Secretary of Agriculture Tom Vilsack delivered this conclusion on the same day in his testimony before the Senate Agricultural Committee:
"In the short term, the economic benefits to agriculture from cap and trade legislation will likely outweigh the costs. In the long term, the economic benefits from offsets markets easily trump increased input costs from cap and trade legislation."
Using EPA estimates of energy prices under ACES to assess the short and long-term impacts of the bill on energy costs to U.S. farmers, USDA found that farmers will at minimum break even in the short-term and stand to gain substantially from ACES in the medium- to long-term, once new revenues from the sale of offsets are included. In the short-term, EPA estimates the sale of agricultural offsets could generate $1-$2 billion annually in new revenues for farmers, (net of the costs associated with implementing offset projects), rising to about $20 billion per year in 2050 (in 2005 dollars). Adjusting for the fact that EPA includes revenue from forest management offsets while USDA does not (forest management offsets comprise approximately half of the total domestic offsets potential in the near-term and approximately one quarter in the long-term), net returns to farmers could total roughly $0.5-$1 billion per year in the near-term and roughly $15 billion per year by 2050. By comparison, USDA's preliminary analysis found that increased energy costs will reduce farm sector income by only $0.7 billion in the short-term and roughly 4.9 billion in the long-term (in 2005 dollars).
Importantly, as USDA indicates in its preliminary report, these cost estimates represent an upper bound because they assume no change in production practices — i.e. they do not account for the ability of farmers to successfully adapt to changes in market conditions — for example, through increased on-farm energy efficiency or a shift towards more renewable energy sources. (ACES includes strong standards and incentives to improve energy efficiency and increase renewable energy, which will help farmers reduce their dependence on foreign oil and other fossil fuels. The House-passed bill calls for 20 percent of electricity to come from renewable sources and efficiency improvements by 2020 and allocated $90 billion in incentives to energy efficiency and renewable energy technologies, including federal tax credits for farmer for energy efficiency upgrades). As a result, USDA's analysis of net benefits to farmers from clean energy and climate legislation are likely conservative, something that Secretary Vilsack appropriately highlighted:
"...we believe these figures are conservative because we aren't able to model the types of technological change that are very likely to help farmers produce more crops and livestock with fewer inputs. Second, the analysis doesn't take into account the higher commodity prices that farmers will very likely receive as a result of enhanced renewable energy markets and retirement of environmentally sensitive lands domestically and abroad. Of course, any economic analysis such as ours has limitations. But, again, we believe our analysis is conservative — it's quite possible farmers will actually do better."
Nevertheless, USDA's analysis has come under criticism from ranking Senate Agriculture Committee Member Saxby Chambliss. In response to the publication of USDA's preliminary analysis, Chambliss and other members of the Committee sent a letter to USDA's Chief Economist, criticizing the agency's use of EPA data and estimates, both of energy price impacts and domestic offsets supply potential in the agricultural sector.
EPA's estimates of energy price impacts under ACES are in line with non-partisan analyses of the bill, including that by the Congressional Budget Office. With respect to the potential supply of agricultural offsets — the amount of greenhouse gas (GHG) emissions EPA estimates the agricultural sector will be able to reduce or sequester, given their estimates of what the carbon price trajectory will be under the ACES cap, through practices like no-till farming, capturing and flaring methane gas from livestock operations, reducing nitrous oxide emissions from the application of nitrogen-based fertilizers, and planting trees on marginal farmlands — EPA's updated June, 2009 estimates, which are frequently criticized for being too pessimistic and therefore short-changing farmers, now seem to be coming under attack from Chambliss and others for being too high and optimistic for farmers!
EPA's analysis of domestic offsets potential is amongst the most credible estimates available and reflects recently updated assumptions about agricultural and forestry practices, policies affecting the agricultural and forestry sectors, as well as land, energy and other commodity prices. Though modeled estimates of offsets potential have obvious limitations, the larger point is that offsets are only part of the story. USDA's analysis does not account for the substantial revenues farmers stand to earn from biomass production for bioenergy or other markets for renewable energy like wind, solar and biogas recovery. Importantly, it also takes no account of the costs to farmers of inaction — the damages farmers will experience from increased droughts, changes in water supply and extreme weather events as a result of unmitigated global warming pollution.
Estimates of revenues from the sale of offsets also do not take into account the potential for innovation — the development of new project types that qualify as offsets over time. The House-passed version of ACES allocates 0.28 percent of emissions allowance value per year from 2012-2016 towards supplemental agriculture and renewable energy incentives programs, with at least half going specifically to agriculture, including investments in the development and demonstration of practices that reduce GHG emissions or sequester carbon in agricultural operations where these opportunities are currently limited. Over time, interest will likely grow in funding projects to explore additional ways to enhance emissions reductions and carbon sequestration on U.S. lands. Once a track record of success is established, these activities could also qualify as tradable offsets, expanding the potential for offset-based revenues to farmers.
The American agricultural community is well positioned to benefit from passage of clean energy and climate legislation. To maximize these benefits, agricultural representatives should now work together with business, environmental advocates, foresters and the American public to help ensure the carbon offsets market is governed by sound rules and that agricultural offsets represent a high-quality commodity that gains the confidence of investors and the public.
]]>In a previous blog, I discussed the ways in which American farmers and ranchers are in a unique position to reap gains from the U.S. transition to a low-carbon economy, and how these gains outweigh increases in fossil energy costs. However, testimony from Bob Stallman, President of the American Farm Bureau Federation, and statements by Senator Kit Bond of Missouri show that the opposition continues to get the facts wrong and, more importantly, tell only half the story. (For a closer look at Senator Bond's convenient omissions, see my colleague Laurie Johnson's blog).
Any analysis of ACESA is fundamentally incomplete if it does not weigh the costs to farmers of higher energy prices against the benefits the bill will deliver in the form of incentives for increased energy efficiency, deployment of renewable energy sources and revenues from selling valuable carbon credits in the carbon market. Let's take these opportunities one by one and add some numbers.
Improvements in energy efficiency will reduce farmers' dependence on fossil fuels and increase their energy security. ACEEE estimates that on-farm energy efficiency measures could generate savings upwards of $1 billion annually. This means $450 in direct savings for an average 418 acre U.S. farm. To help with upfront implementation costs, ACESA offers farmers federal tax credits for energy efficiency upgrades.
The bill will also speed the development and deployment of renewable energy sources, making alternatives like solar, biogas, wind, and biomass competitive with fossil fuels, ushering in a new rural economy.
A major source of new farm revenue will come from the sale of agricultural residues such as corn stover for bioenergy production. A 2005 USDA study estimated that 75 million dry tons of corn stover could be harvested sustainably from those U.S. production acres planted with corn. At a market price of $50 per dry ton, this translates to roughly $2.85 billion in annual net profits, or roughly $13,000 a year for an average-sized farm growing corn.
Leasing land for wind turbines offers farmers and other landowners a lucrative new source of income at no additional cost. If 50-75 acres are required per wind turbine, an average U.S. farm of 418 acres can host between 5 and 6 turbines. From the Wind Powering America program (the Department of Energy's initiative to spur wind development in rural areas), landowners typically get 2%-4% of gross turbine revenue, or about $2000-$4000 per turbine. This translates into roughly $10,000-24,000 in additional annual revenues for a participating average-sized farm.
By harnessing renewable energy readily available on the farm-through solar panels on surfaces like the roofs of farm homes and livestock barns and biogas recovery systems on large U.S. livestock farms-farmers and ranchers can also avoid any increases in electricity costs, either by locking in today's business-as-usual rates or offsetting part of their energy use through on-farm production. In 2020, this could save the average farm roughly $150 in electricity costs.
Under cap and trade, biogas recovery systems that capture and flare livestock methane emissions also offer farmers a direct source of revenue from the sale of offsets, along with opportunities to sequester additional soil carbon through changes to tillage practices and reductions in nitrous oxide emissions from fertilizer application. In 2020, the EPA estimates the agricultural sector had the potential to generate 21-25 MtCO2e of offsets with a total market value of $530-744 million or roughly $270-$381 in additional income for the average farm.
Together, this diversification of energy sources and income on the farm will help our farmers continue to provide the food we all depend on, while also creating jobs and improving our national energy security. For a full analysis of what this new rural economy will mean for Senator Bond's home state of Missouri, see NRDC's Missouri state profile. Farmers should look for opportunity in clean energy and climate solutions rather than listening to messengers that are only telling part of the story.
For a more detailed analysis of opportunities for the agricultural sector under ACESA, see Opportunities for Agriculture: ACES Legislation Will Bring New Energy and Income to America's Farmers.
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"The Heritage Foundation's Center for Data Analysis estimates that the allowance price (in 2009 dollars) will be just under $140/ton in 2035...So if 'other ag' and 'animal waste' [the two ag offset categories for which EPA provides supply curves] add up to 15 million tons per year and the allowance price is $140, then the total offset revenue going to farmers is $2.1 billion-and that's assuming no cost of creating the offset. Compare $2.1 billion in offset revenue to $29 billion of lost farm income...Just this component of lost farm income is over ten times the offset revenue."
A price of $140/ton is wildly out of line with two of the most recent and credible analyses of ACES by the EPA (here), which reported allowance prices of $13/ton in 2015 and $16/ton in 2020, and the Congressional Budget Office (here), which estimates allowance prices would rise from about $15/ton in 2011 to about $26/ton in 2019. For a full critique of the Heritage Foundation's May 13, 2009 memo on ACES, see my colleague Laurie Johnson's blog entitled A Heritage of Shame: The Heritage Foundation's Economic Analysis of the Waxman-Markey Bill.
What the Heritage Foundation gets right is that according to EPA and others, actual supply of agricultural offsets will likely be much smaller than previously believed. However, by focusing exclusively on offsets, it misses the larger story around climate legislation and the ag sector-that though the sale of offsets will create a new source of farm income, offsets are only a small fraction of the benefits that farmers stand to see from climate legislation. More important than the creation of an offsets market, a cap and trade program will speed the expansion of the renewable energy market, making energy sources like wind and biomass competitive with fossil fuels. As these technologies reach commercial scale, farmers are in a unique position to reap significant gains-gains that will greatly outweigh any increases in fossil energy costs.
Now a few more reality checks on prices. There is little question that energy prices have a direct impact on farmers' production costs, from fertilizer to transportation. However, we've already seen that although prices do rise, the effect is significantly smaller than the Heritage Foundation suggests, and especially benign compared to the price volatility in the markets for key farm inputs experienced just a year ago, when, for example, the year-over-year price of natural gas-used to produce ammonia, the main input in all nitrogen fertilizers-increased more than 65 percent.
Moreover, the Heritage Foundation's claims about cost increases neglect three key factors: first, they assume no change in energy consumption from business-as-usual (BAU) levels; second, they assume no change in the composition of energy used on farms; and finally, they ignore the ability of farmers to pass through some portion of their increased costs on to consumers.
In reality, there is a range of energy efficiency options open to farmers, with over $1 billion in potential savings according to the American Council for an Energy Efficient Economy. Under ACES, farmers would be eligible for federal tax credits for energy efficient upgrades to help with upfront implementation costs.
Both livestock and crop farmers can also avoid increased electricity costs by harnessing energy readily available on their farms. For example, by installing solar panels on the roofs of their homes or barns, farmers can lock in today's electricity prices into the future. For livestock and dairy farmers, biogas recovery systems offer two key benefits under a cap: direct revenue from the sale of offsets for reductions in GHG emissions (with a total value of roughly $60 million according to the EPA) and a source of on-farm energy for heat and electricity, which could help mitigate any increases in electricity costs (EPA estimates that biogas recovery systems at swine and dairy farms have the potential to generate up to 6 million megawatt-hours of electricity per year or roughly 15% of ag sector consumption). Even if only half of this potential is realized, combined revenues and savings could be upwards of $200 million in 2020.
Finally, farmers will be able to pass through some portion of their increased costs to consumers. (It is important to note that ACES sets aside 15 percent of allowance value annually to protect low-income households from increases in the costs of energy and energy-intensive goods and services, including food. According to the Center on Budget and Policy Priorities, ACES will fully offset the average cost increase for low-income consumers. This low-income assistance is in addition to relief that would be provided to all consumers, regardless of income).
A carbon cap would also bring farmers significant indirect benefits in the form of avoided volatility in the energy markets. A well-regulated carbon market will reduce dramatic fluctuations in energy prices, thus removing much of the related risk and uncertainty farmers have experienced in recent years. In addition to providing meaningful guidelines for the carbon trading markets, the ACES bill would dramatically improve transparency and close many of the regulatory loopholes used by speculators to manipulate energy prices. For more on the market regulation provisions in ACES, see my colleague Andy Stevenson's blog entitled Climate Bill Puts Speculators on Notice.
Finally, in a carbon-constrained world, farmers and other landowner will have access to increasing direct incentives to set aside marginal lands for their climate benefits and will see the value of their land increase as land becomes an ever scarcer resource. This in turn will raise land rents, decrease the amount of land used to produce crops and thereby raise the price of crops and other agricultural commodities, further benefitting farmers. For a global analysis of land use, see this recent report by the Pacific Northwest National Laboratory.
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Because offsets typically represent lower cost abatement, their inclusion in a cap-and-trade program is one of several mechanisms that can help contain costs. However, since offsets allow capped firms to increase their emissions, an offset must deliver environmental benefits equal to reducing a ton of pollution from a smokestack or a tailpipe or risk "breaking the cap". By setting an offsets limits of 2 billion tons (split evenly between domestic and international offsets), Waxman-Markey allows for considerable cost-containment. However, the draft bill discounts offset credits relative to pollution permits or "allowances", requiring capped firms to submit five offset credits for every four tons of carbon they are offsetting. While only 2 billion offsets per year can be tendered, 2.5 billion can potentially be generated. Assuming offset quality is ensured, this 1:25 to 1 ratio is intended to generate a net climate benefit in each offset transaction, striking a balance between environmental integrity and offset producer profitability.
Nevertheless, concerns remain about offset "quality". The good news is that the draft bill takes concrete steps to ensure quality - i.e. that each offset will be real and additional, meaning it will deliver environmental benefits above-and-beyond business-as-usual, as well as verifiable and permanent, and will not have major adverse effects on human health or the environment. While many regulatory details will necessarily be left to the post-legislative process, the draft sets the rules of the game in a way that helps make certain these criteria will be met. Five specific provisions stand out.
First, the draft bill does not presume that any particular kinds of projects qualify as offsets - it includes no pre-established list of qualifying project types. Instead, that work is appropriately left to the Environmental Protection Agency, with key input from an independent Offsets Integrity Advisory Board, a nine person team of experts comprised primarily of scientists. Putting science first in this way is a big step in the right direction, both for the environment and market participants. Under the draft, recommendations by the Advisory Board - both with respect to which project types are eligible to generate offsets and how projects should be certified and monitored - will be made according to the best available scientific and technical expertise, giving a seal of good quality to qualifying offset project types and an important boost to the value of the offsets market.
Second, the list of eligible project types is subject to periodic review. Every five years, the Advisory Board must conduct a transparent, scientific review of the list of eligible project types, offset methodologies, monitoring practices, policies for mitigating potential project reversals and other accountability measures, and make recommendations for changes to the program accordingly. Project types for which rigorous methodologies are not yet well-developed or which still carry substantial measurement uncertainty may have to sit it out at first, but these regular reviews - during which project types can be added or removed from the eligibility list - mean we can constantly take advantage of new practices, new science and improvements in measurement techniques to keep our offsets regulations as rigorous, current and flexible as possible. It is likely, of course, that these reviews will generate quite a bit of lobbying by groups pushing to get certain project types approved, but term limits for Advisory Board members and a transparent process throughout should help ensure that the Board maintains its independence over time and the process remains sound. In addition, if the process establishes a track record of ensuring high quality, then the producers of high-quality offsets will help defend strong standards, as it is in their interest to keep "junk" offsets from flooding the market and driving down prices.
Third, the draft bill establishes a commitment to assuring environmental performance. In addition to regular reviews of offset eligibility, protocols and measurement methodologies, the bill establishes regular evaluations of the impacts of live offset projects on actual net greenhouse gas emissions at 5-year intervals, regularly asking and answering the question: are offsets delivering their intended emissions reductions and, if not, what can be done better? It also includes annual randomized performance audits of offset projects, offset credits and the auditors themselves, creating essential accountability for environmental integrity in the offset market.
Fourth, the draft bill acknowledges the need to tackle emissions from uncapped stationary sources using policies other than offsets. Although offsets are one way to generate emission reductions in the uncapped sectors, offset-driven reductions do not add to the reductions required by the cap, which does not cover all U.S. emissions - only about 85%. In other words, they do not help us achieve our economy-wide targets. Because the cap won't reduce total national emissions, we need complementary policies to generate substantial reductions in the uncapped portions of the national emissions inventory. To address this need, the draft bill provides for setting performance standards for uncapped stationary sources of emissions producing more than 10,000 tons of CO2 equivalent per year (and that, together account for at least 20% of total uncapped emissions), as well as uncapped sources responsible for at least 10% of uncapped methane emissions, such as manure lagoons in large confined animal feeding operations (CAFO's). Performance standards also apply to those uncapped industrial sources that together with capped industrial sources constitute at least 95 percent of industrial sector emissions.
Finally, the draft bill includes specific language requiring rigorous certification and crediting standards for offsets. The draft emphasizes the need for standardized methodologies (as opposed to case-by-case review) to address concerns about additionality, measurement, leakage accounting and discounting for uncertainty. It also calls for conservative estimates of business-as-usual practices so that we do not credit actions that would have taken place anyway. Importantly, it also addresses the need to assign liability for carbon sequestration activities (like growing forests) that are subject to reversal (for example, if the forest burns or is cut down). The draft provides means of compensating the environment on a ton-per-ton basis for such reversals, either through offset reserves, offsets insurance, or other appropriate mechanisms.
Setting these strong standards is the single best way to simultaneously guarantee environmental integrity in the offsets market and raise profitability for high-quality offset producers.
Overall, the draft bill moves the conversation about offsets regulation in the right direction and sends the right signals about the overarching need to protect the soundness of the cap. It puts forth specific principles about the types of standards necessary to ensure that certified offsets represent real emissions reductions - and establishes the rules of the game for creating those standards - but appropriately leaves room for the details to be filled in by experts through a rigorous, transparent and scientific process.
For our full series of blogs related to the just released Waxman-Markey draft climate and energy (ACES) proposal go to: http://switchboard.nrdc.org/energyandclimate.php
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