Arcadia: Seed of Change

Arcadia Biosciences case Optional reading on additionality HANDOUT: 2012 article re: Arcadia submits methodology for NUE project.

IntroductionLast week we discussed the carbon market and delved into some of its complications of information asymmetry and additionality.

Gold Standard o “high quality” projects o authenticity of projects

Today: a project that might earn carbon credits through the CDM.

We’re also looking at an entrepreneurial venture with a new technology that could be a game changer, but faces serious challenges entering the market

Focus on: Rice with Nitrogen Use Efficiency (N.U.E.) technology and China.

Today’s agenda(1) Assess how much value is being created (2) Strategy to capture this value

Value N.U.E creates in ChinaConsider N.U.E rice in China: How much value would be created?

CENTER BOARDValue created by NUE rice in China

Fertilizer use (private value to farmers) Nitrous oxide (N 2O) (social value)Value of Fertilizer = Usage * % Reduction * Cost1. Baseline fertilizer usage for rice (two valid approaches)A) 29.9 m ha rice [Ex 4] * 180 kg/ha fert / yr [p. 8] =5.4 m ton fert/yrB) Total fertilizer used in China * % hectares for rice 33.2 m tons/year [Ex 4] * (29.9 m ha/141 m ha) [Ex 4]

= 33.2 m ton/yr * 21% = 7 m ton fert/yr

2. Tons fertilizer reduced from NUE50% fertilizer savings from NUE rice [assignment question]A) 5.4 m tons fert /yr * 50% 2.7 m tons/yearB) 7 m tons fert /yr * 50% 3.5 m tons/year

3. Value of fertilizer reductionFertilizer cost [Urea Ex 5] range:A) $474/ton * 2.7 m tons/year = $1.3 b /yearB) $474/ton * 3.5 m tons/year ~ $1.7 b /year

PV of perpetuity @ 10% = PMT/r = $13 b to $17 b

Value of N2O= Baseline N2O * % Reduction * Price

1. Baseline emissions from riceA) 1.94 m tons N2O /yr from rice [Ex 4] * 310 CO2e/N2O=601 t CO2eNote this implies emissions rate of 1.94 m t N2O / 5.4 m t fert= 36% N2O/fertB) 29.9 m ha rice[Ex 4]*180 kg/ha fert/yr [p 8]*27.5% N2O/fert [p 8] * 310 CO2e/N2O = 458 m t CO2e /yr

2. Reduction50% reduction from NUE rice [assignment question]

3. Value of N2O reductionETS mkt ~ $17 / ton CO2e [Ex 5]Vol mkt ~ $3.7 / ton CO2e [Ex 5]

Value of N2O= Baseline N2O * Savings Rate * PriceCER or Voluntary Market?

A) CER Mkt: = 610 m t CO2e/yr * 50% * $17/t CO2e = $5.1 b/yrPerpetuity of environmental/social value:PV of perpetuity = PMT/r: @ 10%=$51 b, @ 30%=$17 b

A) VolMkt: = 610 m t CO2e/yr * 50% * $3.7/t CO2e = $1.1 b/yrPV of perpetuity @ 10% = $11 b; @ 30% = $3.7 bNOTE: PVs are social value, CERs would only last 7 yrs initially, potentially renew up to 21 yrs.

Value capture: N.U.E rice in China: How much of this value could Arcadia capture?What are the challenges Arcadia faces in capturing this value? Let’s consider two strategies:

CENTER BOARDCONVENTIONAL STRATEGY:

Sell seed at premium price (prof from seeds)DONOR STRATEGY

Sell seed at prevailing price (prof from CERs)Pros

Profits from sales and limits exposure to CDM

Few substituteso Conventional hybridso Monsanto averse to GM in

China b/c poor IP protection

Cons/risks IP weak: Brownbagging & area

of national interest Price premium is constrained by

what farmers can afford (lack credit)

CDM credits:Additionality unlikely for Arcadia if price premium already makes it a good investment for Arcadiao But farmers might not agree

or afford price premium Technology risk Cash constraints Thus, farmers could seek

CERs if they can claim they wouldn’t otherwise purchase (thus additionality)

China reg approval (both scenarios)

GM seed approval in China GM food in China (+ exports)

Pros No IP-in-China worries Affordable to cash

constrained farmers

Cons/risks CDM credits for Arcadia

1. CDM method approval2. CDM CER project additionality

o Farmers would buy it anyway to save $ on fertilizer

o Arcadia wouldn’t do this unless it could get CDM credits

o no CDM “case law” on win-wins3. China CER approval / share (tax)

China CER commitment durable, or renegotiable? EXPROPRIATION?

Kyoto II: will CDM rulings hold? (method & additionality)

More substitutes□ Seed co’s alt techn.□ Other CDM projects□ GHG in Annex 1 countries

China reg approval (both scenarios) GM seed approval in China GM food in China (+ exports)

REMINDER: Additionality: “credits only for reduction in emissions in addition to those that would otherwise occur” (case)The case mentions that if China accepts binding reduction targets in Kyoto II that China might “restrict the export of credits from domestic projects” (p. 9). What kind of risk does this pose to Arcadia?Arcadia faces serious challenges in capturing value from NUE rice in China:1. To profit from fertilizer savings, faces IP risk like Monsanto in Brazil – and Monsanto was burned in China2. To profit from emissions, faces CDM regulatory risk (additionality) and China country risk (approve/share credits)

Future Policies / Lobbying GoalsThe wrangling over additionality means that some gains from trade are not being realized – or get swallowed by transaction costs. Are there ways that we can fix additionality?

Fixing additionality Need clear rules Baselines that will not change over time Explicit rules that make “win/ win” propositions acceptable

As the Kyoto II negotiations proceed to develop the next international climate change regime, what should Arcadia lobby for or against?

Arcadia lobbying for Kyoto IIIncrease demand for carbon credits

Further restrict constraints on Annex 1 countries Get LDCs to agree to binding caps

Reduce transaction costs of supply Clarify “additionality” definition Get UN CDM office to expedite method review process

Create penalties to bind countries who grant credits to adhere to deals they make

Wrap Arcadia

Update:1) Regulations (as we started talking about last time):

2009 Copenhagen talks did not make much progress, largely a disappointment from the perspective of promoting the carbon market.

2010 Cancun talks somewhat better – recommitment to carbon reductions, countries signing on to reductions to target temperature increases less than 2 degrees.

Also clarified some rules with regard to additionality and baselines

But post-2012 still seen as very uncertain, prices of carbon credits still falling (article posted).

2) With respect to this project, just last week Arcadia Biosciences announced submission of a methodology to UN for CDM based on NUE rice seed in China.

Article: “Arcadia Takes Next Step…”Interesting: joint partnership with Chinese Academy of Agriculture and Forestry Science to develop GHG measurement gets Chinese involved in the project in a meaningful way, reduce risk of expropriation?Not clear from the article whether they are giving the seeds away or selling them at a premium…

Summary:1. Ag is one of the most impacted sectors by GCC

↑ average temp ↓ min temp: warmer winters ↑ pest scope precipitation patterns: droughts; flooding↓ snowpack (Sierra Nevada, Himalaya)

2. Ag large source of GHGs (esp. methane and N2O) Ag is Largest source after burning fossil fuels, and 1/3 of ag GHG from fertilizer. how to capture value from ↓ GHG?

3. Massive gains from trade – so lots of nations care Ag differs in intensity of fossil fuels, fertilizer, and irrigation

So MDCs more heavily impacted by C price

For GHG , there are big opportunities beyond CO2 and energy. In South Pole, we noted that The Gold Standard eschewed HCFC investments, and in fact new international rules move to exclude credits based on HCFC reductions. But recall that HCFCs, N2O, and other GHGs are much more potent that CO2.

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Source: World Bank, State and Trends of the Carbon Market 2010

Primary CDM sellers in 2009

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Primary CDM sectors in 2009

Source: World Bank, State and Trends of the Carbon Market 2010

Landfill gas

Coal mine methane

Energy Efficiency

Share total anthropogenic GHG emissions in 2004 in terms of CO2-eq.

Source: IPCC Fourth Assessment Report (AR4): Climate Change 2007: Synthesis Report. IPCC, Geneva, Switzerland (Figure 2-1)

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The CDM project approval process is lengthening