Carbon Corner: A New Commodity Futures Contract with a Carbon Twist

Should there be a new commodity contract that captures the market value of new varieties?

By Biofuels Digest special correspondent Dawson Williams, Director of Carbon Advisory Services, The GIC Group

With the demise of the Chicago Climate Exchange (CCX) and the frontal assault by the new Republican leadership in the House on the EPA’s authority to regulate greenhouse gas emissions (GHGs), U.S. carbon markets appear to be headed for a reenactment of Davey Crocket and the Alamo.

These developments aside, groups, such as the Climate Action Reserve (CAR), have not raised the white flag.  Instead, CAR has pushed ahead with three new offset methodologies for production agriculture:  cropland management, nutrient (fertilizer) management, and rice cultivation (methane reduction).

These protocols, which are scheduled for adoption in 2012, will introduce a number of new carbon credit opportunities for agricultural producers that could become even more valuable if the offset approaches are included in California’s cap and trade scheme, which is also scheduled for implementation in 2012.  CAR’s current offsets have been trading at around $9 per ton of CO2eq.

Similarly, agricultural input providers, such as Sygnenta, have entered the fray.  Syngenta has developed a genetically modified corn, Enogen, featuring the alpha-amylase enzyme, which recently received USDA approval  Syngenta’s studies suggest this new variety could help a 100-million gallon ethanol plant reduce its carbon emissions by nearly 50,000 metric tons.

Despite these positive benefits, however, food processors and other agricultural interests worry that this new corn could be mixed up with other harvested corn and impact the quality of corn based food products.  Syngenta has countered that its new corn will only be licensed to growers with contracts from licensed ethanol producers and that growers would be limited to using the corn in strictly controlled areas.

This development along with those involving CAR’s new protocols points to the prospect of new crop contracts for traits and carbon offsets.  It may be not so long in coming considering the volumes of biotech crops and their lower energy footprints.  Should there be a new commodity contract that captures the market value of these new varieties?

With RFS 2 biofuel targets, there may soon come a time for a new corn contract written for specific traits and carbon offsets.  The new contract would capture both the value of the commodity and carbon offset credit, which could make aggregation easier for commodity merchandisers looking to trade both the commodity and the carbon offset.

Secondly, it would provide a clear price differential for producers who could simultaneously transact their offset credit with the commodity, an ideal match to the IP cash corn contract.  Thirdly, a trait specific contract offers a more perfect alignment for corn hedging strategies.  Finally, producers could use such contracts along with agricultural carbon indexes, such as the GIC-ACI to cross-hedge carbon and commodity prices.