warming treaty is ratified by the U.S. Senate.

"This is still really an experiment, but it moves up to the next level.

Let's formulate our policy positions based on our experience," said

GEMCo President Aldyen Donnelly.

Having Too Much Fun

Ms. Donnelly hopes international negotiators are listening.

"They're all having way too much fun flying around and having these

conferences rather than spending time on the ground listening to what

the market says. Real people go to work every day to run a coal plant

or a pipeline or a farm, and they don't have the time to go to those

conferences," she said.

"Don't spend tons of government money on the hope that the market will

care about it. Instead, make sure that your research dollars are

responding to what the market is saying. We've put real dollars on the

table for research [on tilling's creation of CO2]," she said.

GEMCo also hopes those dollars will help convince the Clinton

administration to support carbon credits for changes in agriculture.

Until now, the White House has focused on reforestation and ignored

farm practices, Ms. Donnelly said.

"Forests are being cut down around the world because unsustainably

intense agriculture constantly requires new fields," Ms. Donnelly said.

"The U.S. hasn't looked at this, but it's been my experience that the

best way to get an American's attention is to show him the money."

International Extension

The GEMCo credits are to be verified by the Environmental Resources

Trust in Washington. The hope is that the early reductions will be

recognized in a international greenhouse gas allowance trading program

in the event the Kyoto treaty is enacted.

"This is a milestone," said Daniel Dudek, who is on the board of

directors of the Environmental Resources Trust.

"When people think of global warming, they think of burning coal to

generate electricity, not about growing corn. But some of the much

bigger opportunities are in projects like this one, so getting the

agriculture sector involved is enormous," said Mr. Dudek, who has

worked for the Environmental Defense Fund for 15 years developing

market-based programs to reduce pollution.

But Ms. Donnelly said that the deal doesn't totally depend on the Kyoto

treaty, which she personally believes will never be enacted.

"We do believe that carbon trading is here. [The] Kyoto [treaty] is

fatally flawed, in part because it will have quite a substantial effect

on the price of electricity, but responsible energy companies are going

to be under pressure from markets and governments to manage greenhouse

gas emissions," she said.

The Kyoto treaty requires developed nations world-wide to cut

greenhouse gas emissions below 1990 levels by 2012. The Clinton

administration has convinced other countries that have signed the

treaty that emissions can best be controlled with a market-based

approach similar to what has been used successfully in the U.S. for

reducing acid rain.

Details Being Negotiated

Many details of an international market in greenhouse gas emission

allowance are still under negotiation. But greenhouse gas emission

limits will be set for each country, and allowances will be issued to

electric utilities and other emitters. Companies that reduce emissions

beyond their quota could sell the leftover credits to those that emit

beyond their individual limit. Companies could also get credits for

reducing emissions in other industries and for building forests,

because plants absorb CO2.

"The range of things we can do to address climate change can be

relatively straight forward, like farm management. On the industrial

side, tightening up efficiency in the shop can become a profit center

in itself," Mr. Dudek said.

"The Canadian utilities are going in with their eyes wide open. They

have no guarantees that these credits will be legitimized by any

government 10 years from now," Mr. Dudek said.

The upside potential for the Canadian utilities and other early

participants is that the earliest credits, at about a $1 a ton, are

much cheaper than credits will be in a more developed market. Another

Iowa farmer, Roger Doescher, said he definitely plans to sign up with

GEMCo.

"It's amazing to me that we can do something about global warming. But,

if we're going to live here, we've got to have clean water and clean

air and it can't get too hot. The thing is how to do it the cheapest,"

he said.