Projections on increased costs from cap-and-trade to agriculture vary widely. Analysis by Iowa State University economist Bruce Babcock indicates “relatively small” production costs of roughly $4.52 per acre for corn and soy farmers in Iowa, on the order of 1-2%. To put this potential cost increase into perspective, the variable cost of producing corn and soybeans in Iowa in 2009 is somewhere around $300 per acre. Babcock also cites that the amount of soil carbon that can be increased from adoption of no-till farming is typically on the order of one ton of CO2 per hectare, or about 0.4 tons per acre annually. At a $20-per-ton carbon price, this amounts to $8.00 per acre.
USDA analysis of ACES also indicates only marginal production cost increases. In fact, USDA found the near-term impact of ACES on net farm income is less than a 1% decrease. While USDA predicts the cost of fertilizer and production will increase over the medium and longer term, these increases are still predicted to be less than 10%.
Depending on the carbon pricing scheme, farmers could increase their net profits under a cap and trade system (after taking costs into account). Recent USDA 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.”
KEY OFFSET TERMS
To have value in the market, offsets represent an actual reduction in greenhouse gas emissions. Offsets meet some basic guidelines to ensure quality. Pending federal cap-and-trade climate legislation would begin the creation of universal standards. However, generally, offsets that are Permanent, Additional, Verifiable, and Real emissions reductions will have value:
1. Permanence. The most desirable carbon sequestration projects are those where the emissions reductions are likely to remain intact indefinitely. However, some types of projects may be reversible; these projects may enter into a contract lease, potentially as short as a handful of years. A project of this variety could qualify for offsets, particularly if the purchaser agrees to make up the lost emission reductions through other means after the lease expires.
2. Additionality. An offset project needs to be an activity that would not have taken place normally, therefore keeping more carbon dioxide from reaching the atmosphere than would have otherwise happened. That is, the project needs to be a net reduction beyond the baseline for operations or behavior.
3. Leakage. When a carbon offset project in one location results in a net increase of emission elsewhere, this is referred to as leakage. For example, if keeping part of a field fallow to sequester carbon at a site leads to land clearing elsewhere, the emissions is said to have “leaked”. Quality offsets must account for and minimize leakage.
4. Verification. Reductions must be measured and monitored for accuracy. Moreover, periodic third party measuring and monitoring is important to ensure honesty and transparency.
5. Double Counting. When carbon reductions are applied to multiple reduction targets or counted twice within the same reduction target. This can happen across supply chains and if a project is included in two different markets.
6. Stackability. The potential to earn additional payments for multiple types of ecosystem benefits. That is, stackability could mean earning carbon payments in addition to other payments such as water quality permit payments, CRP incentives, etc.
(i) US Environmental Protection Agency, 2005, Greenhouse Gas Mitigation Potential in U.S. Forestry and Agriculture, EPA 430-R-05-006.
(iii) Calculations based on 2009 EPA analysis of domestic offsets usage under the domestic and international offset market scenarios. Data from: U.S EPA. 2009. EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress. Retrieved online from: http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf
(iv) Values in real 2005 dollars. Office of the Chief Economist, Economic Research Service, USDA. 22 July 2009. A Preliminary Analysis of the Effects of HR2454 on US Agriculture.
(v) Office of the Chief Economist, Economic Research Service, USDA. 22 July 2009. A Preliminary Analysis of the Effects of HR2454 on US Agriculture.
(vi) U.S. EPA. 2009. EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress. Retrieved online from: http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf
(vii) Congressional Research Service. 6 Mar 2007. Climate Change: The Role of the U.S. Agriculture Sector.
(ix) Babcock, Bruce. Center for Agricultural and Rural Development, Iowa State University. 13 July 2009. “Economist: Climate bill’s farm impact ‘relatively small’.” Retrieved online from: http://blogs.desmoinesregister.com/dmr/index.php/2009/07/13/economist-climate-bills-farm-impact-relatively-small/.
(x) Babcock, Bruce. Center for Agricultural and Rural Development, Iowa State University. 2009. Costs and Benefits to Agriculture from Climate Change Policy. Iowa Ag Review. Summer, Vol. 15, No. 3. Retrieved online from: http://www.card.iastate.edu/iowa_ag_review/summer_09/article1.aspx.
(xii) Office of the Chief Economist, Economic Research Service, USDA. 22 July 2009. A Preliminary Analysis of the Effects of HR2454 on US Agriculture.
(xiv)Office of the Chief Economist, Economic Research Service, USDA. 22 July 2009. A Preliminary Analysis of the Effects of HR2454 on US Agriculture.