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audio icon USDA Proposes Market-Based Conservation (mp3)


MJ: Good morning everybody. My name is Michael Jenkins and I’m delighted to welcome you all here. We’re in the Baker, McKenzie Conference Center and we have the pleasure of being with the Undersecretary of Natural Resources and the Environment, Mark Rey. He’s going to talk to us today is, some of the ideas around market based conservation that I think are going to be a part of the farm bill, or at least certainly proposed as part of the farm bill.


I might just say a couple of things to kind of contextualize this. And this comes from a perspective of I work with an organization called Forrest Trends which is a non-profit conservation organization. This idea of market-based conservation in my mind is part of what I think of as really a new chapter for conservation. An opportunity to think, to move to a place to where we’re starting to think about natural resources that we depend on in a way that can be linked directly to human livelihoods.


So terms like ecosystem services and payments and markets around these ecosystem services are all, I think, a powerful new set of ways to think about our, conserving our natural resource base. The interesting part about ecosystem service payments is the payment piece which is an ability to bring together, to bring in some private sector investment into what has been historically the role of either the public sector or the non-profit sector and preserving the public goods.


And from our perspective, this is an incredibly important piece of this new chapter because it gives us an opportunity to bring in the kinds of resources that are going to commensurate with the problems that we’re facing, such as climate change and water pollution. Appropriate that we’re here at Baker McKenzie because when we look forward, the answers, the solutions to these issues are going to be, I think, combinations of public agencies such as the ones that Mark oversees, non-profit organizations such as the one that I run.


And also, the private sector is going to play an incredibly important role in this. So I think it’s very appropriate that we’re sitting here with Baker McKenzie. We worked with them over the last number of years. They are a leader in terms of trying to shape some of these new markets around carbon and water and bio diversity. And so we’re delighted to be in their offices. Finally, I think that Mark is going to talk about is some of the roles that a public agency can play when you think about these set of new emerging markets.


And it’s critical that we establish some standards. It’s critical that we have instruments that give confidence that these markets are real markets. That the products are really delivered that we’re talking about. So that’s going to be, I think, some of the comments that Mark will make in terms of the role that the public sector agencies can play in helping develop these new emerging environmental markets.


I have known Mark for a number of years and have been in a number of different settings with him. He served as the undersecretary as of 2001. And previous to that he had a number of decades of work in the private sector in primarily the forestry and natural resources area. So it’s a very unusual combination that we have in Mark of both the political savvy to be able to navigate some very complex issues in the political setting, as well as the depth that he brings to these issues with his background in natural resources. So with that I’ll turn it over to you, Mark.


MG: Thanks, Michael. Thanks very much, Mike, and thank you all for joining us here. I want to welcome in particular a couple of people who cooperated with us as we’ve looked into market based approaches to conservation and as we organized this event today. Those include Jessica Orega from Eco-securities, Roger Allman from the Linden Trust, Michael Firestein from Cheyenne Capital in the United Kingdom who’s on the phone with us and not here, and of course Michael as well.


And we'll hear from some of those folks in a little bit. And after we hear from them then we’d be happy to entertain questions from either the media or anyone else who is either here with us today or on the phone listening in. What we wanted to talk about today is the development of market based approaches to conservation and private markets for ecosystem service. And we wanted to talk about it in the context of the upcoming farm bill that Congress is currently considering because we think the farm bill provides a forum and a mechanism to facilitate and accelerate the development of private markets for ecosystem services.


A little bit about the status of the farm bill so that you have some context for that piece of legislation. The current farm bill, which was written by Congress and signed by President Bush in 2002 expires at the end of this fiscal year, in other words at the end of September. Should Congress not reauthorize or extend it, then under its terms, farm policy would be governed by legislation first enacted in 1949, which would cause a severe disruption to the agricultural community and the agribusiness industry as we understand it today.


So it’s in nobody’s interest to fail to see new farm bill, new farm legislation enacted. And indeed, both the Chairs of the Senate and House Agriculture Committees have committed themselves to the production of a 2007 farm bill, along with the Administration. For our part, we sent our proposals to Congress on January 31. They were released at that time by my boss, Secretary of Agriculture Michael Johanns, with the President’s approval.


And we’ve been talking with the Agriculture Committee Chairs and members since that time as we have been assisting them in understanding what we proposed as well as reducing some of our proposals to specific legislative language. So that has been under say since, as have oversight hearings on the part of both the Senate and House committees, with an intent to try to produce legislation by those two committees in late Spring or early Summer.


And with the subsequent hope that a final bill could be completed before the end of September so that it could be sent to the White House for President Bush’s signature. So then both committees have been very active and have been very diligent in not only reviewing what we’ve sent forward, which was the result of our thoughts after a series of nationwide listening sessions that we conducted in the Summer and Fall of 2005.


But also doing their own due diligence in oversight, both last Fall and again this Winter and Spring. So I think from the standpoint of context, we have a real opportunity to address the issue of developing private markets for ecosystem service in the context of farm legislation that I believe Congress will pass this year and enact as the 2007 farm bill. Our interest in facilitating or accelerating the development of private markets for ecosystem services started at about the time that our review of farm policy did in 2005.


In August of 2005, Secretary Johanns established a USDA council on developing market based approaches to conservation and asked me to chair it, and asked us to begin looking at these markets in the context of what the government could do to help accelerate their development, and as part of what we might propose ultimately to Congress in the context of the 2007 farm bill. So our efforts started in August of 2005.


Subsequent to that time we have done a number of things in addition to putting together the proposals for the farm bill that I'll describe shortly. But in addition to that we’ve signed a memorandum of understanding last Fall with the Environmental Protection Agency to work on water quality trading with some pilot watersheds that are being selected for that purpose now. And tomorrow in Washington, D.C. the Natural Resources Conservation Service, one of the agencies that I oversee in the Fish and Wildlife Service, will sign a second memorandum on endangered species habitat trading.


So even within the context of what can be done under existing law, we’ve moved forward to try to identify and do things that would accelerate the development of private markets. What we’ve also done in the ensuing months since the Secretary chartered us in August of 2005 is to take a close look at how these markets are developing and the fashion in which they exist today, both domestically and globally.


And as a consequence of that review we’ve kind of come to five conclusions that (unint.) the proposals that we sent to Congress in January and are continuing to work with Congress on today. The first of those conclusions is that these markets exist in varying scales, both ranging from local markets that are as specific as an individual watershed with people trading credits to achieve higher levels of water quality at one end of the spectrum to fully functioning global markets like the EU carbon exchange at the other end of the spectrum.


So they exist locally, regionally, nationally and internationally today for a variety of ecosystem services. (unint.) conclusion that we arrived at was that they exist today with varying, at varying levels of development and sophistication ranging from, again, local one off transactions that are just the beginning soundings of what might develop as a functioning market to, once again, to fully functioning transparent markets where credits are being traded and investments are being made.


The third conclusion that we arrived at is these markets are developing largely, although not exclusively as a response to regulation as an alternative means to achieve regulatory objectives. Not as an alternative to regulation per se, but as an alternative means to achieve a specific regulatory objective through mechanisms that may be more efficient or more cost effective than more classical regulatory techniques or the installation of required technology that a regulatory program requires.


I say largely, although not exclusively, because in many cases markets are developing where there is no regulatory inducement to do so. People are buying carbon credits in the United States today even though there is no regulatory program that’s driving the sale or the purchase of those credits. But rather people are doing it simply because they want to make a statement about how they want to live their lifestyles, what they want their ecological footprint to be, and for a variety of other social or public purposes.


So there are markets that are developing where there is no regulation, but where there is regulation the markets are developing probably more quickly. The fourth conclusion that we reached is that there is a significant amount of private sector capital poised to enter some of these markets at the point that they become fully functioning and large enough and transparent enough to justify that investment.


So that in addition to the simple purchase and sale of these credits to achieve an environmental objective and the transactions between a buyer and a seller, they’re also people who are looking at these markets as potentially investment opportunities that may justify the allocation of investment capital which in turn would, of course, allow the credits to be paid for and created much more quickly.


The last conclusion that we came to is that there are some things that government can do to facilitate the development of these markets and probably a number of things that the government likely shouldn’t do because it might serve to simply get in the way of what is already developing quite well without government involvement. To that end, what we’ve tried to do is to identify the former category of activities as among those that we propose to Congress as part of our January farm bill proposal, and to the extent possible to stay away from the latter category of activities so that we didn’t actually impede the development of these markets.


In the farm bill proposal that we sent forward at the end of January therefore, is a specific proposal for the creation of an interdepartmental or an interagency ecosystem standard setting. Because one of the first conclusions that we arrived at was that a fundamental first step in the development of these markets is to have broadly agreed upon standards that both buyers and sellers and to the extent that we’re meeting regulatory objectives, regulators all agree will govern the development of a credit for an ecosystem service.


So in simple terms, you have to know what the carbon sequestration value of a particular conservation practice is, and everybody more or less has to agree on that value before that value can be bought and sold as a credit in any kind of a functioning market.


So the first step, the most important step we think which we’ve proposed to Congress as part of the Administration’s 2007 farm bill proposal is the creation of an interdepartmental ecosystem service setting board so that we can expand on work that has already been pioneered to some extent by the Department of Agriculture and the Department of Energy in the case of greenhouse gas credits, by the Department of Agriculture and the Environmental Protection Agency in the form of some water quality credits.


And soon we hope by the Department of Agriculture and the Department of the Interior in the form of endangered species habitat credits.


I should also note that the Department and the Army Corps of Engineers have worked cooperatively in the development of wetland mitigation banking proposal that’s also up and running. So what we’re going to try to do is pull those, ask Congress to give us the authority to pull those all together to create a new entity that will be representative of several departments of government that are involved in this to standardize what these credits should look like and therefore help accelerate the development of these markets for that purpose.


There is a couple page description of what we propose in the materials that we sent to Congress on January 31 and in the materials that we distributed to you here today. The materials that we sent to Congress on the 31 st is available on USDA’s website, so you can pull that down. And as I said earlier, we’re busy now working with the Agriculture committees in both the Senate and the House to convert these concepts were presented in fairly detailed form into express statutory language that could then be thereafter considered and hopefully enacted by Congress and later signed by the President. So that’s what we’ve looked at, what we’ve done, what we propose.


And now I think that we’re at a point where we can welcome our hose, or maybe more specifically allow him to welcome us. Taking this a little bit out of order, but for those of you on the phone, the weather here is proving to be somewhat of a challenge and we’re not starting with the sunniest day in New York and therefore the most easy travel. But with that I'll give the microphone to Skip Rankin.


SR: Well thank you Mr. Undersecretary, and my apologies. I was at another meeting across town, and getting across Midtown Manhattan today with the weather, as you said, is a bit of a challenge. But it’s our pleasure to have you here today. We welcome you and we'll hope you come back and visit us many times in the future. I’d just like to say a quick world of welcome to those of you here in attendance and those on the phone.


We’re in the conference room at Baker McKenzie here in New York. I’m a partner with Baker McKenzie and have been involved myself over the years with alternative and renewable energy. And it’s an area of great interest to Baker around the world, both with respect to our offices here in the United States, also Asia and Europe. So we’re most pleased to be a host today for these important announcements and to see the developments in both the statutory and regulatory fields.


And we’re here, frankly, to help you get the word out. And I'll turn it over for questions and answers at this point, correct?

MS: Actually, a couple of more speakers Michael’s going to introduce.

MS: Thank you

MS: Okay. We have a couple of people what would like to say a few things. Mitch, are you still on the phone? Do we have you there?

MS: Can you hear me?

MS: Yes. Let me introduce you, Mitch.

MS: (unint.) J.D. Capital Management Limited. For those of you who aren’t familiar with it, J.D. Capital Management is one of the (unint.) greenhouse gas space (unint.) development, standardized commodities (unint.). I couldn’t agree more with the Undersecretary on, stress enough the importance to a score of capital markets (unint.) that create solutions to global warming changes (unint.).


I think the conversation gets to where what we want to create is quantification of permanent bustling transparently created in development standard that create the universally and internationally functionable product (unint.) important to create the accepted commodities (unint.) striving to (unint.) everybody’s on the same page trying to bring forward. It adds a great deal of credibility to any kind of programs out there (unint.) water picture to get the higher international (unint.) the first Kyoto based, protocol based mechanism that created a system for the trading of emission credit.


There’s some problems with that structure and hopefully the structure that comes forward will return the market based mechanism back and build on the next system to come out (unint.) are created within this market mechanism and I'll be happy to…


MS: Thanks a lot Mitch. Chaney Capital has been very important in the early years of certainly that carbon markets and Mitch himself has played a central role in helping some of these markets evolve, particularly the voluntary carbon market that’s out there right now.


MS: I think, yeah, I think to get back to that, I don’t want to take up too much of everyone’s (unint.) regulatory program. The most important thing to get out there is climate change education. I think there’s a big gap in terms of people not really knowing exactly how to quantify what’s going on (unint.) forefront here. The two important things are government regulatory practices are very, very important. But the two markets are (unint.) started our fund in August, 2005 (unint.) actual infrastructure so that we can make a substantial change.


A wild corporation and a lot of businesses are getting (unint.) the voluntary sector and there’s such a demand out there that’s going to be, make the regulatory market look a lot smaller. You have to be complementary with each other…


MS: All right. Thanks, Mitch.

MS: Sure.

MS: I’m going to then turn it over to Jessica, Jessica Raska, who works with Eco-securities, another critical institution I think and one that we worked with over the years and really like what they bring to the table. And you ready to use the mic here for a bit?


JR: I’m ready, and also (unint.). I don’t know if everyone is familiar with the (unint.) a bit of background where one of the leading companies involved in the CDM carbon market (unint.) market. And we’d like to start by welcoming the USDA (unint.) they’re very encouraging (unint.) in the offset market, so we definitely believe in market based (unint.) to promote the very credible reductions (unint.) while also meeting (unint.).


Offsets provide an opportunity in this (unint.) as well as farm operators to benefit from Eco-systems (unint.) the CBM, we believe that the agricultural sector (unint.) farmers benefit from cheap (unint.) electricity generated and just have electricity entirely renewable (unint.) also the introduction of this technology (unint.) offsets are extremely unverifiable. And then we also (unint.) our focus has been on (unint.).


MS: Thank you Jessica, and that last part I think is really important that while we have chatted a little bit about carbon, because carbon obviously is the big beast these days. There are lots of interesting innovations around marketed, market-like instruments that are going to, I think, bring additional resources and solutions to some of the other problems such as water nutrient trading and others.


There are a number of people that were not able to join us on the call that did want to write in their support of the initiatives through the USDA, including Tom Tuckman who’s with the U.S. Force Capital Group, and Dixon Harvey who is the co-founder and partner of the Environmental Bank and Exchange Group. So they want to just make sure that they were mentioned as certainly supporting this initiative. With that, why don’t we go ahead and open it up to questions. Anybody that’s on the phone or anybody that’s in the room that would like to ask any questions of Undersecretary.


MS: … answered all your questions. It’s been a successful section so far. I don’t think so. Let me repeat the question though for the folks on the phone. The question goes to another part of our farm bill proposal, and that is the Administration’s support for the production of ethanol from mixed cellulosic feed stocks. In fact, we believe the technology to make ethanol for mixed cellulosic feed stocks is on the verge of commercialization.


Plants are being built today at commercial scale to make ethanol from mixed cellulosic sources. Just as the 2002 farm bill and preceding legislation provided incentives and loans to commercialize corn based ethanol, with a significant increase to our renewal energy supply, so do we think the 2007 farm bill can help make that same leap for the production of ethanol from mixed forms of cellulose. The importance is the development of technology that allows the production of ethanol from mixed feed stocks.


And the reason that that’s important is because the ability to utilize mixed feed stocks makes the production of ethanol more economic because you can utilize a wider variety of materials as raw material, thereby decrease the transportation costs of bringing that material to the plant. And you can use materials that would otherwise be waste to make a valuable product out of. So the way we see it, as this technology goes commercial over the next several years, we'll be seeing ethanol plants in places like the Sierra Nevadas, at the foot of the mountain, in the central valley.


It’ll be using orchard trimmings from the walnut and olive orchards from the central valley. It will be using rice chaff from the rice fields of the valley. It will be using forest things from the higher elevation national forests which need to be thinned to reduce wild fire risk, and which don’t have any, the material has no commercial value right now. So we’ll not only be putting to good use material which is presently wasted, but we'll be reducing the cost of achieving some other environmental benefits that we heretofore had to spend more to do.


So our proposal suggests a $1.7 billion loan guarantee program for the development of ethanol production from mixed cellulosic feed stocks. We think that that’s a reasonable bet on the commercialization of that technology and we hope that six years from now we can look back at the 2007 farm bill and see the kind of progress with ethanol from mixed cellulosic sources then that we’re seeing with corn based ethanol today. Other questions?


I didn’t mean to say that regulation is needed, but that instead these markets seem to develop faster when they provide an alternative to achieve a goal that’s otherwise required by a regulatory program. And we’re seeing the carbon market in the U.S. develop relatively quickly as a voluntary market. And that seems to be doing quite well. But in other areas, the markets are responding to the desire to achieve an objective that a regulatory program is designed to achieve but using a different mechanism.


MS: Yeah, I might just add a quick comment to that which is that there are a number of markets that you might be referring to like ecolabelling markets. So if you were to buy certified timber or certified coffee that are not regulated markets, but I think what the Undersecretary has been discussing today is the need for, even in those voluntary market spaces, to have the instruments that give confidence to the market. So there’s were certification comes in. That’s where standards come in. All of these things are going to vital to even a voluntary market having any kind of scale at all.


MS: Probably the largest voluntary market that USDA is involved with is the organic market. And indeed that market has evolved much more quickly as a consequence of the farm bill requirements that directed us to establish standards for organic products. That was a couple of farm bills ago and it was expanded in the 2002 farm bill.


FS: (unint.) I have a question.

MS: Okay.


FS: Can you (unint.) what the ecosystem market willing (unint.) looking at carbon (unint.) and then also, you know, what kind of percentages and all are you looking for. Can you just spell out the (unint.) initiative of this reform?


MS: Sure. And again, for those of you who might not have heard the question is, what kinds of services, what kinds of ecosystem services would these markets involve, and what sorts of incentives would be provided to produce them. The answer to the first question is evolving over time. There is, there are viable markets now for (unint.) and that includes not only carbon, but other greenhouse gases. And there was a functioning market for a while for SO2 emission credits back when EPA was implementing the 1987 Clean Air Act. So we’ve seen air quality credits being traded.


Water quality credits are also being traded today in various parts of the country. Here in New York City for instance, one of the biggest trades that we’ve done in the water quality area was developed with the Natural Resources Conservation Service, the City of New York, and the Dairymen and other farmers that operate in the New York City watershed.


And what the City of New York did was to underwrite the cost of conservation practices to reduce suspended solids and BOD into the New York City watershed so that the City could meet drinking water standards through that mechanism as opposed to a substantially more expensive alternative, which was the construction of new filtration capacity. So that was a great success story here. So we currently see water quality credits being traded.


The Corps of Engineers which runs a nationwide regulatory program regulating the conversion of wetlands, runs a successful wetlands mitigation bank so that should a developer need to convert a wetland, he or she or the developing entity has the opportunity to purchase wetlands that are being created by other land owners. And as we get underway, after we sign our memorandum of understanding with the Fish and Wildlife Service tomorrow, we hope that at some point in the future we'll be trading endangered species habitat credits.


As Michael indicated though, the threshold, or the fundamental requirement for those kinds of trades to take place and for a market to occur, is a common understanding of broadly accepted value for what certain land management activities produce by way of sequestered greenhouse gases or improved water quality or improved habitat. The incentive that we’re providing for the landowners who chose to produce that and to introduce those services into the marketplace is the financial incentive.


So for instance if you are a dairy farmer in the New York City watershed, what you got for helping the City of New York improve water quality was you got a financial incentive to install the conservation practices that resulted in that water quality improvement. And that in turn was added to your bottom line as a farmer, as a dairyman, in what you took in that year. That kind of, in a fairly simple way, answer the question?


FS: What I’m really looking to find out if the initiative that you are proposing or planning to propose, what exactly, you know, are you going to (unint.) that Congress approved the creation of standardized (unint.), procedures. That’s what I’m looking at.


MS: No. I don’t think that we would ask Congress to approve the standards because that’s in some cases a very time consuming, empirical process.


FS: Right.


MS: That takes a long time. What we’re asking Congress to authorize and to fund is the creation of a standard setting board so that the Departments who are interested and have expertise in the development of such standards have both the authorization and the funding to do so. And then as that standard setting board gets its work under way, it will expand on work that’s already been done in a somewhat more ad hoc way by the different agencies of government that have been working on that, both the federal government and now as some states are moving into this area, by state governments as well.


Over time, what you would hope would evolve is that if a regulatory agency like either the EPA or state water quality or air quality agency is looking at the progress they’ve made with the implementation of a regulatory statute and realize that it’s either slowed or stopped, that they might come to the standard setting board and say I think we’ve got a possibility here for the development of some market based solutions through achieving my regulatory needs.


How about working with us to set the standards that we could us if they aren’t already in existence to take that next step.


FS: (unint.) that as an example. Like, you know, a body that’s setting standards.


MS: Yes.

FS: Okay.

MS: It’s setting them and then coordinating their utilization.

FS: Thank you very much.

MS: Unless there are any more urgent questions, I think we would, are there any other questions? Yes.

MS: Secretary, you had mentioned that perhaps with (unint.) of new feed stock, I’d almost want to encourage you that perhaps when we take a look at (unint.) you flew in here you probably saw our Hudson River here and the vast ability for us to do bulk distribution. I’d like to encourage that perhaps maybe even if there isn’t already a memorandum of understanding perhaps, rail and water board distribution (unint.) not fueling more trucks.


That they would continue to take trucks off the road and (unint.) we once had thousands going up and down the Hudson (unint.) we could have is barges that would come down with feed stock.


MS: I think that’s a good point. You know, when you talk about the production of renewable energy, ethanol or other forms of biomass, what you have to be careful about is not only the economics of it but also the energy balance equation associated with it. If you don’t benefit society as a whole by burning more diesel, then you generate in terms of kilowatts if you’re hauling materials great distances and at great expense to produce renewable energy.


So the transportation link is a direct part of the equation. In looking at bulk transportation that’s not highway based is going to be a part of that.


MS: Well that’s, I think maybe a good point to close the questions. I'll turn it back to you Skip.


MS: Thank you, and thank you, Mr. Undersecretary, for today’s presentation and all of those who were in attendance today and for your questions and comments. And I look forward to continued presentations in the future.



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