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From Kansas State University's:

Consortium for Agricultural Soils Mitigation of Greenhouse Gases (CASMGS)



Charles W. Rice, K-State Department of Agronomy, National CASMGS Director

(785) 532-7217 cwrice@ksu.edu

Scott Staggenborg, K-State Department of Agronomy (785) 532-7214 sstaggen@ksu.edu

Steve Watson, CASMGS Communications (785) 532-7105 swatson@ksu.edu





Economic Analysis of Cap-and-Trade Legislation’s

Impact on Agriculture


There is much discussion about the economic impact on agriculture of the American Clean Energy and Security Act (ACES). This Act was passed by the U.S. House of Representatives in 2009. The ACES establishes an economy wide cap-and-trade program. The cap gradually reduces covered greenhouse gas emissions to 17 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050. Under ACES, capped entities could purchase offsets to meet compliance obligations. Domestic and international offsets would be allowed up to a total of 2 billion metric tons of greenhouse gas emissions annually. Agriculture and forestry can serve as offset providers, and the USDA would oversee the offset program for these industries. Currently, the bill allows for emissions to be offset by:


* Soil carbon sequestration

* Animal waste methane capture

* Nitrous oxide reductions from fertilizer application

* Afforestation carbon sequestration

* Forest management carbon sequestration


Some of the important questions for agricultural producers are:

1. How much will carbon credits be worth?

2. How much could production costs increase through higher energy costs?

3. What about those in the agriculture and forest industries who are unable to generate carbon credits?


One of the factors to consider when evaluating the potential costs to agriculture of the cap-and-trade legislation is the potential cost in the absence of legislation. If no federal legislation is passed to control greenhouse gases, the EPA now has the authority to regulate CO2.


The Supreme Court ruled in 2007 that the EPA has the authority to regulate carbon dioxide emissions but that the agency must first determine whether carbon dioxide presents a threat to the public. This finding would give the federal agency the authority to regulate carbon dioxide from vehicles and potentially from stationary facilities around the US. The EPA may soon issue such an “endangerment finding” – a move that would pave the way for federal regulations on greenhouse gas emissions. The EPA has said it would cede that authority if Congress passes a strong climate bill.


The following is a brief summary of the currently available economic analyses of ACES.


USDA Analysis



ACES will likely have small but significant effects on crop and livestock producers. Over the short run, impacts are largely negligible due to the “energy- intensive, trade exposed entities” (EITE) provisions of the bill which would shield producers from the effects of higher natural gas prices on fertilizer prices. After 2025, however, fertilizer prices would likely increase. While energy-intensive crops will be most affected, the legislation also provides significant opportunities to offset increased costs through carbon sequestration activities. Greater demand for renewable electricity will put upward pressure on the demand for biomass and provide an added source of farm income.


The increases in energy prices cause the variable cost of production to increase for all crops. The extent of the price increases above the baseline levels ranges from an average of 0.3 percent for upland cotton to 0.9 percent for sorghum. Most of the impacts are felt through increased fuel costs. Thus, those crops where fuel costs are proportionately higher showed larger impacts (e.g., rice, sorghum.) Total farm production expenses could rise by 0.3 percent, in the near term.


ACES would also provide opportunities for farmers and ranchers to receive payments for carbon offsets. EPA’s analysis indicates that in 2020 agricultural lands would supply 70 million tons of CO2e offsets through changes in tillage practices, reductions in methane and nitrous oxide emissions, and tree planting (afforestation). By 2050, agricultural lands could supply 465 million tons of CO2e reductions and existing forests supply an additional 178 million tons of CO2e reductions. This could generate gross domestic agricultural and forestry offset revenues of $2 billion per year in real 2005 dollars in the near term, rising to about $28 billion per year in real 2005 dollars in the long term. USDA’s analysis strongly suggests that revenue from agricultural offsets (afforestation, soil carbon, methane reduction, nitrous oxide reductions) rise faster than costs to agriculture from cap and trade legislation. It appears that in the medium to long term, net revenue from offsets will likely overtake net costs from HR 2454, perhaps substantially.



U.S. Environmental Protection Agency Analysis



Carbon credits will initially have a value of $15 per ton of CO2 equivalent, and this value will rise slightly each year after the program takes effect. There will be a 50% increase in the percent of cropland using conservation-tillage and no-till by 2020 in response to a $15/ton CO2 incentive payment. Overall land area in crops will decline due to an increase in afforestation. Reductions in fertilizer use will result in declines in yields. If fertilizer application can be improved without yield penalties, the potential for emissions reductions will be higher.


Prices for petroleum, electricity, and natural gas could rise above baseline levels by 4.0 percent, 12.7 percent, and 8.5 percent, respectively, by 2020. As the limits on greenhouse gas emissions become more constraining over time, the impact on energy prices becomes more significant. By 2035, prices for petroleum, electricity, and natural gas could rise above baseline levels by 7.2 percent, 14.3 percent, and 16.9 percent, respectively. By 2050, petroleum prices could be almost 15 percent above baseline prices, while natural gas and electricity prices could exceed baseline levels by over 30 percent.



U.S. Energy Information Administration Analysis



There are many uncertainties to take into account when trying to project future energy costs under the ACES Act. Across all main analysis cases (see the web site above for all the assumptions involved), allowance prices range from $20 to $93 per metric ton in 2020 and from $41 to $191 per metric ton in 2030. The lower prices in the range occur in cases where technological options such as Carbon Capture and Storage and adoption of new nuclear power plants can be deployed on a large scale before 2030 at relatively low costs, and/or the use of international offsets helps to hold down compliance costs. Higher allowance prices occur if international offsets are unavailable, among other possibilities.


ACES increases energy prices, but effects on electricity and natural gas bills of consumers are substantially mitigated through 2025 by the allocation of free allowances to regulated electricity and natural gas distribution companies. In most future scenarios, electricity prices range from 9.5 to 9.6 cents per kilowatt-hour in 2020, only 3 to 4 percent above the Reference Case level.  Average impacts on electricity prices in 2030 are projected to be substantially greater, reflecting both higher allowance prices and the phase-out of the free allocation of allowances to distributors between 2025 and 2030. By 2030, electricity prices in the ACES Basic Case are 12.0 cents per kilowatt-hour, 19 percent above the Reference Case level.




University of Missouri Analysis of Costs: Scott Brown and Pat Westhoff, FAPRI



This analysis uses increases in energy costs as estimated by CRA International (http://www.nationalbcc.org/images/stories/documents/CRA_Waxman-Markey_%205-20-09_v8.pdf). Using the 11, 34 and 45 percent increases found by CRA International in motor fuel, natural gas and electricity prices, respectively, by 2050 as a result of H.R. 2454, Missouri crop operating costs are estimated to increase by 8.1 percent for dryland corn, 8.8 percent for irrigated corn, 4.4 percent for soybeans, and 10.4 percent for wheat. The authors stress that this report does not account for the impact of crop prices by the effects of H.R. 2454 on biofuel production. This analysis also does not consider any gains that Missouri crop producers could receive by selling carbon credits. The authors state that all of these issues remain important to include in any overall analysis of H.R. 2454.



Iowa State University Analysis of Costs: Bruce Babcock



If the United States adopts a cap-and-trade policy to combat climate change, the negative impacts on agriculture will likely be relatively small, particularly if agricultural emissions remain uncapped, according to this analysis. Once companies here and abroad have a profit incentive to find low-cost ways to reduce greenhouse gas emissions, it is doubtful that carbon dioxide prices will rise high enough to dramatically increase agricultural production costs. Adding up the extra costs from diesel, fertilizer, and propane at a price of $20 per ton of CO2 results in a cost increase of $4.52 per acre for Iowa's corn and soybean farmers, assuming that farmers make no adjustments to their operations. To put that cost increase into perspective, the variable cost of producing corn and soybeans in Iowa in 2009 is somewhere around $300 per acre. Thus even a $10.00 increase in the cost of production represents a 3.3 percent increase.




-- Steve Watson, CASMGS Communications













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