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By Cole Gustafson, Published June 05 2009

New energy economics: Carbon cap and trade seminar for USDA economists

FARGO- On May 27, Ray Massey from the University of Missouri and I had the pleasure of presenting a seminar to the U.S. Department of Agriculture’s Economists Group in Washington, D.C. The group meets monthly to discuss current and emerging political topics likely to affect the USDA.

Massey and I were invited to speak on the topic of carbon cap and trade. The seminar was timely, given the U.S. House Energy Committee’s passage of the Waxman-Markey climate legislation the prior week.

I began my presentation with a review of alternative ways to manage greenhouse gases. While carbon cap and trade is receiving the most attention, I reminded the audience that taxation, outright regulation and laizze faire market approaches were options that had differing economic impacts on agriculture.

Under cap and trade, firms that emit GHG are given a maximum emission level (cap). They either can either reduce their emissions or purchase credits from other firms that find it easier to adjust (trade). Under this system, the level of GHG reduction is known, but the cost to industries or price is not.

The tax approach to green house gas management would have just the opposite result. The cost to the industry or price would be known (for example, amount of the tax), but the quantity of green house gas reduction is not because some firms would continue to pay the tax. Others would choose to avoid the tax by investing in green house gas-reducing technologies. This is problematic for politicians because they cannot document specific GHG reductions to interested constituents.

Regulating green house gases is a third alternative. Generally, economists detest regulation because direct policy interference in a marketplace creates dead-weight losses and leads to rigid firm responses. However, I reminded the group that we have partial green house gas regulation already in place. Under the Energy Independence and Security Act, new biofuels are defined by their potential to reduce green house gases. The reductions are 20 percent for conventional biofuels, 50 percent for advanced biofuels and 60 percent for cellulosic biofuels.

Since the Environmental Protection Agency has just announced new proposed regulations on May 5 that corn grain ethanol only reduces green house gases by 16 percent, ethanol plants are now scurrying to improve their carbon footprints.

Finally, Congress could leave green house gas reduction to the market. Many are skeptical that firms and consumers are fully aware of the potential threats posed by rising green house gases. I pointed out that with education, market-based approaches can lead to the desired political outcomes. To illustrate the point, I reviewed one of my earlier news releases that described new carbon labels that food processors in Japan voluntarily are placing on their products to inform consumers of the reductions they are making.

I closed my presentation by noting that green house gas management is complicated, not only by the uncertainty of science, but also by economics and ethics. Tradeoffs exist among this and future generations, humans and other life forms that inhabit the globe and developed and less developed countries, as well as the diverse regions within the U.S that have differing interests.

Massey stated that under a green house gas cap and trade, agriculture has the potential to have regulations placed upon it, while also being a potential contributor of credits. He noted that soil management, enteric fermentation and farmer and rancher manure management practices likely would be scrutinized.

He stated that in for agriculture to contribute carbon credits in the future, it must have permanence, provide additional green house gas reduction above baseline levels and be verifiable. At present, farmers can claim credits if they pledge to adopt no- till production methods for five years. However, at the end of that time, the land can be plowed, which emits some of the carbon that was sequestered.

Under the proposed EPA regulations, it is possible that existing no-till farmers would be ineligible to collect future credits because they already have adopted the system. In other words, to claim additional credits, the farmers would have to reduce green house gas emissions beyond what they are presently doing.

Massey stated that proposed EPA regulations initially targeted livestock units that produce more than 25,000 tons of carbon annually. These would be dairy farms with more than 5,000 head, swine units with more than 73,000 head and beef operations with more than 89,000 head. There are 44 of these firms nationwide.

In total, they emit 2.6 percent of the national manure emissions. Since manure emissions are a small source of total green house gas emissions, capping the largest livestock operations only will reduce national GHG emissions by less than 0.03 percent. The cost of developing a federal program to monitor compliance could negate most of the program’s benefit.

The conference organizers posed many questions to us after our presentation.

Most related to the complexity of administering the program. Massey and I both stressed the fact that agriculture is complex and that government policy is going to create winners and losers, but neither are clear at the present time.

Cole Gustafson is a biofuels economist with the NDSU Extension Service