The Texas Coastal Exchange: Trading Rules & Standards

Editor's note: This is the third of a three-part series that introduces The Texas Coastal Exchange (TCX), a trading clearinghouse involving the sale of ecological services. Click here to read part one of this series.

The SSPEED Center research team has determined that some of the more prevalent carbon trading rules and practices are not well suited to the goals of the Texas Coastal Exchange (TCX) system because they tend to significantly restrict landowner participation. Therefore, these rules and practices work against the goals and objectives of the TCX triple-bottom-line program, if not against a global goal of quick and efficient removal of carbon dioxide from the atmosphere. 

For this reason, the SSPEED Center team has determined that a separate set of trading rules and standards need to be developed that are different from the rules and standards practiced in existing exchanges. These rules and departures are explained as follows:

1. Legal Structure of the Texas Coastal Exchange

As of the date of this summary, The Texas Coastal Exchange has been incorporated as a Texas nonprofit corporation.  The function of the exchange will be to oversee the implementation of the rules and standards developed by TCX and expedite the transactions between buyers and sellers. At this point in time, the long-term relationship of TCX with Rice University has not been determined, although some type of continuing connection with Rice would be beneficial to TCX if not Rice. 

2. Property Rights

Carbon dioxide storage as soil carbon by a landowner is treated as a property rights concept under the TCX.   If it can documented that the amount of carbon dioxide has been increased in one’s soil, then one may sell that stored carbon dioxide (measured as carbon in the soil) through the TCX. 

The landowner also may undertake any other activities on the property which are not inconsistent with carbon storage, including cattle ranching, hunting, eco-tourism, water supply enhancement, flood reduction, and fish and wildlife.  The landowner can realize income from multiple ecosystem services on the same property and is encouraged to do so.   

3. Rules and Standards

The TCX will allow the sale of carbon dioxide and other ecosystem services to the extent that the existence of the service can be documented.  In the case of carbon dioxide, proof is required that the milligrams of carbon per kilogram of soil have increased.  

Buying and selling of flood reduction for riverine systems will be based on soil infiltration capacity or possibly using vegetation (e.g., native prairie) as a proxy variable.  Buying and selling of fish and wildlife production will be based upon vegetation or ecosystem type.  Further research is necessary to fully explore buying and selling of water supply enhancement capability, but it likely will be based upon vegetation or ecosystem type. 

No seller may sell carbon dioxide through the TCX unless a baseline is measured and the property is enrolled on a registry approved by TCX.  All transactions will be by commodity sales contracts with a contractual commitment from the seller that the sold commodity will remain in place for twenty or more years.   

4. Registration

 One or more existing registries will be identified by the TCX for use in qualifying projects for TCX-sanctioned transactions.  In order to register a property, a landowner must provide a legal description of the tract and must have undertaken carbon or other appropriate testing prior to registration.   The purpose of the registration is to develop a unique identification method for each transaction to prevent selling the same carbon or other services to multiple buyers. 

5. Monitoring and Measurement

Measurement is a core requirement of the Texas Coastal Exchange.  If a landowner wishes to sell carbon dioxide through the TCX, then the amount of carbon in the soil must be determined in a statistically sound manner to the 95 percent confidence level. 

In order to do this, landowners shall evaluate their terrain, soil type and vegetation types in consultation with a monitoring firm approved by the TCX.  At a minimum, Texas Coastal Exchange standards will require five, one-meter deep soil cores to be tested per soil horizon per soil type, with each soil horizon being separately tested and then composited across soil types on the property.  Subsequent monitoring replicates the initial measurement protocol in approximately the same location. 

TCX will attempt to secure either grant or loan funding for farmers and ranchers who wish to enroll but lack sufficient capital to do so, and will work with the ranching community to develop a dependable pool of testing contractors. 

6. Independent Validation and Verification

Independent validation and verification is a core component of the TCX, with the purpose of assuring that all carbon or other ecosystem services sold are real and verifiable.  Before any ecosystem services credits are executed, a qualified, independent third-party verification firm shall review the landowner’s documentation and the associated monitoring reports, and issue a statement verifying the amount of carbon claimed to have been sequestered. 

The aforementioned is a critical step that will guard against fraud, ensure the credibility of the exchange, and provide buyers with a high degree of confidence that the carbon stored is real and has been quantified correctly. 

In contrast to many other aspects of TCX, the requirement for independent validation and verification is a core component of all the major voluntary carbon exchanges.  Based on SSPEED research to date, it is expected that most major buyers of credits, as well as the major registry operators will require independent validation and verification in order to partner with the TCX.

7. Transaction Commodity Contracts

All transactions will be by commodity contract.  The terms and conditions of the model commodity contract have yet to be determined but will include the required registry information for the seller’s offering, the tons to be transacted, and the sequestration longevity time of the contract.  The standard contract will identify the type of insurance required in case of default to ensure that the purchaser receives carbon dioxide storage for the agreed amount of time.   All contracts are enforceable under standard commodity contract law. 

8. Management to Enhance Ecosystem Service Value

One of the key concepts of the Texas Coastal Exchange is that various land management approaches exist that can enhance the ecosystem service potential of a landowner’s property.   In particular, actions such as adaptive multi-paddock (AMP) grazing and natural ecosystem restoration appear, based upon the literature and anecdotal evidence, to increase the mass of carbon stored in the soil and enhance other ecological services as well. 

TCX will develop a data base of management practices that increase ecosystem service value and thereby help the landowner realize greater income.  In the early stages, the TCX hopes to offer consulting assistance to interested landowners in order to optimize carbon dioxide removal and storage.

9. Buyer’s Club

At the current time, the market for carbon is relatively calm, with larger bulk buyers being hesitant to get too far ahead of their competitors.  On the other hand, it appears from preliminary research that overall global soil and biomass sequestration is limited and substantially less, even with improved land management practices, than current, much less projected, emissions. 

Based on this assessment, it is reasonable to conclude that when the market develops, supply will be less than demand.  Assuming that access to sequestration capacity is necessary for market penetration if not operation, the ability to access carbon dioxide storage in the future will be quite important, if not essential, to hydrocarbon-centered businesses.  For this reason, TCX has created a special preferred category for potential buyers whereby they receive the right of first refusal to new offerings through the Texas Coastal Exchange as long as they offer prevailing market price. 

In order to become a member of the buyer’s club, a significant yearly membership fee will be required by the TCX.  If collective demand among the members is greater than supply, then a bidding process will be undertaken among the potential buyers to allocate the tendered tons.   

10. Compliance with Other Standards and Protocols

The TCX standards are different from other existing regulatory or voluntary carbon trading systems.  This difference derives from the goals of TCX as well as the basic concept of TCX relative to carbon.  The TCX views carbon dioxide and its removal and storage as a commodity—as a reality.

The exchange is, effectively, being developed to compensate a landowner for removing carbon dioxide from the atmosphere.  If it’s removed, one can sell it to another party who has added carbon dioxide to the atmosphere. The only requirement is that the landowner proves that more carbon dioxide is in the ground than when baseline was first measured, and that the landowner is offering the increased amount for sale. 

This approach denies sale value for storage occurring before testing, but allows tonnage to be claimed and sold with testing and registration. The TCX is not trying to force one type of land management over another. That is the election of the landowner. The landowner, however, will undoubtedly have more carbon to sell if the landowner uses certain management concepts and abandon others. 

11. Stacking

Similarly, TCX is allowing and, in fact, encouraging “stacking” of benefits.  The goal of the TCX is to increase economic, ecologic, and social resilience.  To this end, multiple ecological service commodities resulting from the same land management practice can be sold. 

In this manner, a carbon farmer could sell flood storage and water supply enhancement, while also running cattle and leasing the land for hunting.  None of these transactions involve the same commodity although they result from the same land management practice.  This is not double counting; rather, it is good economic practice that benefits environmental and social goals as well.

Conclusion

The Texas Coastal Exchange is in start-up mode. There is a need for additional work on almost every issue, even as the need to initiate enrollment, testing, and measurement is ever-pressing.  We invite comments and criticisms, and invite interested parties to join us for an interesting journey.

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Jim Blackburn is an environmental lawyer and planner, co-director of the SSPEED Center at Rice University, Professor in the Practice of Environmental Law in the Civil and Environmental Engineering Department at Rice and author of A Texan Plan for the Texas Coast, forthcoming, November 2017, Texas A&M University Press.

Dr. Henk Mooiweer has his doctorate in chemistry and is a specialist in creativity and innovation in his private company, Innovenate, and in his role as adjunct Professor at Rice University.  He is formerly with the Gamechanger Program among several other positions with Royal Dutch Shell.

Megan Parks is a Principal with AMB Parks Consulting, where her practice focuses on innovative compliance efforts, biomimicry and ecological valuation strategies.  She previously worked for over 15 years with BP Corporation, including work on the Deepwater Horizon spill.  Megan holds a B.S. in Chemical Engineering and an M.S. in Environmental Engineering. 

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Editor's note: The views expressed by contributors to the Cynthia and George Mitchell Foundation's blogging initiative, "Can Texas's approach to sustainability inform a path forward for the U.S.?," are those of the author and do not necessarily represent the views of the foundation. The foundation works as an engine of change in both policy and practice, supporting high-impact projects at the nexus of environmental protection, social equity, and economic vibrancy. Follow the foundation on Facebook and Twitter, and sign up for regular updates from the foundation. 

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