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.

MARK REY

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.

# 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?

JESSICA RASKA

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 credits1.

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.

END OF TAPE