Project Report:
Assessing the Economic Factors Driving Agricultural and Point Source Participation in Market-Based Ecosystem Trading Programs
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Purpose
- Investigates the causes of economic imbalances.
- Explores and develops market-based solutions.

Summary

With the grant of $35,000 American Farmland Trust (AFT) received from the Alex. C. Walker Foundation in December 2008, AFT conducted two economic and market analyses to inform the design and launch of a private, market-based environmental trading system involving industrial facilities purchasing credits from farmers. The grant was critical for laying the foundation for launching the Conservation Marketplace of Minnesota, a multi-partner water quality trading market that brings together corporations, municipalities, and private landowners to protect water quality and restore wildlife habitat on agricultural land. Walker Foundation funding supported: 1) An analysis of the private market demand for ecosystem service credits in the watershed (i.e., the economic factors influencing industry's motivation to purchase environment credits from farmers); and 2) An analysis of the supply side for ecosystem service credits (i.e. the ability and inclination of farmers to produce sell credits).

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Description

AFT was founded in 1980 by Peggy Rockefeller and other environmentalists and conservationists to meet challenges not being addressed by existing environmental organizations: the loss of farmland to development and the need for enhanced environmental stewardship of farm and ranch lands. Since then, AFT has helped to protect millions of acres of working lands by stimulating the creation of the federal farmland protection program, 27 state-level programs, and scores of local farmland protection programs and policies. AFT also helped expand stewardship on millions of acres of working lands through advocacy work on federal and state conservation programs and on-the-ground demonstration projects.

The project supported by the Alex C. Walker Foundation is part of AFT's Agriculture & Environment initiative, which is mobilizing farmers across the country to improve their environmental practices and performance, with particular emphasis on improving water quality, combating global warming, and advancing policies to support agriculture's role in improving our environment. AFT is working in the Upper Mississippi and Ohio River basins, the Pacific Northwest, California, the Chesapeake Bay watershed, and other areas to: a) Promote sustainable farming practices; b) Engage agriculture in environmental practices to improve water quality by reducing nitrogen run-off and to offset greenhouse gas emissions through participation in carbon "cap and trade" programs; c) Strengthen the economic viability of farms; and d) Advance the development of federal and state policies that will support both environmental practices and local farms.

In this project, AFT assessed the market supply and demand factors impacting the successful functioning of a self-sustaining, market-based multiple “eco-services” trading market. The geographic focus of this work is the Sauk River Watershed in Central Minnesota. The activities and outcomes are based within AFT's broader work in the watershed to create local infrastructure and support systems that facilitate farmers' and point sources' participation in the first test of a water quality trading and multiple "eco-services" market involving point source polluters and agriculture in the Midwest.

AFT seeks to design a multi-credit or "stackable" credit market because many of the conservation practices that farmers can implement on their farms can provide multiple environmental benefits. If an individual farmer is only paid for one of the environmental benefits, such as phosphorus reduction, it may not provide enough incentive for this farmer to implement the practice. However, if we can "stack credits" and the farmer then is paid for multiple environmental benefits--such as phosphorus reductions, carbon sequestration, and wildlife habitat--the value of the multiple credits may be enough to induce the farmer to implement the conservation practice(s). If there are more dollars available to be paid to farmers through multiple ecosystem service markets, AFT expects increased implementation of conservation practices on farms and marketing of credits.

Project Activities and Outcomes:

1) Analyze Private Market Demand for Ecosystem Service Credits (Winter - Summer 2009):

At the start of the project, AFT and its partners identified two likely market drivers and a receptive state climate for water quality trading with water quality trading rules under development. First, the Sauk River Watershed was within the area that was eligible for inclusion in the Chicago Climate Exchange carbon-trading program. This proximity provided us the opportunity to work with the Minnesota Farmers Union to enroll producers in the carbon-trading program through the Sauk River Trading project. Secondly, we assumed that soon-to-be released water quality restrictions (Total Maximum Daily Loads, or TMDLs) would likely create the need also for additional emission reductions by various point sources, reductions in use and runoff of nitrogen and phosphorus, and a greater need to reduce erosion to lower turbidity levels in the Sauk River. And finally, Minnesota was in the process of drafting water quality trading rules—which greatly facilitates the development of markets by providing already approved ground rules. Thus, AFT planned to focus the first round of environmental market trading on generating water credits concerning nitrogen, phosphorus, and sedimentation/erosion (turbidity). We also planned to encourage farming practices that would generate carbon credits. By using improved conservation practices to produce both nutrient (phosphorus, nitrogen, and sediment) and carbon credits, we believed that farmers would have the opportunity to improve water quality and diversify their income stream by selling “stacked credits” to distinct sets of buyers.

At the time, AFT’s assumptions on emerging market drivers seemed conservative and valid. The Chicago Climate Exchange’s (CCX) carbon trading program was rapidly expanding and gaining in popularity with farmers and farm organizations that stepped into aggregate credits. The wastewater treatment facilities (WWTF) were facing difficult reduction goals from impending TMDL determinations (those were expected in 2008 or 2009). The TMDLs being developed for the Sauk River Chain of Lakes (SRCL) and Lake Pepin also indicated significant phosphorus reductions would be required. The SRCL is a lake system consisting of fifteen lakes, seven of which are on the main stem of the Sauk River. Likewise, Lake Pepin is a naturally formed lake on the Mississippi River with a watershed that incorporates drainage from approximately 50 percent of Minnesota and parts of Iowa, North and South Dakota and Wisconsin. In both TMDL studies, early indications were that SRCL would require over a 50 percent reduction in phosphorus loading and Lake Pepin would need approximately an 80 percent reduction in phosphorus loading.

However, the potential market drivers were delayed, greatly reducing and changing the landscape of potential buyers. There were several reasons for this delay. First, the opportunity to participate in the CCX program ceased when the trading program was suspended. The suspension resulted from the failure of Congress to enact legislation in response to the Supreme Court ruling that the Environmental Protection Agency should regulate carbon dioxide. This decision has limited the viability of the United States’ voluntary carbon market. In addition, the pending TMDLs encountered significant unforeseen delays as well. Because both of the lake systems described above are run-of-the-river lake systems, they do not respond with the typical lake characteristics in the eco-region that demonstrate the ability to attenuate river tributary concentrations and maintain a lower lake concentration of phosphorus. Both TMDL modeling efforts indicated that the lake systems have concentrations that more closely parallel the tributary river concentrations and are not able to maintain lower long-term average concentrations. This meant setting appropriate lake goals based on eco-region standards would also, by default, be setting river nutrient standards much lower than eco-region expectations. As a result, an effort is now underway to set appropriate lake goals by promulgating site-specific standards. As of the date of this report, neither of the TMDLs has been finalized. Without the TMDL approvals, WWTF have not been assigned their waste load allocations that would require reductions and trigger the need to consider options for compliance. This delays the opportunity for WQT to provide lower alternative costs for compliance and the demand for offset credit generation. Finally, delays in finalizing Minnesota’s water quality trading rules created uncertainty about what is needed to operate a viable water quality trading market in the region. As of the date of this report, the trading rules still have not been finalized.

Due to the lack of drivers for any water quality trading or greenhouse gas credit markets to develop in the watershed and the lack of information to develop a useful analysis, AFT decided to focus efforts on researching and developing other potential voluntary trading markets. Working with project partners, AFT developed business plans to guide us in developing viable ecosystem services markets in the Sauk River Watershed and the Minnesota River Basin. In the Sauk River Watershed, AFT focused on marketing our project to municipalities that have at-risk drinking water supplies. By engaging these communities, we can provide a service where municipalities can purchase Source Water Protection credits by working with our trading program. Also, we have marketed our services to companies in the watershed that have a strong social responsibility corporate strategy that drives them to purchase various environmental service credits, such as water quality credits and pollinator habitat credits.

AFT also continues to target best management practices best suited for adoption by Sauk River Watershed farmers and promote the value and viability of our trading program. Practices that can be implemented in the watershed to generate various credits—including, nutrient BMPs, reduced tillage practices, field borders and buffer strips in riparian areas, and planting permanent grassland (which can be harvested to supply feedstock for bio-mass energy facilities)—are still of relevant value. This is giving us ample time to test the resiliency of our market framework with voluntary pilot trades before the regulatory drivers are put in place. Our focus continues to be on well-known, effective practices that have merit and can be marketable as ecosystem services, and thus, result in “stackable credits” farmers can sell to aggregators, while also marketing these credits to a different set of buyers.

The following provides additional detail on activities and outcomes AFT accomplished with funding from the Alex C. Walker Foundation:

• AFT recruited and worked with farmers to build a cohort of committed participants.

Over the past three years, the Sauk River project team helped facilitate the first demonstration trades in the watershed. The team initiated three Source Water Protection (SWP) trades for nitrogen reduction BMPs to support the City of Cold Spring’s wellhead protection efforts. Historically, producers operating in the Wellhead Protection Area (WHPA) avoided participating in federal cost-share conservation programs like the Environmental Quality Incentives Program (EQIP). By working with local trusted agricultural advisors, the Stearns County SWCD built relationships with the producers and offered a menu of conservation initiatives including EQIP practices that reduce nitrogen application rates on working lands. The City offered a payment for ecosystem services in exchange for nitrogen reductions made. To support the trades, we developed an application form and nitrogen inhibitor verification form for the 2010 program. In the first year we were able to work with three farmers (out of seven in the priority area) to implement nitrogen reduction practices on 277 acres of corn, resulting in 4,076 pounds of nitrogen reductions. Farmers were paid $10 per acre to apply a nitrification inhibitor to reduce the loss of nitrogen, thus, allowing farmers to apply less nitrogen. In 2011, we continued the SWP nitrogen reduction credit program for the City of Cold Spring. Again, three producers participated (we lost one and gained another). The program paid for the producers to use ESN (a slow release nitrogen fertilizer) and the city paid the difference for the upgrade. One producer also used Instinct (a nitrification inhibitor) with their weed and feed application in the spring. The number of dry land acres treated totaled 434. We estimated that 2,660 lbs of nitrogen were removed from the SWP area.

Project partners will continue the work in the City of Cold Spring in 2012 and will be working with the City of St. Peter in the Minnesota River Watershed to initiate a similar project in 2012.

Also, the participants in our farmer listening session will be a group that we can go to for more information as potential credit suppliers as new opportunities develop. They have all agreed to provide feedback on potential market opportunities and have indicated a willingness to be a credit seller as markets develop.

• AFT has worked to finalize the mechanics of trading.

AFT has completed development of the necessary materials and methods to launch ecosystem services trading in the Sauk River Watershed. Program materials and methods developed include: maps that identify target areas for trading; credit estimation calculation and protocols; credit uncertainty calculations; application forms; BMP verification and certification forms; protocols and audit protocols; a project business plan; and a training protocol for Certified Field Representatives.

The purpose of developing a project business plan was to detail how the trading regime will be operated and identify all of the issues that will have to be considered by the three operating committees. The business plan will also be the basis for a Water Quality Trading Program application that will be submitted to the Minnesota Pollution Control Agency (PCA). Minnesota’s preliminary trading rules indicate that all trading programs will need to be approved by PCA to ensure that credits are being generated and certified under an acceptable process. Once our trading program has been approved by PCA, point sources will have confidence that credits purchased through our program will be valid and acceptable under PCA rules and National Pollutant Discharge Elimination System permits. We plan to update the business plan once the Minnesota Water Quality Trading Rules are finalized. In the meantime, we have: completed benchmarking national programs; selected commonly used methodologies; developed a user-friendly spreadsheet calculation tool; developed eligibility boundaries/restrictions for aquatic ecosystem services; coordinated with the Minnesota Pollution Control Agency on WQT rule development and project content; and developed the majority of the protocols and documentation forms to produce a repeatable method for crediting, selecting, and documenting credit-generation site performance.

• AFT is planning for additional markets and new partnerships.

1). AFT is developing additional markets.
The project that began in the Sauk River Watershed in 2008 has spurred a larger effort throughout Minnesota. Our project team partnered with the Minnesota River Board, the Greater Blue Earth River Basin Alliance, and Rural Advantage to secure an additional $1,000,000 in funding for the project from the USDA Conservation Innovation Grants program. The primary purpose of the larger, federally-supported project is to create self-sustainable local infrastructure and support systems called the Conservation Marketplace of Minnesota (CMM) to facilitate agricultural participation in Water Quality Credit Trading and other ecosystem services markets in three diverse watersheds in Minnesota (Sauk River, Middle and Lower Minnesota, and Greater Blue Earth).

It is important to emphasize that, without funding from the Alex C. Walker Foundation, it is unlikely that the larger project could have been developed, or that the $1 million in additional funding would have been secured.

In the course of developing CMM, AFT has identified several ecosystem market opportunities that we are now exploring to develop over the next two years. They include:

Habitat for Pollinators: Bees, butterflies, and other animals pollinate more than 2/3 of the world’s crop species. The Xerces Society reports that over 1/3 of managed honey bee colonies have died in past three years and some native bumblebee species are on the brink of extinction. The cause may be from a combination of pesticides, parasites, viruses, and/or climate change. Providing good quality habitat is a straightforward way to attract and increase native populations as well as benefit managed honeybees. Conservation Marketplace of Minnesota (CMM) enhances pollinator habitat by generating conservation projects with the following specifications:
o High diversity plantings with native grasses, wildflowers, and shrubs.
o Blooming plants during entire growing season.
o Insecticide-free zones.

CMM follows guidelines and recommendations from the USDA Natural Resources Conservation Services (NRCS) and the Xerces Society to ensure pollinator credits accurately meet specifications. In addition, CMM will provide the following services:
o Identify appropriate site location to maximize habitat benefits.
o Identify and measure all environmental uplift generated.
o Oversee project installation and verify credits.
o Reporting and verification throughout the project.

CMM partners, working in partnership with the Many Rivers Chapter of The Prairie Enthusiasts and funded by contributions from Unimin, delivered a project package of 8.5-acres of high quality pollinator habitat by restoring the native prairie on private land for a cost of $5,399.98. Also, AFT recently learned that General Mills has committed $50,000 dollars to CMM to fund additional restoration of pollinator habitat in the Minnesota and Sauk River watersheds.

Wellhead Protection: Wellhead Protection is an effective way to protect a community’s drinking water supply by managing the area around the well to prevent potential contamination. Conservation Market-place of Minnesota (CMM) will develop a program tailored to community goals for nitrate-nitrogen reduction in Wellhead Protection areas. Nitrogen reduction practices may include:
o Alternative Nutrient Management
o Advanced Application Practices for Nitrogen
o Crediting Nitrogen in Irrigation Water
o Perennial Plantings that Reduce Nitrogen Leaching

CMM will provide expertise identifying land parcels most vulnerable to nitrogen loss through the root zone maximizing the benefits of the program. In addition, CMM will provide the following services:
o Evaluate crop type, rotation and management level to determine the best nutrient management alternatives.
o Oversee installation or verify credit enhancements.
o Utilize vetted reporting and verification methods during and after project implementation to document nitrogen reductions.

Habitat for Blanding’s Turtles: Watershed conservation efforts that restore wetlands, rivers, streams, and adjacent upland habitats can be effective steps toward helping the Blanding’s turtle (Emydoidea blandingii). Blanding’s turtles are threatened by loss of habitat, human disturbance, and increased predator populations. Conservation Marketplace of Minnesota (CMM) promotes the following habitat management practices in areas with existing Blanding’s turtle populations:
o Wetland restoration projects.
o River, stream, and ditch enhancements.
o Upland nesting habitat improvement on hill shoulders and slopes.

Preferred upland habitats are sparsely vegetated, often with a mix of grasses and forbs tolerant of well-drained soils. These conditions are selected by nesting female turtles, they promote egg development in the nest cavity, and provide easy dispersal of turtle hatchlings. CMM is working with the Minnesota Department of Natural Resources to ensure the supported practice specifications meet their habitat standards. The following services will be provided:
o Identification of appropriate sites to maximize habitat benefits.
o Oversight and verification of the project.
o Recognition of your environmental contributions.

Pheasant Habitat: The single most important factor influencing pheasant success is habitat. Pheasants require a broad range of habitat requirements throughout their life cycle. Conservation Marketplace of Minnesota (CMM) supports habitat enhancements that provide for:
o Adequate food supplies.
o Nesting cover.
o Winter cover.
o Habitat interspersion across the landscape.

Habitat enhancements often incorporate a vegetative buffer that contains a specified mix of native grasses and wildflowers and is more than 100 ft. wide. CMM will work with Pheasants Forever staff to select optimum sites that meet or exceed the habitat goals specified by the organization. In addition, CMM collaborators will:
o Identify appropriate site location to maximize habitat benefits.
o Identify and measure all environmental uplift generated.
o Oversee installation or verify credit enhancements.
o Complete reporting and project verification.

In addition, AFT and CMM partners are developing payment for ecosystem service programs from private industry and foundations to provide incentive for producers. Some producers want to enhance their conservation efforts but have not participated due to lack of knowledge, conflict, incentive, or trust in conservation programs. CMM provides farmers with innovative options and flexibility. For instance, CMM can allow farmers to receive payments for ecologically positive BMPs while still allowing a farmer to hay or graze at a specified time of the year. CMM can also offer non-governmental funding for those farmers reluctant to participate in traditional programs.

Finally, AFT and CMM partners will begin a project in 2012 to test and demonstrate USDA’s Nutrient Trading Tool (NTT) to evaluate land management scenarios and provide measureable outcomes for conservation practices designed to reduce non-point source pollution in watersheds across the state. The NTT compares agricultural management scenarios to calculate a change in nitrogen, phosphorous, sediment loss potential and crop yield. A farm economic component will be incorporated to understand the economic bottom line related to productive land management.

2) Analyze supply-side of Ecosystem Service Credits (Spring-Fall 2009):
To accomplish this economic analysis goal, AFT held a facilitated "listening session" for farmers and agriculture industry representatives to identify financial constraints and solutions for trading, and also surveyed farmers on the financial motivations of their participation in trading.

A) AFT conducted a listening session on December 1, 2010 with farmers and agricultural stakeholders in Minnesota’s Sauk River Watershed (proceedings attached). We presented pertinent materials for the trading program and solicited feedback from the farmers who attended. The purpose was to elicit feedback from farmers on whether they accept the credit estimation techniques, the workability of the certification and verification process and, most of all, if they are willing to participate in selling credits based on all of the information presented. We were pleased to find out that all of the farmers in attendance indicated that, if the economics of trading become positive, they will definitely participate in selling credits in a trading program. In addition, the information from the listening session will be used as part of our adaptive management process to make changes to the trading program if necessary.

B) AFT intended to survey farmers on the financial motivations of their participation (in Fall 2009). However, funding did not prove sufficient for completing this work.

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Purpose

Farmers are paid to produce food, fiber and fuel in response to market prices. They also provide environmental goods such as cleaner air and water and wildlife habitat for which there are no market prices and for which they are not compensated. These environmental benefits are highly valued by the public. However, one of the great economic imbalances in the U.S. economy is the lack of naturally occurring markets for environmental services.

Establishing private ecosystem markets can help solve this market failure. But for markets to be established, it must be economically attractive for farmers to adopt conservation or production practices that improve the environment. Sufficient analysis of the supply and demand of ecosystem service credits is needed. A market structure has to be set up and approved by stakeholders and regulatory authorities. And finally, farmers must be educated to understand the economics for their individual farm of changing practices and selling credits.

Scope

AFT is continuing its efforts to develop a multi-credit water quality trading system in the Sauk River Watershed that will serve as a model for other watersheds and states. As a functioning market for ecosystem services, it will help to address our society's failure to value and produce environmental benefits. When environmental goods and services (e.g., clean water, wildlife habitat, reductions in greenhouse gases) are not seen to have economic value, the private marketplace does not reward their production and the economy produces fewer of these outcomes. One promising tool to address this is the creation of markets for environmental services--paying farmers for adopting practices that produce environmental benefits. AFT's vision of success is for farmers to view ecosystem services as an income-generating commodity, just like corn, soybeans or wheat.

Information Dissemination

Results were distributed to AFT staff and partners working on developing ecosystems in other parts of the country, including the Chesapeake Bay states, the Ohio River Basin, California, and the Pacific Northwest. Also, findings were distributed and explained to the local committees, partners, and interested parties working on the project in Minnesota. AFT made presentations on the project at regional and national conferences relating to water quality, ecosystem services and agriculture, such as the USDA-Cooperative State Research, Education and Extension Service National Water Conference in February 2009. The project will also be mentioned, as appropriate, in AFT's policy "white papers" on related subjects.

During and after the grant term, the Sauk River Watershed project team:

• Promoted Conservation Marketplace of Minnesota at a number of local conferences and meetings, including: Upper Mississippi River Source Water Protection Project, Cold Spring Agricultural Producer Meeting, Minnesota Rural Water Association Trade Show, Biomass Workshop, Minnesota Pollution Control Agency, the Board of Water & Soil Resources.
• Placed a featured article in the Corn and Soybean Digest magazine.
• Developed educational and explanatory materials.
• Developed additional explanatory materials, including the Cold Spring SWP crediting process and a fact sheet to engage potential buyers.
• Developed a training manual for certified field representatives and held a pilot training session with three Soil and Water Conservation District staff (unaffiliated with project committees) to test the training materials.
• Began to identify landowners to test the Nutrient Trading Tool on cover crops to evaluate nutrient reduction to both shallow and deepwater aquifers.

During and after the grant term, AFT and members of the CMM project team:

• Hosted quarterly conference calls and annual update meetings for the National Advisory Committee.
• Maintained a project Web site (www.conservationmarketplaceofmn.org).
• Reviewed and provided input to the Minnesota Pollution Control Agency’s draft rules for water quality trading.
• Initiated conversations with various government entities regarding ecosystem service markets, including: US Department of Agriculture (USDA); National Resources Conservation Service (NRCS); Minnesota Pollution Control Agency (MPCA); Minnesota Board of Water and Soil Resources (BWSR); Minnesota Department of Agriculture (MDA); Minnesota Department of Health (MDH); multiple Soil and Water Conservation Districts.
• Explored partnerships to assist with posting credits on a trade registry. (Most promising partner is the Minneapolis Biomass Exchange, due to the organization’s flexibility to evolve as our program continues to develop.)
• Hosted a symposium, “Conservation Marketplace of Minnesota,” at the 2010 National Soil and Water Conservation Society meeting in St. Louis, MO, where the theme for the annual meeting was “Ecosystem Services.”
• Presented the following oral presentations in support of CMM:
o Conservation Marketplace of Minnesota: A New Market for Ecosystem Services; Joint Meeting of the Minnesota Chapters of the American Fisheries Society, Society for Conservation Biology, and The Wildlife Society; Nisswa, MN; 3/10.
• Presented the following technical posters at conferences:

o Conservation Marketplace of Minnesota: Establishing an Ecosystem Service Market to Support Conservation Efforts; Land Conservation and Clean Water Summit; Chaska, MN; 10/09.
o Conservation Marketplace of Minnesota: Partnering Ecological Service Science and Policy Nutrients in Our Environment; Science to Solutions Conference: Reducing Nutrient Export to the Gulf of Mexico; Des Moines, IA; 12/09.
o Conservation Marketplace of Minnesota: Establishing an Ecosystem Service Market to Advance Agriculture Sustainability and Conservation Efforts; Nutrients in the Environment; Mankato, MN; 2/10.
o Conservation Marketplace of Minnesota: Establishing an Ecosystem Service Market to Advance Agriculture Sustainability and Conservation Efforts; Martin County Farm-Home Expo; Martin Co., MN; 3/10.
o Conservation Marketplace of Minnesota: Development and Testing of Ecosystem Services Market; Minnesota Water Resources Conference; St. Paul, MN; 10/10.

Project Link http://www.farmland.org/programs/environment/solutions/upper-mississippi.asp

Amount Approved
$35,000.00 on 12/15/2008 (Check sent: 12/22/2008)


  Related Organizations
American Farmland Trust  


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Attachments
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Ecosystem Services Credit Fact Sheets (PDF)
Sauk River Watershed Workshop Proceedings (Doc)
Unimin Project Summary (PDF)
Photo Log of Unimin Project (PDF)

Address
1200 18th St NW
Suite 800
Washington, DC 20036


Phone
(202) 331-7300
(202) 659-8339 (fax)

Contacts


Brian Brandt
Director of Risk Management Programs, Agricultural Conservation Inno

Posted 9/29/2008 4:10 PM
Updated   3/23/2012 4:03 PM



 
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