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Patrick Westhoff ([email protected])
FAPRI-MU (www.fapri.missouri.edu)
University of Missouri
Breimyer Seminar, 2010
“Greenhouse Gas Regulation, Boom or Bust
for Agriculture?”
Columbia, Missouri, May 27, 2010

Status of climate change legislation

What would climate change legislation mean
for the farm sector?

Other Congressional action on greenhouse
gas regulation

House passed bill in 2009
 Formally the “America Clean Energy and Security Act of
2009,” or ACES
 Often referred to as “Waxman-Markey” after sponsors
 Passed House 219-212 on June 26, 2009

Senate has not passed a bill
 Environment and Public Works Committee approved a bill
in Nov. 2009
 Senators Kerry and Lieberman have proposed the
“American Power Act”

Would limit greenhouse gas emissions from main
sources
 Covered firms need allowances to emit
 Can trade allowances or purchase offsets
 Offsets earned by reducing emissions/ sequestering
carbon in uncapped industries

Cap reduced over time
 83% of 2005 level in 2020
 17% of 2005 level in 2050

Capped
 Electric and natural gas utilities
 Oil refiners
 Most “heavy” industry

Not capped
 Farms (although input industries are)
 Various small emitters of greenhouse gases

Some given away for free
 Electric utilities, natural gas distributors
 Energy-intensive, trade-exposed industries
(including nitrogen fertilizer producers)
 Free allowances generally phased down over time

Others auctioned
 Revenues used to reduce net costs to consumers
 Some set aside for deficit reduction

Reduction in emissions or sequestration by
uncapped industries

Agriculture examples
 Shift to no till
 Install methane digester
 Convert crop or pasture land to forestry

Can be domestic or international

Most analysis shows biggest actual GHG
reduction from electric utilities
 Reduced use of coal
 Expanded use of renewables and especially
nuclear power

Relatively little change in transportation fuels

Carbon price increases over time
Source: Table
3 in USDA
testimony
before House
Agriculture
Committee,
Dec. 18, 2009,
p. 21.

Estimates of allowance values of House bill
 Are very different (and there are other competing
estimates, even from EIA)
 Increase over time

Imply significant incentives for sequestration
 No-till and other practices that may have little effect on
agricultural production and prices
 Expansion of forestry or energy crops, which could have an
important effect on crop production

Many provisions same or similar to those in House
bill
 Greenhouse gas reduction targets
 Basic regulatory system (although not identical)

Some distinctive features
 Additional incentives for nuclear power, offshore drilling
 Distribution of free offsets different than in House bill
 Allows fewer international offsets
EIA basic
HR 2454
EIA high
offset
EIA high
cost
EPA
HR2454
Diesel fuel
8.3%
4.6%
9.0%
4.0%
Electricity
3.8%
3.6%
5.4%
12.7%
14.4%
8.3%
20.2%
8.5%
Diesel fuel
15.0%
8.0%
17.5%
5.6%
Electricity
22.3%
11.8%
32.7%
13.3%
Industrial natural gas
25.9%
10.2%
39.9%
10.4%
2020
Industrial natural gas
2030
Source: EIA and EPA analysis of HR 2454, the House climate change bill. These
costs include the value of allowances.

How much will energy costs change?

How does a given change in energy costs affect
prices for fertilizer, chemicals, etc.?

How will provisions to benefit energy-intensive,
trade-exposed (EITE) industries work?

What changes will farmers make in production
practices?
EIA basic
HR 2454
EIA high
offset
EIA high
cost
EPA
HR2454
With free EITE allowances
1.9%
1.0%
2.7%
1.6%
Without EITE allowances
3.7%
2.2%
4.6%
2.6%
With free EITE allowances*
5.9%
2.5%
8.4%
2.6%
Without EITE allowances
7.8%
3.7%
10.6%
3.3%
2020
2030
*Free allowances are phased out between 2025 and 2035 under HR 2454.
Source: FAPRI-MU estimates.

FASOM model (Dr. McCarl, Texas A&M) results: much crop
and pasture land will shift to forestry

Reduction in crop production results in higher crop prices

Tennessee analysis: at moderate carbon prices, energy crop
area increases (less effect on forestry)

If grain and oilseed production is reduced, prices will increase
 Depends on magnitude of production decline
 And on how price responsive users and other producers are

Estimating impacts on U.S. agriculture of
multiple scenarios
 Different increases in energy costs
 Different assumptions about how biofuel sector is
affected
 Different assumptions about how many acres
shift out of grain/oilseed/cotton/sugar production

Following results are all preliminary and may
change if we get new information
Energy costs
Biofuel response
Acreage shift into
to higher gasoline forestry?
and diesel prices?
Scenario 1
(“EIA costs”)
EIA’s basic scenario
for HR 2454
No
No
Scenario 2
(“Plus biofuel effect”)
EIA’s basic scenario
for HR 2454
Yes
No
Scenario 3
(“Plus acreage shift”)
EIA’s basic scenario
for HR 2454
Yes
20 million acres by
2030
Source: FAPRI-MU
estimates. Measures
changes in variable
expenses (excluding
land) for crops, feed and
nonfeed expenses for
livestock
Source: FAPRI-MU
estimates. Farm prices
for crops, Nebraska
direct prices for steers,
and 51-52% lean prices
for hogs
Source: FAPRI-MU
estimates. 13 crops
include listed crops,
upland cotton, sorghum,
barley, oats, rice,
peanuts, sunflowers,
canola, sugarcane and
sugar beets.
Source: FAPRI-MU
estimates. These estimates
do NOT include income
from sale of offsets. If
included, offset sales
would increase net farm
income.

Reported estimates are based on layers of
assumptions and may be revised

But basic points should hold
 Higher energy costs would reduce farm income, all else
equal
 But increased biofuel production, acreage shifts (and
offset income) could change the picture
 Landowners most likely to benefit; livestock producers
least likely

Senate debate on Kerry-Lieberman in June/July/???
 Would require 60 votes to overcome filibuster
 Both partisan and regional issues
▪ Any Republican support?
▪ Will coal-state Democrats support?
 Bill could change before or during floor debate
 And always possible no bill passes
 Even if bill is approved, would have to be reconciled with
House-passed bill (and recall close House vote last year)

EPA has proposed to move forward on regulatory
approach if no climate legislation
 Sen. Murkowski (R-AK) proposes “disapproval resolution”
 Vote now tentatively set for June 10
 Unlikely to stop regulation (even if passes both Houses,
President can veto), but some see as key test vote
 Sen. Rockefeller (D-WV) seeks 2-year delay in regulations
 Appropriations bills could seek to delay or limit
implementation
 Outcome uncertain

Biofuel tax credits and tariffs
 Biodiesel credit ($1 per gallon) expired at end of 2009
 Ethanol credit ($0.45 per gallon) and ethanol specific tariff




($0.54 per gallon) expire at end of 2010 if no legislation
Unfolding debate this week on large bill including
biodiesel credits for 2010
Many expect year-end tax legislation to address issue of
provisions expiring this year
Much support, but budgetary cost is major concern
Renewable Fuel Standard requires minimum levels of
biofuel use even if credits are not available

Good chance no climate legislation will be approved in 2010

Terms of debate could be very different in 2011
 New Congress could have different partisan make-up
 This and other factors could lead to very different legislation (or none
at all) being considered

Budget issues could transform debate
 Attacking budget deficit likely to be a high priority in 2011
 Taxing carbon or selling greenhouse gas allowances could raise a lot of
revenue
 But would also face widespread opposition

To contact me: [email protected]

FAPRI-Missouri website:
www.fapri.missouri.edu