CAP&TRADE IS GOOD FOR THE FARMERS – STUDY

25X'25 Releases University of Tennessee Study Analyzing Impact Of Climate Change Legislation on U.S. Agriculture; Report Shows Net Returns Positive under Properly Constructed Cap-and-Trade Program
November 11, 2009 (25X'25)

SUMMARY
Under a cap&trade system aimed at cutting U.S. greenhouse gas emissions (GhGs), the agricultural sector will benefit from income for GhG-sequestering land management practices but will be hurt if a cap&trade system causes energy prices to go up. So here’s the basic question: Which will have the bigger impact?

In Analysis of the Implications of Climate Change and Energy Legislation to the Agricultural Sector, the University of Tennessee’s Energy Analysis Group (BEAG) reports that agriculture will benefit substantially more from a well-designed cap&trade system with offset payments for GhG-cutting land management practices, potentially by as much as $13 billion dollars per year.

There are 2 significant types of people who would be affected by decisions that impact the agricultural sector: (1) Those who eat (because what happens to farmers ends up happening to anybody who happens to need the food they produce) and (2) those who breathe (because what is done in land management alters air quality).

The key drivers behind impacts from the policies are:
(1) The demand for bioenergy crops generated by the policies;
(2) The availability for emissions credits for transitioning to bioenergy crops;
(3) The cost of emissions offsets paid to land managers for best practices;
(4) The cost of emissions and whether or not fertilizer costs are included; and
(5) The handling of crop residues and the requirement of doing so in a carbon neutral way.

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The benefits would come from offsets and market revenues and be greater than increased costs for energy and fertilizer.

The vital subtext of this report is that if Congress fails to enact an energy bill with a cap&trade system, the Obama administration EPA is expected to use the Clean Air Act and supporting Supreme Court decisions to enforce GhG reductions. The study makes clear that the agricultural sector does not want to see that happen.

The study, funded by the 25X25 alliance, compared 4 scenarios with USDA baseline business-as-usual (BAU) projections through 2030. It also includes an assessment of the benefits that would be associated with an EPA-regulated emissions reduction program instead of a cap&trade system. In that case, farm income would suffer from higher energy and fertilizer prices.

The logical conclusion is obvious: It would be practical for farmers and large rural landowners to be supporters of energy and climate legislation. Beyond that, people who eat and people who breathe might want to take notice as well.

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COMMENTARY
The fundamental premise behind rewarding managers of agricultural land, livestock and forests for best practices is that such practices help the land and forests store greenhouse gases and somewhat prevent livestock populations from making them worse.

In addition, a shift to bioenergy crops, theoretically without compromising food crops or driving deforestation, would theoretically provide new sources of liquid biofuels that could theoretically provide a significant improvement in the carbon footprint of the transportion sector. (The BEAG study assumed the Renewable Fuels Standard (RFS) that was created by the 2007 energy bill would remain in place.)

The study compares BAU and the EPA-regulated scenario to:
(1) a Limited Offsets Scenario, in which the offsets available to agriculture are methane capture, afforestation, and conservation tillage and in which crop residue removals must be carbon neutral.
(2) a Multiple Offsets Scenario, in which there are many agricultural offsets, including those for bioenergy crop production and grassland sequestration, there is no requirement for crop residue removal to be carbon neutral but it must be kept at acceptable levels for erosion.
(3) a Multiple Offsets Scenario, in which there are many offsets, no restraints on crop residue removal and the effects of pasture conversion and forage replacement on the cattle industry were included.
(4) a Multiple Offsets/RCN Scenario, in which there are many offsets and the removal of crop residues must be carbon neutral. Again, the effects of pasture conversion and forage replacement on the cattle industry were included.

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In the Multiple Offsets/RCN Scenario there are ~$209 billion more in net returns and $364 billion more than the EPA-regulated scenario.

POLYSYS, an agricultural policy simulation model, was used to project impacts on economic returns, climate benefits, feedstock prices, and land use.

The returns from a well-designed cap&trade program exceeds the increased costs on 8 of the 9 crops analyzed in the study. Corn adds $1.9 billion per year over BAU expectations. Soybeans add $600 million per year.

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It will require a moderate and reasonable cap&trade system-created allowance price of $27 per metric ton of carbon equivalent (MtCO2e) to begin the process of reforestation of cropland. Costs to the agricultural sector for such a moderate allowance price are more than made up for by benefits.

A cap&trade system is not expected to shift the use of commodity cropland. Conversion of pastureland to energy crops is expected.

Crop and beef prices would not be affected by a well-designed cap&trade system.

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The shift to the growth of biomass feedstocks will, the report finds, bring significant direct and indirect reductions in greenhouse gas emissions (GhGs).

In the case of an EPA-regulated emissions reduction regime, farm income would be less than in a BAU scenario because:
(1) energy prices would go up and there would be no compensating revenue stream,
(2) impacts on beef production are uncertain,
(3) afforestation and grassland management would be the only offsets allowed,
(4) allowance prices could go up to $160 per MtCO2e but at some inordinately high price, probably ~$80 per MtCO2e, there would finally be conversion of croplands and pastures back to forests (115 million acres) and grasslands (20 million acres).

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Conclusions:

(1) For farmers and rural landowners, it will make a big difference which policies are selected to fight global climate change so they had better be paying attention and backing the right horses in Washington, D.C.

(2) A cap&trade system (a) with a variety of offsets for agriculture, including payments for shifting to bioenergy crops that actually cut GhGs, and (b) that requires residue removal to be carbon neutral, will cut GhGs and pay off. The agricultural sector could see ~$209 billion in net returns by 2025 over BAU. The sector would see $364 billion more in net returns than under an EPA-regulated emissions-cutting program without multiple offsets.

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(3) A well-designed cap&trade system would (a) not inordinately drive allowance prices up, (b) not drive afforestation, (c) not affect most crop decisions, (d) not significantly affect crop or beef prices, and (e) drive a conversion of pastureland to bioenergy crops.

(4) A well-designed cap&trade system would optimize direct and indirect GhG reductions through (a) plant sequestration of carbon and (b) methane capture.

(5) An EPA-regulated emissions-reduction problem would likely cut net farm income below the USDA BAU and cut into the amount of cropland converted to forests and grasslands.

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Finally: It is not only the agricultural sector that stands to gain from the right energy and climate legislation and lose if Congress does not act. In the absence of good energy and climate legislation from Congress, food prices will go up and air quality will grow more unhealthful. A well-designed cap&trade policy will benefit the farmers and the rest of the nation that depends on them.

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QUOTES
- Daniel de la Torre Ugarte, study co-author, University of Tennessee: "…[A] well-constructed cap-and-trade program that allows multiple offsets for agriculture, including bioenergy crop production and manages residue removal to be carbon neutral, can generate positive net returns to agriculture and yield significant carbon benefits…"

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- Bart Ruth, policy chairman, 25'x25 alliance: "The study has found that income from offsets and from market revenues is higher than any potential increase in input cost, including energy and fertilizer, if cap-and-trade is done right…The study provides clear evidence that EPA regulation, as dictated by the Supreme Court, could subject agriculture to higher input costs…And there will be no opportunity for farmers, ranchers and forestland owners to be compensated for the greenhouse gas reduction services they provide…"
- Fred Yoder, past president, National Corn Growers Association: "Energy prices will very likely go up under any cap-and-trade scenario…But with a properly constructed system that maximizes the contributions agriculture can make to stemming climate change, farm revenues will grow as well, increasing by $13 billion per year…This study indicates higher commodity prices, and it also shows farmers will have the opportunity to get paid for growing bioenergy crops, reducing their emissions by managing fertilizers and manure, and sequestering carbon in the soil…"

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- Roger Johnson, president, National Farmers Union: "Farmers and ranchers want to be a part of the climate change solution and this study illustrates the significant role they can play…Failing to address climate change through legislation, and instead subjecting producers to EPA regulations, would be a huge mistake…"