Governments rarely lead change, but the former federal Liberal government would have you believe that it began the greening of Canada with its commitment to the Kyoto agreement.
A more cynical view would suggest the agreement was signed without any understanding of how to implement Kyoto obligations. Alberta, as Canada’s largest producer of greenhouse gas emissions (GGE), has the most to lose under Kyoto and has consistently been blamed for the Harper government’s refusal to endorse the agreement.
It is ironic, then, that the first government to introduce legislation to reduce GGE is Alberta. On July 1, Alberta began regulating the emissions produced by some of the province’s largest companies using a system of quotas and emission targets.
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Companies that produce more than 100,000 tonnes of greenhouse gases per year must reduce their emissions by 12 percent beginning in July.
Failure to meet the target may generate a hefty penalty of $15 for every tonne of emission over the quota unless the company has offsetting carbon credits it has bought from another source.
One such source could be Alberta farmers, who can earn carbon credits by using practices such as zero tillage and direct seeding.
But it would be difficult for a single farm to produce enough credits to satisfy the demand.
That means the accumulation, pooling and sale of these credits represents a business opportunity for someone. There are already two companies scouring the countryside trying to sign up farmers to contracts of four to five years for their credits. Called aggregators, these companies pool the credits of several farms to gain sufficient tonnes of reduced carbon dioxide emissions to use on North America’s only carbon trading exchange, the voluntary Chicago Climate Exchange (CCX).
Alberta is setting up a Compliance Carbon Offset Market that is expected to be launched by the end of summer.
The problem with signing a long-term contract is the farmer is likely to get only a small amount for his sequestered carbon.
Although the penalty for overproducing emissions is $15 per tonne, the carbon trades at only about $4 US per tonne on the CCX. This is equivalent to around $1 to $1.50 per acre per year for the farmer, depending on the soil zone. The producer must pay an independent third party to verify that the reduced emissions are real.
Saskatchewan, Manitoba and Ontario are likely to follow Alberta’s lead with legislation of their own to regulate GGE. Once a compliance-based marketplace develops, whether nationally or provincially, the market for carbon credits should increase rapidly. If carbon credits trade between $6 and $12 US per tonne as expected, locking into a long-term contract now will mean the farmer will lose the higher value for credits as the market matures and becomes more active.
The Canada Revenue Agency will also take its bite out of carbon credits. In a recently published ruling, the agency said carbon credits sold by farmers that have been earned incidentally through their farming activities would normally be included in farming income for income tax purposes.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
