By Daniel Ciolkosz
These days, there seems to be a lot of talk in the ag community about "credits". Whether it's electricity, heat, carbon, nitrogen, or whatever, the idea of some sort of credit seems to be popping up almost on a daily basis. With this in mind, it seems that it might be good to take some time to review what is going on and how farmers can take advantage of the situation.
Let's start with the most relevant and obvious question, namely "what is a credit, anyway?".
While the word "credit" can be used for a lot of things, in the context of this article, a credit can be thought of as a coupon that represents some sort of hard to define, intangible benefit. This coupon can be sold to others, or kept by its owner. Some examples of credits include:
- Renewable Energy Credits - representing the "renewableness" of the energy that is created (there are a wide array of types of renewable energy credits).
- Nutrient Credits - representing the benefits that occur when fewer nutrients are released into the ecosystem.
- Carbon Credits - representing the benefits that occur when carbon dioxide is removed from the atmosphere.
- Pollutant Credits - representing the benefits that occur when pollution emissions are reduced.
From the list above, you can see that most credits are related to some sort of ecosystem benefit that, under normal business practices, can't easily be included in a business's income and expense statement. In fact, the whole point of creating credits is to be able to monetize things that are important in the grand scheme of things, but don't traditionally show up on the ledger.
Since the credit represents an intangible benefit, its existence and saleability must be verified somehow. Generally, it is the buyer of the credit who gets to decide what counts as a valid confirmation of the credit's existence. Alternately, if the sale of credits is mandated by the government, then the government sets the rules for how to count and verify the existence and ownership of credits. Those rules have to be pretty carefully structured so that it is not easy for unscrupulous people to "game the system" to their advantage.
Once the credit is created and properly registered with whatever authority maintains the official list of credits, it can be bought and sold just like any other commodity. Some companies buy credits so that they can advertise to potential customers that they support that particular intangible value represented by the credit (you've probably seen ads that do this very thing). Occasionally, companies or individuals buy credits simply as an expression of their philosophy or values. For example, many individuals in Pennsylvania choose to purchase electricity from a "100% renewable" supplier because believe this to be a worthwhile thing to do. Those renewable electricity suppliers are most likely purchasing renewable energy credits that correspond to the amount of power they sell to end users. While some people and organizations voluntarily decide to buy credits, most credits are bought because their purchase is mandated by the government. The most prominent example of this is the "RIN" - a federally mandated credit that corresponds to renewable transportation fuel. One RIN corresponds to the "renewableness" in one gallon of ethanol, or about 2/3 of a gallon of biodiesel. Thus, the generation and sale of RINs is used to track the amount of renewable transportation fuel used in the United States.
Why are credits such a popular topic these days? This is a good question. First off, credits represent a way to monetize ecosystem services. In fact, they arguably are the most successful attempt to adapt our economy to the need to maintain a healthy ecosystem. Second, they are a means for encouraging positive changes without resorting to costly and unpopular regulations and enforcement. This is especially important for free market economies such as that in the United States. Third, the "free and open market" aspect of credits provides opportunities for "wheeler dealer" types to buy low, sell high, and generally earn a living simply by being clever. As a result, people who love to sell things all of a sudden have something new to promote and discuss.
Farmers, just like all other business people, can purchase credits on the open market. However, most attention thus far has been on the idea of farms generating credits and selling them as a way of enhancing their income. This process can be broken down into three main steps:
- Carrying out the activity that generates the credit.
- Obtaining appropriate verification of the credit's existence and saleability.
- Selling the credit.
In upcoming newsletter articles, we will be discussing some common types of credits that Pennsylvania farmers may have an opportunity to create, and discuss how to verify and sell that credit.
Source : psu.edu