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~0018200. WP
Page 1
Climate Change and the Agricultural and Forestry Sectors
I. BACKGROUND ISSUES
Agricultural and forestry activities (the land use sectors) contribute directly to emissions and
sequestrations of greenhouse gases (GHG) through a variety of processes. For example:
Agricultural activities accounted for 6% of gross U.S. GHG emissions in 1996.
Agricultural soils constitute a major reservoir of the global carbon pool. Soils can act as a
major source or absorbent (sink) of carbon depending on the net flux of organic matter in
the soil.
Forestry activities sequestered some 117 million metric tons of carbon equivalent
(MMTCE) in 1996. Gross anthropogenic greenhouse gas emissions in the United States
in 1995 were 1,676 MMTCE. However, by including those forest sinks, net greenhouse
gas emissions totaled 1,559 MMTCE, or 7% lower.
Increases in the carbon stored on forest lands over the last 40 years have stored the
equivalent of 25 percent of U.S. carbon emission during the period.
Some of these land use-related GHG contributions will be included in the calculation of net U.S.
emissions that will be compared to our Kyoto Protocol target, but others will not. By addressing
the contributions that do count and extending the Protocol to cover other aspects of land use that
strongly influence the carbon cycle, we can be sure these sectors will play an important role in the
ability of the U.S. to meet its treaty obligations at reasonable cost.
How can the agriculture and forestry sectors help mitigate the risk of climate change?
Storing carbon in vegetation and soils:
Various agricultural and forestry activities sequester carbon dioxide and thereby offset some
emissions associated with industrial activity. Trees, other vegetation, and organic matter in soils
take up carbon dioxide through photosynthesis and transform the carbon dioxide and store it in
vegetative tissue, also called biomass. These carbon sinks mitigate the emissions of carbon
dioxide from fossil fuel combustion.
Helping us meet the target:
The Kyoto Protocol recognizes reductions to net emissions through certain carbon sinks. For
countries such as the United States, where acres of tree-planting exceed acres of tree-cutting
annually, this is an opportunity for the United States to reduce net emissions at low cost.
Although the IPCC greenhouse gas inventory guidelines provide methodologies for estimating
anthropogenic terrestrial sinks, they address comprehensive measures of changes in carbon stock
rather than the changes in stock due only to the limited set of activities recognized in the
Protocol's Article 3.3. Specifically, the Protocol recognizes sinks and emissions that:
"[result] from direct human-induced land-use change and forestry activities, limited
to afforestation, reforestation, and deforestation since 1990, measured as verifiable
changes in stocks in each commitment period."
~0018200.W
Page 2
The Parties to the Protocol could interpret the activity list (afforestation, reforestation, and
deforestation) several different ways with potentially with very different contributions of sinks in
the baseline, as well as different opportunities to credit increases in sinks with targeted forest
polices. The language does make clear that to qualify carbon must be sequestered on land that
has experienced one of the three forestry activities since 1990, meaning that the continued
sequestration in forests established before 1990 does not count under Article 3.3. Other
important sequestration opportunities, including agricultural soils and sustainable forest
management, may be added to the Protocol under Article 3.4 pending methodological work by
the IPCC and further negotiations among the Parties to the Protocol.
Presenting policy opportunities:
Complementing the offset of emissions through business as usual forestry activities, targeted
policies could stimulate the creation of additional carbon sinks at low costs. Economic studies
have indicated some of the cost-effective potential of these policies. For example, one study
derived a marginal cost curve for carbon sequestration for the United States based on analysis of
land use decisions between 1935 and 1984 for a set of counties in Mississippi, Arkansas, and
Louisiana. It found that more than 150 MMTCE could be sequestered at $25/ton. Another study
assessed several different scenarios of tree planting on agricultural land and found that about 250
MMTCE could be sequestered at approximately $25/ton. Studies based on engineering/costing
models indicate that even more carbon could be sequestered at low costs.
Lowering the costs by slowing capital stock turnover:
Carbon sequestration through land use changes and forestry can be thought of as a cushion for the
transition to a more emissions-efficient economy. Investing in sinks in the near term can allow
slower capital stock turnover in the emissions side, lowering the total cost of achieving the target.
However, as sequestration in forests, vegetative cover, and soils increases, the marginal cost of
additional sequestration will rise, other land uses will become more competitive, and the reduction
in net emissions will come from other sectors of the economy.
Offsetting fossil fuel consumption:
Finally, the land use sectors can reduce net GHG emissions to the extent that biomass energy can
offset the consumption of fossil fuels. Biomass fuel is used primarily by the industrial sector in the
form of fuelwood and wood waste, while the transportation sector dominates the use of
biomass-based fuel, such as ethanol from corn or woody crops. The IPCC inventory guidelines
currently exclude carbon dioxide (CO2) emissions from biomass combustion from the total
because the fuels had previously extracted the carbon from the atmosphere. The 1995 CO2
emissions from biomass, reported for informational purposes, were 51 MMTCE. The small
amount of non-CO2 GHG emissions from biomass combustion are included in the respective
inventories for those gases.
Does the Kyoto accounting system for sinks create perverse incentives for landowners?
Some climate watchers are concerned that by only counting post-1990 forests, the Kyoto
Protocol could lead to perverse incentives to cut down older forests to receive sequestration
~0018200.WP
Page 3
credit for newer forests on replanted lands. In addition, the negotiating history of the Protocol
indicates that the treaty does not recognize emissions from harvest unless the land is deforested.
The distinction between national incentives and individual landowners' incentives is crucial. By
making sure domestic policies for land use do not create perverse incentives, policy makers
probably can largely mitigate this concern at least for U.S. forests. Nonetheless, a more
comprehensive carbon accounting system, either through a broader interpretation of the current
Protocol language or an expansion of that language under Article 3.4, is the surest way to avoid
creating perverse incentives.
How do the agriculture and forestry sectors contribute to the risk of global climate change?
Agricultural and forestry activities release three kinds of greenhouse gases, which are presented in
Table 1 below. 1 The inclusion of multiple greenhouse gases under the Protocol allows more
flexible and cost-saving emissions reductions, and more opportunities for the agricultural sector to
participate in efforts to slow global climate change.
Table 1. Greenhouse gases from Land Use Sectors
Greenhouse gas
Symbol
Global warming potential in carbon
equivalent
Carbon dioxide
CO2
1
Methane
CH4
6
Nitrous Oxide
N2O
85
Although agriculture accounts for a small share of total U.S. energy use, it is energy intensive:
Energy-related expenditures account for about 20 percent of total production
expenditures.
For many economically important crops and livestock operations, energy accounts for
more than 40 percent of variable production costs.
Since 1975, energy efficiency in the agricultural sector has increased more that 50 percent
so that, although production has increased dramatically, now farmers use less fuel than
they did 20 years ago.
Although it is tempting to lump agricultural activities together, the sector is actually extremely
diverse. Undoubtedly, a variety of flexible approaches will be needed to address the numerous
ways agriculture affects GHG concentrations. Table 2 below outlines some of the most pertinent
aspects of agricultural operations and their 1995 GHG levels.
Table 2. 1995 Gross Emissions from Agriculture (MMTCE)
Activity
Description
CO2
CH4
N2O
~0018200.V
Page 4
Fossil fuel
Emissions from fuel consumption, including
30
consumption
operation of farm equipment.2
Enteric
Methane is a product of digestion in beef and
34.9
fermentation in
dairy cattle. Emissions depend on number of
domestic livestock
animals as well as feed quantity and quality.
Manure
Emissions are higher when manure is stored
17.1
management
as a liquid, as in some confined livestock
facilities.
Rice cultivation
Soil's organic matter decomposes in flooded
2.8
conditions, releasing methane through plants.
Soil Management
Improved production practices can lower
N/A
18.4
and Fertilizer Use
N2O emissions and increase soil carbon (not
included in total below).
Field burning and
Burned carbon was previously sequestered,
net zero
.04
agricultural wastes
so net carbon is zero. Net methane is
positive.
Total
103 MMTCE (US gross total = 1422)
30
54.5
18.4
% of U.S. gross
6% of all GHG gases in MMTCE
2% of
31% of
46%
emissions
CO2
CH4
N2O
III. POLICY ISSUES FOR SINKS
How could carbon sequestration by the land use sectors be encouraged?
Printing tradable credits:
Carbon sequestration from land use activities could play an important cost-lowering role in
offsetting emissions. For example, sinks provide the only way to "print" new tradable credits.
Those credits could be generated through three main approaches:
(1) Private projects
(2) Targeted government policies
(3) Reductions attributable to exogenous changes in land use
In the first approach, for example, a forest products firm might plant trees in a designated area,
measure the carbon sequestered on it during the commitment period, and receive tradable credits
in that amount from a verifying entity. In the second approach, the government could provide
incentives for the same activity, but rather than the credit accruing ton-for-ton to the private
landowner, the sequestrations are credited to the U.S. account to be redistributed or retained to
cover emissions not included in the cap and trade system.
The last approach recognizes that some sequestration will occur under business as usual. Those
sinks allow emissions elsewhere in the economy, and some means to create and allocate credits
from them can be developed. A hybrid system could reward private activities such as planting
trees with tradable credits, but not require measuring and verifying the exact number of
incremental tons of carbon sequestration. This approach would need to limit the number of
credits to the sequestration produced by these activities and others that do not receive credit.
~0018200.
Page 5
Measuring performance:
The amount of carbon sequestered by a sink activity that would have otherwise been emitted into
the atmosphere could serve as a basis for sink credits. With growing forests, the sequestered
carbon is relatively straightforward to measure or calculate. Agricultural soils, however, lose
carbon both to the atmosphere and through eroded sediments that are sequestered elsewhere.
More research is needed to improve the certainty of sequestration measures for agricultural soils,
and to better understand the carbon flux process.
Policies and measures
Examples of policies that promote carbon sequestration (although not all would receive credit
under the current Protocol language) include those that encourage:
Restoration of degraded lands
Afforestation, reforestation, and the reduction of deforestation, including environmentally
appropriate afforestation of marginal agricultural lands. For example, afforesting 22
million acres of marginal crop and pasture land in the South could sequester an additional
32 MMTCE each year.
Forest management measures that improve stocking density, increase stand growth rates,
and lengthen rotation cycles
Lower grazing intensity
Enhancement of carbon in agricultural soils. This could include practices such as
conservation tillage, crop residue management, elimination of summer fallow, and use of
winter crops. Nutrient and pesticide management can also reduce emissions.
Examples of policy approaches that could encourage sequestration and/or reduce emissions
include policies that:
Implement project-by-project activities. The participant alters production practices or
adopts climate-friendly technology and receives technical assistance, incentive payments or
tradable carbon credits. This approach is similar to USDA's Environmental Quality
Incentives Program.
Provide credit for landowners who are credit constrained and cannot otherwise update
their capital equipment and adopt environmentally superior technology.
Acquire partial interests in land, such as easements or rental agreements, to promote
sequestering activities. This is similar to USDA's Conservation Reserve Program and
Farmland Protection Program.
Fund R&D for improved agricultural and forestry technologies, such as biomass energy
and more fuel efficient equipment. This approach is similar to the Climate Change
Technology Initiative.
Make participation in other attractive government programs contingent on adopting best
management practices that reduce emissions or sequester carbon (similar to Conservation
Compliance for highly erodible land).
Regulate production practices, for example by requiring plans for soil, nutrient, and
manure management. Some States have used this approach to address water quality
~0018200.WP
Page 6
problems.
Eliminate preferential pricing of farm-related fossil fuel.
Encourage replacement of fossil fuels with biomass energy sources.
Policy caveats:
Sink activities face the same policy challenges inherent in any project-oriented approach:
whatever the level of carbon sequestered and credited in a particular project, what matters
is the GHG activity across all relevant land use. If offsetting or unaddressed emissions are
ignored, the net sequestration could be less than anticipated. For example, a policy
approach that rewards designated afforestation projects but ignores deforestation and
harvest probably won't accomplish much. Similarly, if a policy increases forest sinks but
also increases the projected supply of commercial timber, the lower projected prices will
work simultaneously to reduce private replanting on other lands. Sinks policy developers
should carefully anticipate the full long-term emissions inventory effects of the options.
Many of the policies discussed above require endorsing some technologies over others.
This has well-known pitfalls.
Finally, carbon sinks can quickly become sources if the sequestering activity is not
maintained. For example, if a firm receives credit for the incremental sequestration in its
growing post-1990 forest, then the policy should address what happens years later if the
forest subsequently burns or succumbs to disease, perhaps when the land is owned by
someone else.
II. POLICY ISSUES FOR EMISSIONS
How else can emissions from land use sectors be addressed?
One of the main policy challenges to controlling emissions from the land use sectors is their
non-point source nature. Utility plants, industrial facilities, and other big emitters are easy to
identify and their emissions are relatively straightforward to monitor. In contrast, in 1997 the
U.S. had 2.06 million individual farms, over a million operations with cattle, and over 968 million
acres of land in farming, all of which contribute in some way to GHG activity. Although the
number of head of cattle about 99.5 million head in 1998 -- can provide a basis for rough
estimates of methane emissions from enteric fermentation, other GHG emissions such as from
manure management and soils are harder to calculate and come from widespread sources. In
addition to land use activities on commercial operations, countless other landowners affect the
carbon cycle by clearing, burning, and otherwise managing their property.
Emissions from land use activities could be covered under the cap and trade system shared by
other industries. To the extent that their emissions can be monitored, land use sector firms could
be part of the initial allocation system (grandfathering or auctions), international emissions
trading, and an early action credit program. Just as for other industries, an upstream/downstream
level of production would be designated as the level at which permits must be used for
compliance.
~0018200.WP
Page 7
Pros:
Caps emissions.
Allows trading and abatement across more sectors and gases, which helps lower
the total cost of attaining the target.
Doesn't create inequities across different industries because all sectors face the
same marginal abatement cost.
As a performance-based approach, cap and trade doesn't require picking individual
technologies or practices to reward or discourage.
Cons:
Not all land use emissions are easily monitored, so ascribing emissions levels to
specific landowners or firms could be difficult and costly, if not impossible.
May enormously expand the number of actors in the trading system, depending on
the choice of upstream/downstream level of participation, which could raise
coordination costs.
What approach make sense for each source?
Emissions trading is obviously only appropriate for emissions that can be measured at reasonable
cost and for which an identifiable party can be held accountable. Small emitters may too
numerous and diffuse to trade but may benefit, for example, from policies such as technical
assistance programs that help them identify appropriate production practices for their operations.
Treatment of emissions from land use sectors should be consistent with treatment of any
analogous emissions from other industries. For example, fossil fuel consumption by farm
equipment should be treated much the same way as emissions from trucks and construction
equipment. Otherwise an unworkable distinction would be drawn between emissions from farm
equipment and non-farm equipment.
Finally, policy makers should consider potential complementarities and tradeoffs across
environmental objectives and coordinate climate change with other environmental concerns. To
the extent that emissions reductions from certain activities are too costly, too uncertain, or too
unpalatable, there is also the option to encourage sufficient emissions reductions and
sequestrations elsewhere to make up the difference.
If some emissions are not included in the cap and trade system, how can the U.S. be assured
of achieving its target?
Each Annex B Party starts the commitment period with a pool of internationally tradable
emissions permits equal to our assigned amount (the target), about 1500 MMTCE per year for the
U.S. The domestic trading system will initially allocate a share of the permit pool to U.S. firms
for domestic and international trading. The remaining reserved share will used to cover emissions
from all sectors not encompassed by the trading system. If the U.S. government does not retain
enough permits to cover these uncapped sources, some means to acquire additional permits will
~0018200.V
Page 8
be required for the U.S. to comply with the treaty.
IV. EARLY ACTION
How could land use sector firms receive credit for early action?
Many of the same issues outlined in the Early Credit Mechanism paper apply to the land use
sectors. These issues are not discussed here, but include the problem of identifying baselines,
performance measures, and an appropriate cap on the number of early credits. Sequestering
activities present several other early action considerations:
Forestry ramps up:
Carbon sequestration in new forests involves an especially long lead time. The first few years after
an area is reforested, it actually emits more carbon than it sequesters due to the disruption of soils
and decomposing brush produced by the planting process. Thus, to accrue significant carbon
sequestrations in the first commitment period, early action for new forests is critical. Perhaps one
of the most important early action items in the land use sector is the reduction of deforestation.
Cover from lands deforested before the first commitment period will be decomposing during the
first commitment period, increasing total emissions. Moreover, were those lands to have been left
forested, their incremental sequestrations may have been creditable as sinks.
One-time sequestrations:
In all probability, the accounting system under the Protocol will only recognize sequestrations that
take place during the commitment period. To the extent that an early action provides primarily a
one-time sequestration, for example by increasing soil carbon content to a new plateau, early
action will not contribute to the attainment of the target. From that perspective, the action should
take place during the 2008 to 2012 period.
Economic rationales:
As with other industries with slow capital stock turnover, the uncertainty about the
seriousness of our treaty commitments may generate lower-than-optimal investment in the
forestry sector. To the extent that early action policy projects certainty that carbon
sequestered in new forests will receive one-for-one emissions credits, the option value to
waiting to invest declines.
Sinks activities don't need "baseline protection" because they won't need grandfathered
permits.
The more quickly and cheaply production practices can be adjusted, the lower the
economic justification for early action credit.
Early action credit for land use technological pioneers may be appropriate, especially if the
new technologies are made public and can transfer to other firms.
Maintenance:
The potential impermanence of carbon sequestration, as discussed above, makes credit for
activities early in the 1999 to 2007 an issue. Early credit could be contingent on proper
maintenance through 2007 or beyond, depending on how emissions from the same source would
~0018200. WP
Page 9
be treated during the commitment period.
JA
8/98
SP
QF
CARBON SINKS:
From JAF
MANAGEMENT TOOL OR BOTTOMLESS PIT
Robert Mendelsohn
Yale School of Forestry.and Environmental.Studies
New Haven, CT
[email protected]
Paper prepared for NBER "Post-Kyoto" Snowmass Meeting, August, 1998.
ABSTRACT
The Kyoto multilateral agreements to control greenhouse gases explicitly include management of sinks as
a viable control alternative for nations. By increasing carbon storage in trees and soils, countries could offset
emissions. However, managing sinks is difficult. It can be expensive to monitor carbon storage across vast
landscapes over long time frames. Countries have an incentive to overstate storage efforts. Storage outcomes are
subject to natural cycles beyond human control. Lareg scale management alternatives to increase storage are
expensive because land is scarce and increasing storage per hectare usually involves large opportunity costs.
Finally, there are large nonmarket impacts associated with increasing carbon stocks on terrestrial lands which
would need to be assessed.
I
The control of greenhouse gases is one of the most daunting env ironmental challenges mankind has
yet faced. Greenhouse emissions, especially carbon dioxide, are difficult to av oid. Carbon dioxide itself
emanates from a basic need for inexpensive energy. Greenhouse emissions are global in nature as they can
occur anywhere on the planet and have the same effect (Houghton et al., 1996). The resulting impacts are
complex and universal as just about everyone would be affected by changes in climate and carbon dioxide
levels. There are many complex scientific uncertainties associated with the problem both in terms of
understanding solutions as well as understanding what will happen in the absence of control. Finally, it is
a multilateral problem, requiring cooperation across countries which is difficult to achieve and sustain.
As a first step towards control, many countries of the world gathered in Kyoto in 1997 and
attempted to negotiate an initial policy response to greenhouse gas emissions. The conference focused on
setting near term limits on the greenhouse gas emissions of highly industrialized countries. However, in
addition to emission controls, the conference discussed the possibility of controlling the sinks and sources
of greenhouse gases as an alternative policy. Virtually all the greenhouse gases are part of natural cycles
which emit and absorb material between the atmosphere, oceans, and land masses. By managing these
cycles, it may be possible to absorb some of the gases which would otherwise remain in the atmosphere.
For example, if a country planted trees in vacant land, the trees would absorb carbon from the atmosphere
and put the carbon into the soils and tree mass. The Kyoto agreement considers these management
alternatives as a viable method to meet national greenhouse gas control goals.
At first glance, controlling sinks looks very attractive. A nation could counterbalance industrial
development by emphasizing nature. Unused land could be placed into productive service. Mature forests
could be protected. Nature's mechanism to keep cycles in balance by increasing uptake when atmospheric
concentrations rise could be reinforced: a gaia program. Forests would be planted throughout the world,
returning land to its former natural state, creating new habitat and an enhanced environment. Initial
studies suggest all this can be done at a low cost of 1 to 10 $/ton C (Watson et al., 1996, Chapter 24). In
comparison, most serious abatement programs are considering costs of well over a 100 $/ton c (Bruce et
al., 1996, Chapter 9).
Of course, before a sink policy can be analyzed, it must first be defined. First, the policy must
establish a baseline from which to measure changes. Second, the policy must determine what changes will
be measured and how carbon is credited to a country. Third, the cost of the program should be measured.
Finally, the nonmarket effects should be quantified, whether positive or negative.
In this paper, we examine two generic types of sink programs. The physics-based approach looks
at carbon as a pool of molecules which cannot be created or destroyed. To a first approximation, any
increase in the amount of carbon on terrestrial land is roughly equal to the amount removed from the
atmosphere. This is not a precise statement as the oceans also serve as sinks and sources of carbon. In this
program, a baseline survey would establish how much carbon is currently stored in each country. Periodic
measurements following the baseline would measure how much this terrestrial storage changes over time.
Counties would be credited or indebted for any changes between measurements.
An alternative approach would not consider the entire landscape but rather only selected locations.
2
The policy-based approach would measure carbon setasides only in official management projects.
Countries would establish projects to increase carbon storage. They would be credited for any increase in
carbon stored at these official sites. By making the carbon measurements permanent at official sites, the
policy-based approach would resemble the physics based approach except that the sites considered would
be selective.
Both of these programs have their strengths and weaknesses, which the paper analyzes. Despite the
initial charm of sink policies, there are many potential problems. Sinks are subject to large natural forces.
Keeping track of the ebb and flow from these sources is expensive and may leave countries at the mercy of
natural and economic forces beyond their control. Managing sinks over the time frame relevant to
greenhouse gases, requires being involved in decisions about how land is to be used across the globe. This
raises serious questions about monitoring and designing adequate institutions to cope with such a massive
undertaking. No land is truly idle. Planners who intend to plant trees in "empty" deserts and grasslands
will have to overcome natural barriers which are likely to be quite expensive. Returning farms to forests
will be increasingly difficult in the future as world populations increase, making remaining farms ever
more valuable. Increasing the carbon in existing forests is not straightforward and may involve
management or planting exotics which may or may not be ideal habitats. Vast programs to increase sinks
are likely to affect nonmarket services and these changes should be assessed.
I. TERRESTRIAL CARBON STORAGE
There are many alternative ways of defining a carbon sink program. The most straightforward
approach is to take a physics based approach and simply account for all terrestrial carbon. A baseline
would be established by an initial inventory of all carbon in terrestrial systems. Taking advantage of the
principle that matter is neither created nor destroyed, the amount of carbon in each country's terrestrial
systems would be their initial stock. This becomes the baseline. Any increase in this carbon inventory
would be considered uptake and any decrease an emission. Every reporting period, the inventory would be
updated and changes would be credited or subtracted to each country. Presumably, most of the changes in
terrestrial sinks would come at the direct expense of the atmospheric sink, leaving the oceans as a neutral
party. Of course, explicit efforts to mine carbon from the oceans would have to be banned as these would
not serve greenhouse gas objectives.
One drawback of using terrestrial carbon storage as a baseline is that this quantity is subject to
large natural forces. Although we often think of nature as a balanced entity in stasis, evidence suggests
that there are actually large natural swings and movements in carbon cycles. For example, there is a large
seasonal swing in carbon uptake. In the paleological record, there is evidence that carbon dioxide levels
have varied in earth's history. Even in the near term, it appears that the carbon stored in regions varies by
decade. For example, American forests are currently in a growth phase where they are adding carbon.
This is partially due to earlier harvesting activities which have rejuvenated forests across the United States.
If left to natural forces, however, these forests would eventually mature, slowing their growth rates down
and eventually degrade. Thus, for several decades, the American natural forests will be a sink and that will
be followed by a period where they would be a source. If the baseline is defined in terms of total carbon
stored in terrestrial systems, these natural swings will have to be counted in the carbon budget. These
fluctuations may not be trivial. There are approximately 49 Gt of carbon in vegetation and soils in the US
',,
(Watson et al., 1996, Chapter 24). A 7% swing in this storage IS equivalent to current annual carbon
emission levels for the US
One problem with using carbon storage as a barometer of carbon storage programs is that climate
and other environmental forces may have large effects on carbon stocks over which the host country has
little control. These swings in stocks could dwarf emission programs. Such accounting may be considered
unfair by countries who find themselves victims of forces beyond their control.
A second major problem with using terrestrial carbon storage as a barometer is that it is expensive
to measure. Carbon cycler models have not yet identified all the sinks and sources of carbon on the earth.
Although there have been excellent measurements of carbon at selected micro-sites across the landscape,
carbon has proven to be complex to measure. Carbon flows vary by time of day and season. They are
affected by the whims of weather. They are highly sensitive to species mixes and ages. They vary from
the forest floor to the tops of trees. Carbon stocks include such stable items as tree trunks and branches,
but they also include leaves, litter, roots, and soils. Getting accurate measures of all these components of
stock is not straightforward. Since the program would measure the difference in stock from one time
period to another, accurate measures would be extremely important. Otherwise, countries would be
subject to large random fluctuations in credited emissions simply from fluctuations in measured stock.
The carbon stock program would consequently have to devote serious resources to measuring stocks
carefully.
An interesting sidelight of counting terrestrial carbon storage is that it is affected by greenhouse gas
policies (Sohngen et al., 1998). The increasing levels of carbon dioxide in the atmosphere will stimulate
plant growth leading to higher levels of carbon storage. This becomes a bonus of using terrestrial carbon
as a measure since every country will get some credit for it. As climate changes, this too will affect the
carbon in terrestrial systems, although this effect may be either beneficial or harmful. For example,
grassland soils lose carbon with warmer temperatures. These losses would have to be considered
emissions under a carbon storage program. In contrast, other ecosystems may be able to store more carbon
in a new climate regime (VEMAP, 1997). Some areas will gain and others will lose from climate change.
An alternative approach to a complete landscape program is to develop a policy-based program
which would explicitly measure only official projects to store carbon. The baseline is the initial condition
of lands as they enter the program. Rather than determining a physical quantity of storage over the entire
landscape, the policy program would focus only on official sink management efforts. Areas enter the sink
program when a management project is created, such as a new forest. The country measures the carbon
storage at the site at the beginning of the project and is credited with changes in carbon storage for the life
of the project.
One advantage of an explicit sink program is that it focuses only on what is under the control of
each nation. Natural swings in carbon storage would not be considered unless they were captured in the
program area. Countries could control what happens in the sink program. Monitoring could be devoted
strictly to sink program areas. Further, simple accounting rules could be used instead of complex carbon
measurements. Programs could be credited with a certain amount of carbon simply on the basis of average
growth rates or other conventions. Monitoring costs would be more modest with this program.
4
The problem with including only explicit projects in carbon accounting hes in defining an adequate
baseline There is an incentive for countries to try to count all new forestry planting projects as carbon
storage programs. That is, there is an incentive for countries to cut down trees and then enter the bare land
into the programs. All the increased carbon storage in these areas would count as a net gain. Mature areas
would not be included in the program until they were harvested. By appearing to start with vast areas of
empty land, this could create the appearance of setting aside large amounts of carbon. However, many of
these forestry areas would have been planted anyway, so that what appears to be new carbon storage may
not be not new at all.
The policy program could be made more honest if there was a way of determining what would
happen in the absence of an explicit carbon program and then crediting the carbon program only for
marginal changes. The problem is that it is difficult to know what each country would have done in the
absence of a carbon program. There are many changes occurring in forests even without carbon controls.
Timber plantations are being established in subtropical regions of the world (Sohngen et al., 1998a). More
intensive forestry practices are being implemented in productive forest areas (Sohngen and Mendelsohn,
1998). Natural forests are being actively managed in fringe regions (Sohngen et al., 1998a). Farmers are
still converting forest land into agricultural sites in tropical regions. All these changes are following a
slow dynamic path determined by major economic forces around the world. A carbon sink program is just
one more dynamic force on top of these other active agents. Consequently, it is difficult to know whether
a new project is a carbon project, a timber project, an environmental project, or some combination of the
above. In reality, most activities will respond to a combination of incentives.
One way of limiting the accounting mischief in establishing baselines is to make all official
projects permanent. Countries could add new lands to the sink program whenever they wished but they
could not withdraw lands. Countries who use the policy-based approach to bias baselines would
exaggerate the marginal contribution of their carbon program. However, this would be a one-time affair
occurring at the beginning of each project. Land would be entered when cleared. However, after this
point, countries would be responsible for any future loss of carbon at these sites.
This unfortunately would create an incentive for countries to clear forests just to enter them as bare
land. Natural mature forests would be cut down just to benefit from the carbon policy. Since this would
clearly not be help control greenhouse gases, one possible solution is simply to credit countries for the
carbon in existing natural forests. That is, one could give countries credit for accumulating the amount of
carbon currently in natural forests. They would then be responsible for any change in the amount of
carbon in these forests. A country which subsequently cut the forest would have to treat the loss of carbon
as an emission. Countries would then have a large incentive to enlist their mature natural forests in the
program. Again, this would create a false signal of large setasides, but it would be a one-time effect.
The policy-based approach gives countries a number of credits for carbon control that do not really
remove carbon from the atmosphere. In a sense, the sink program delays the beginning of a serious
abatement program as countries first take advantage of these inexpensive credits. This is simply a delay,
not a permanent hemorrhage as countries eventually run out of these opportunities to claim new carbon
credits. Given that the urgency of starting expensive abatement efforts is not clear, the world may well be
able to afford an ineffective startup period as a mechanism for beginning the long road to international
cooperation.
An open question for carbon management concerns stocks of carbon in the economy. Although
many stock management programs have focused on storing carbon in vivo, it is also important to recognize
that substantial quantities of carbon are stored in paper, wood products, and landfills. Including storage in
the economy raises new policy options such as moving timber from paper to lumber and extending the
lifetimes of buildings. Including landfills raises the possibility of storing carbon at new underground sites.
As shown in Sohngen et al., 1998b, doing a complete accounting of carbon can change some conclusions
about the magnitude of carbon storage and even whether it is increasing or falling.
II. COSTS
Many carbon mitigation studies suggest that setting aside carbon in forests is cheap. The IPPC
review of forest mitigation costs suggests that most programs would cost 1-10 $/ton C (Watson et al.,
1996). These studies suggest that vast mature forests can be setaside cheaply, large land masses are
waiting to become new forests, and that existing forests can handle considerable increases of carbon.
Although these assertions are true on the margin, any attempt to set aside substantial quantities of carbon
are likely to be expensive. Further, even initially, carbon set aside programs may turn out to be quite
expensive because one cannot differentiate between new actions and actions which would have taken place
anyway.
The amount of forests on the earth's surface has shrunk considerably in the last 300 years as society
has shifted land use from forests to cropland and grazing. One obvious solution to protecting the stocks of
existing carbon is to prevent further deforestation. That is, prevent more mature natural forest land from
being converted to cropland. The opportunity costs of preventing further deforestation appears to be low
because the productivity of most of the remaining lands are low and they are inaccessible. In recent
analyses of future timber needs, Sohngen et al., 1998a calculate that most of the remaining natural
inaccessible forests are in the tropics and boreal regions. These areas are low productivity and low valued
regions. Sohngen et al predict that these areas will not even be harvested for timber. Despite the fact that
the forests in these areas are mature, their economic value is low enough that the timber market does not
intend to harvest this wood. Examination of returns from agriculture in the boreal and tropical forests
suggest that these values are also very low suggesting that there is little economic pressure to convert to
farming. In other words, the opportunity costs of protecting these natural forests are effectively zero. The
remaining natural forests should be protected. However, it would appear that they would be protected
even without a carbon program.
If the bulk of existing mature natural forests are likely to be left alone by the economic system,
what would happen if a program were created to pat countries to protect these stocks. Countries would
not likely admit that only a small fraction of the remaining stocks are vulnerable. Instead, they would ask
to be compensated for the entire stock within their borders. Although it might only cost a small amount of
money to protect the marginal sites which would have been harvested, a large sum might get spent
protecting all of the remaining forest. A potentially inexpensive program to protect the fringes of these
forests would turn out to be an expensive program to protect everything.
If new amounts of carbon are to be extracted from the atmosphere, they will have to come from
6
new forests or more intensively managed forests. If we are to convert land from other uses back into
forestry, where will the new forest land come from? One solution is to reverse historical trends and plant
trees where they used to be. This would be the simplest approach from a biological perspective because
one is returning the land to its natural state. A place where trees could compete on their own. The
problem is that most of this fertile land is in productive use now. That is, fertile areas where forests have
been cleared, such as the Willamette Valley or most of France and Germany, are now farms. In order to
plant new forests, these lands must be taken out of cropland. Agricultural subsidy programs in highly
industrialized temperate countries have created an excess of agricultural land. The shortrun costs of taking
away farmland is currently low. In the future, however, these lands will be needed for agriculture to feed
expanding world populations. The long run costs of reforesting substantial amounts of temperate farmland
are likely to be high.
An alternative approach is to rely on marginal farmland. That is, grow trees on grazing lands and
lands which barely support crops. These lands are inexpensive and account for almost a quarter of the
earth's land surface. However, there is a drawback to using these lands; they are less productive. Although
one can plant forests in these areas, the trees may grow slowly or they may be subject to high probabilities
of fire. Consequently, although these areas may be inexpensive, they may not support large amounts of
carbon storage.
Alternatively, one could try to intensify forest management and increase carbon per hectare on
existing forest land. One could increase carbon per hectare by lengthening forest rotations, increasing
stocking, or stimulating growth. Intensive management is underway on fertile lands. The question for a
carbon program is how much intensity to apply and how does intensity and rotation length interact to affect
carbon storage. Clearly there are diminishing returns to new inputs suggesting that small programs might
be effective but that large programs would have much higher costs. For example, fertilization increases
growth rates but at diminishing rates. Further, as trees get larger more quickly, there is an incentive to cut
them sooner which defeats the entire purpose of increasing on-site storage. Preliminary attempts to use
intensive management to increase on-site storage have not been promising.
An alternative approach is simply to manage for more storage. An obvious approach is to take
forest lands and set them aside. As these lands mature, they will store more carbon. Of course, once such
lands reach maturity, they will no longer pull any additional carbon from the atmosphere. Further, by
setting aside these lands, one obtains no market services from the trees which is somewhat expensive on
productive land. However, this strategy is well suited for marginal commercial timber land which may
have little value.
An alternative approach is to manage commercial lands differently. By lengthening rotations
beyond economic optimums, one can increase the storage on commercial lands. Further, since these lands
are still used for harvest, one can still maintain a timber industry.
To illustrate this point, we examine lengthening rotations on Loblolly Pine (Table 1) and Douglas fir
(Table 2) plantations in productive and marginal commercial forest. We assume that carbon storage is
proportional to trunk volume. Although carbon in forest soils is important, it is not clear that these
programs would affect the amount of carbon stored in the soils. Carbon in branches is probably
proportional to volume.
7
It IS clear from Tables 1 and 2 that increasing rotation length stores more carbon in trees. By
holding trees till they reach larger sizes, there is more above ground carbon being stored. Because larger
trees have higher average growth rates, this increase can be sustained without giving up average growth
rates. For example, the economically efficient age to harvest Loblolly Pine on a good site is 32 years.
Holding onto the trees until they are 100 gives the same average growth rate per hectare. The cost of
holding onto the larger trees is the opportunity cost of holding such large volumes in slower growing trees.
The present value of rotations falls from the optimum of $1105 to $43 as one lengthens the rotation from
32 to 100. A similar phenomenon occurs with Douglas Fir which is slower growing. The optimal rotation
is 58 on a good site with a long rotation of 200. The present value falls from $610 to -$184 by lengthening
the rotation. However, for both species, the longer rotation involves holding much bigger trees on average
on timber lands. Tree volume would increase by 6 fold for LobLolly Pine and by ten fold for the Douglas
Fir.
Examining the marginal cost of lengthening the rotation reveals an interesting phenomenon.
Lengthening the rotation to the economic optimum has no cost as the extra growth rewards the owner for
waiting. Beyond the economic optimum rotation age, the marginal cost rises as the present value of the
trees falls rapidly with longer rotations. Curiously, after one passes the maximum sustained yield rotation,
the marginal cost of lengthening the rotations begins to fall. The trees continue to grow but the present
value has fallen enough that extending the rotation further becomes less expensive.
Another interesting result is that there are important differences between productive and marginal
forest lands. Productive lands are more responsive to lengthening rotations. That is, they can add more
wood and thus more carbon per hectare. However, the cost of adding wood to productive lands is higher.
Marginal timber lands are actually better suited for longer rotations than productive lands because the
opportunity cost of mismanaging marginal lands is lower. Although they cannot setaside as much carbon
per hectare, marginal lands cost less per ton of carbon stored.
III. NONMARKET EFFECTS
It is widely thought that carbon storage programs can be nothing but helpful to nature. By
lengthening rotations and setting aside lands, one is returning more lands into natures hands and
eliminating the role of management. Many environmentalists believe that whatever changes eliminating
management will cause, they are beneficial. It certainly is reasonable to argue that removing lands from
management will increase the wilderness quality of lands. As more lands are affected solely by the forces
of nature, people who simply want to be in unmanaged lands, will be able to enjoy more spaces. However,
official carbon storage programs may decide to manage the lands for carbon by planting exotics or by
tending the trees. Further, people looking for specific outcomes in nature, such as wildflowers,
mushrooms, game animals, songbirds, or large trees may or may nor benefit from the carbon programs.
The effect of these programs on nonmarket services needs to be examined. Any large scale change in the
way that land is managed across the globe is likely to have myriad but possibly profound effects on nature.
We need to examine these nonmarket effects and try to determine whether they are beneficial or harmful,
important or trivial.
8
It IS hard to project what effect carbon storage programs will have on the globe since it is not yet
clear what these programs will actually do. If the programs merely try to freeze land use in its current
form, people may perceive the programs being harmless. However, if the programs prevent land use from
shifting to optimal future uses, the programs may have a large effect in the long run. Further, it is not at all
clear whether a world designed to store more carbon provides more or less nonmarket services.
For example, if programs lengthen tree rotations, one can predict that tress will grow larger. People
who admire large trees will have more landscape to enjoy. Animals which prosper in older rotations will
have more habitat. In contrast, animals which prefer younger trees will have less habitat. People who
enjoy early succession habitats will have less landscape. Whether these changes are beneficial or harmful
depends upon the magnitude of these changes and people's preferences. Although it is well known that
citizens have strong feelings about protecting nature, it is not clear how they would respond to choices
between young and mature forests. Social scientists have not done enough research on the details of
people's preferences to be able to predict whether such changes would be perceived as improvements or
damages.
Although programs to set aside land for natural forests would enhance wilderness, other programs
to increase storage may require management. For example, many analysts are pushing to plant trees in
locations where they have never been before. With management, for example, one could plant trees in
grasslands and deserts. Afforestation in unnatural locations would require irrigation and planting. They
may provide habitat or they may turn out to be poor sites for wildlife which has never seen trees in such
locations before. Carbon programs may turn to exotics. The purpose is to try to maximize carbon storage.
Certain trees may prove to be better than natural stocks for storing carbon. The exotics, however, may or
may not be good habitat.
Since one is potentially considering managing the entire global terrestrial surface, nonmarket
services from these lands are likely to be important. Before large scale programs are put in place, th effect
of these programs on nonmarket services should be assessed. If the programs appear to be harmless, then
nonmarket services may prove to be unimportant. However, it is far more likely that nonmarket services
will be affected. In fact, the larger the programs, the more likely nonmarket services should be considered.
The important point to remember is that we would be foolish to institute solutions to the greenhouse gas
problem which turn out to be more harmful than climate change.
IV. CONCLUSION
This paper notes that managing sinks has been brought forward as a promising mechanism to
control greenhouse gases. There is certainly merit to the idea that stocks could be managed to extract
some amounts of greenhouse gas from the atmosphere. However, as with all things, it is likely to be
difficult to institute programs which will extract large quantities of greenhouse gases. As the programs
expand in scale, they will become increasingly expensive. Not only will they require increasing amounts
of valuable resources, but they are likely to have increasingly serious nonmarket consequences.
This paper also notes that policies to control stocks could be expensive to monitor. Complete
accounting of the carbon cycle is expensive requiring extensive knowledge of land use and carbon
9
consequences. More limited programs focused on official carbon projects is more feasible. However, this
project focus has its own problems of bias and incentives
Although countries may well want to pursue carbon stock management as part of an overall
strategy to control greenhouse gases, they should be aware of how difficult this will prove to be in the long
run. Policies should be carefully evaluated not only for their short term political expedience, but also for
their long term consequences. Controlling greenhouse gases is different from most environmental
problems. The key to greenhouse gas control is to be effective in the long run. Managing terrestrial stocks
of carbon can contribute to greenhouse gas control in the long run, if the programs are carefully designed
today.
10
REFERENCES
Bruce, J. Lee, H. and Haites, E. 1996. Climate Change 1995; Economic and Social Dimensions of
Climate Change Intergovernmental Panel on Climate Change,
Cambridge University Press:
Cambridge.
Houghton, J. T., Meira Filho, L. Callander, B. Harris, N. Kattenberg, A. and Maskell, K. (eds)
1996a. Climate Change 1995: The Science of Climate Change Intergovernmental
Panel
on Climate Change, Cambridge University Press: Cambridge.
Sohngen, B., Mendelsohn, R., and Sedjo, R. 1998a "Forest Conservation, Management, and
Global Timber Markets" American Journal of Agricultural Economics, (forthcoming).
Sohngen, B., Mendelsohn, R., and Neilson, R. 1998b "Predicting CO₂ Emissions From
Forests
During Climate Change: A Comparison of Natural and Human Response Models" Ambio
(forthcoming).
Sohngen, B. and Mendelsohn, R. 1998. "The Economic Effect of Climate Change on US
Timber Markets" in Mendelsohn, R. and Neumann, J. (eds) The Economic Impact of
Climate
Change on the Economy of the United States Cambridge University Press, Cambridge, UK.
VEMAP Members. 1995. Vegetation/Ecosystem Modeling and Analysis Project: Comparing
Biogeographic and Biogeochemistry Models in a Continental-Scale Study of Terrestrial
Ecosystem Response to Climate Change and CO2 Doubling. Global Biogeochemical Cycles 9:
407-437.
Watson, R, Zinyowera, M., Moss, R., and Dokken, D. 1996. Climate Change 1995:
Intergovernmental Panel on Climate Change Impacts. Adaptations. and Mitigation of Climate
Change Cambridge University Press: Cambridge.
11
TABLE 1
Cost of Carbon Mitigation From Lengthening Tree Rotations
Loblolly Pine
High Site Quality
Low Site Quality
Age
Avg Vol
M.Cost
Avg Vol
MCost
Years
MBD/yr
S/MBD
MBD/yr
S/MBD
30
9.6
-10.9
1.9
-14.4
40
17.2
23.2
4.8
-17.9
50
24.9
30.7
8.5
6.6
60
32.1
29.9
12.8
14.3
70
38.9
26.3
17.3
15.6
80
45.1
21.9
21.8
14.3
90
50.7
17.7
26.2
12.2
100
55.9
14.0
30.4
9.9
a
The yield function for Loblolly pine is InV=12.11-92.71/n for 80 site quality and InV = 12.09-
52.9/n for 120 site quality. The price is $100 per thousand board feet, regeneration costs are $150
per acre, and the interest rate is 4%. The Faustmann rotation is 32 years for the high site and 46
years for the low site.
12
TABLE 2
Cost of Carbon Mitigation From Lengthening Tree Rotations
Douglas Fir
High Site Quality
Low Site Quality
Age
Avg Vol
M.Cost
Avg Vol
MCost
Years
MBD/yr
S/MBD
MBD/yr
S/MBD
60
10.5
2.9
1.8
-34.4
80
22.8
17.6
5.7
4.0
100
37.0
14.5
11.4
8.7
120
51.8
9.5
18.4
6.8
140
66.4
5.7
26.2
4.3
160
80.3
3.2
34.3
2.5
180
93.6
1.7
41.5
1.4
200
106.1
0.9
50.8
0.8
a
The yield function for Douglas fir is InV=12.91-223.71/n for 110 site quality and InV = 13.06-
145.61/n for 160 site quality. The price is $200 per thousand board feet, regeneration costs are
$200 per acre, and the interest rate is 4%. The Faustmann rotation is 58 years for the high site and
75 years for the low site.
13
Page 1
Sinkbil2.wpd
U.S. Sink Source
Annual MMTCE Carbon Sequestration or Emissions
during the budget period (BAU Case)
2008-2012
2013-2017
2018-2022
Alternative 1: Include regeneration of harvested forest lands, exclude carbon harvested
from existing forest lands
Afforestation
31
33
33
(Established since 1990)
Reforestation
59
97
137
(Forests replanted since
1990)
Deforestation
-15
-15
-13
Alternative 1 Total
75
115
157
Alternative 2: Include regeneration of harvested forest lands, include carbon from
harvesting existing forest lands
Afforestation
31
33
33
(Established since 1990)
Reforestation
14
43
76
(Forests replanted since
1990)
Deforestation
-15
-15
-13
Alternative 2 Total
28
66
108
Alternative 3: Exclude existing forest lands - Only count new forests and deforestation
Afforestation and
31
33
33
reforestation
(New forests established
since 1990)
Deforestation
-15
-15
-13
Alternative 3 Total
16
18
20
Alternative 4: Define "activities" as new and additional projects
Net impact on baseline from Alternative 4 is Zero
Carbon Sinks:
Analysis of the Kyoto Protocol
Summary
Introduction - the scope of our commitment
Sinkbil2.wpd
Page 2
but interpre toton
is un number "Endeided
Under the Kyoto Protocol, the United States must reduce net greenhouse gas emissions to an
average of [about 1494] million metric tons of carbon equivalent (MMTCE) over the 2008 to
2012 budget period. These emissions represent an average annual departure from the 1990 base
year of about 560 MMTCE annually in the five years of the first commitment period.
Emissions Budget =
5 years X (1990 Emissions of CO2, CH4, N2O + 1995 Emissions
of HFC, PFC, and SF6) X 93% [excludes land use change and forestry]
2008-2012
Commitment =
[Total emissions of CO2, CH4, N2O, HFC, PFC, SF6 2008-2012] - [net
changes carbon stocks from forests due to afforestation, deforestation and
reforestation] level of the
up,
as measured protocol
The accounting system for forests and land use change in the K yoto Protocol is significantly
different from accounting methods previously used by the US. These changes have significant
implications for the magnitude of baseline US emissions growth and for defining actions that can
be used to offset emissions. The most significant change is that Parties are no longer required to
subtract carbon sequestration that occurred in the base year in determining their budgeted amount
of emissions. This change provided a benefit to the US of 55 MMTCE in 2010 (3% of our
overall emissions). In addition, the Kyoto Protocol requires that forest and land use change
activities be used to meet a Parties commitments but limits activities to: afforestation,
reforestation and deforestation activities since 1990. Under the agreement, Parties must count
greenhouse gas emissions and removals that
"[result] from direct human-induced land-use change and forestry activities, limited
to afforestation, reforestation, and deforestation since 1990, measured as verifiable
changes in stocks in each commitment period."
The Parties to the protocol could interpret the activity list (afforestation, reforestation, and
deforestation) several different ways with potentially with very different contributions of sinks in
7
the baseline, as well as different opportunities to credit increases in sinks due to policies or other
actions. The purpose of this paper is to explain the Kyoto sinks language and evaluate alternative
interpretations and, where possible, net sequestration effects for the U.S. We will be working on
analogous numbers for other key countries.
This paper describes four alternative sets of definitions for the activity list. Each set of definitions
has pros and cons. Under any of the proposed alternatives, the US either gains or is no worse off
than the negotiating team anticipated in Kyoto. This does not mean that there are not problems
with the language. Indeed, each alternative has problems that can only be addressed in the
context of long-term changes to the Kyoto Protocol language. As a consequence, we strongly
recommend that the USG develop a clear strategy for improving the forest and land use activity
list (as requested in Article 3.4 of the Protocol). It is expected that this issue will be a top priority
of negotiators at the upcoming Meeting of the Parties (MOP) in Buenos Aires, in November,
1998.
describe all 4 alternatives here
Sinkbil2.wpd
Page 3
Options for Defining Forest and Land Use Activities
Alternative 1: Include regeneration of harvested forest lands, exclude carbon harvested from
existing forest lands
Afforestation: planting or other human-induced forest establishment on lands not in
forest.
Reforestation: planting or other human-induced forest regeneration after harvest of other
forest disturbance.
Deforestation: conversion of forest lands to other uses.
Pros:
This set of definitions produces the biggest carbon bonus
Consistent with forestry terminology used in the United States
Consistent with agreement to exclude harvesting (negotiated in contact groups during the
negotiations)
Allows some activities on forest lands (e.g. regeneration) to be given credit
Cons:
Hong
Does not accurately represent the impact of activities on the environment. Carbon
emissions from forest activities are excluded.
can
Creates an incentive to prematurely harvest lands -- to get lands into the system.
Lands that are sustainably harvested (partially cut) may not qualify. Only lands that are
W
clear cut.
Alternative 2: Include regeneration of harvested forest lands, include carbon from harvesting
existing forest lands
Afforestation: planting or other human-induced forest establishment on lands not in
forest.
Reforestation: planting or other human-induced forest regeneration after harvest of other
forest disturbance( including carbon emissions from harvesting activities.
what does
3
Deforestation: conversion of forest lands to other uses.
This
m
Pros:
The incentive to prematurely harvest forest lands is lowered
Cons:
Page 4
Sinkbil2.wpd
May be inconsistent with negotiating history (to exclude carbon from harvesting).
May still provide incentives to clear cut (if lands that are sustainably managed do not
qualify).
Alternative 3: Exclude existing forest lands -- Only count new forests and deforestation
Pros:
Eliminates the incentive to harvest -- since regeneration of harvested lands are not
considered "reforestation II under this definition
Eliminates the large "optical" bonus of carbon that is a result of counting replanting of
lands harvested (but not subtracting the carbon that is harvested)
Focuses only on baseline changes in forest cover to be credited. Defers the decision of
how to treat existing forest lands until they can be comprehensively addressed in Buenos
Aires.
Cons:
All existing forest lands are not addressed.
Alternative 4: Define "Activities" as "Projects": Under this interpretation, the US will essentially
disregard baseline trends in forest and land use change and focus on specific actions that will
increase carbon sequestration. This approach is consistent with the interpretation used in Kyoto
that allowed the US to agree to a 7% reduction from 1990 levels -- which took no credit for
forest and land use change carbon.
Pros:
Allows for forest carbon sequestration projects
Greatly simplifies what we need to account for
Only provides positive sinks, albeit small
Cons:
Possibly inconsistent with negotiating history
Doesn't count baseline trends
No disincentive to emit carbon from sinks, e.g. harvest and deforestation
Ignores the effect of projects on non-project lands (e.g. offsetting effects)
Hard to measure as "verifiable changes in stocks" as required by Article 3.3
Leakage of carbon emitting activities a problem.
Page 5
Sinkbil2.wpd
Appendix A -- Key Word Analysis of Forest and Land Use Change Language
"activities"
The qualifying land use change and forestry activities can be interpreted in two main ways:
(1) All listed activities:
all qualifying land use change and forestry activities, done publicly or privately
(2) Only additional or special projects designed specifically for carbon sequestration.
This interpretation reads "activities" as synonymous with "projects," which greatly limits the
effect that sinks can have on our target responsibilities, one way or the other. It is something like
a domestic joint implementation.
"since 1990"
This phrase restricts the sources of carbon sequestration to only those that result from the listed
forestry activities that took place since 1990. For instance, the carbon sequestered in the budget
period by 50 acres of forest planted in 1989 cannot be included in our positive sinks since the
trees were planted before 1990. As the budget period commences, each annual cohort of trees
planted in the years after 1990 sequesters an amount of carbon based on its acreage, age, and
other characteristics.
Since the overwhelming majority of U.S. forests were established before 1990, the phrase "since
1990" severely limits the carbon sequestration we may count as positive sinks. Other countries,
such as New Zealand, Canada, and Sweden, have experienced much more rapid forest turnover (a
shorter forest harvest cycle) or much greater reforestation and afforestation since 1990 than the
U.S. For those countries, the share of their net actual sequestration that "counts" under the
protocol is much higher than for the U.S., making the U.S. relatively disadvantaged by this
language.
"measured as verifiable changes in stocks"
This language may exclude future consideration of "conservation" activities as a positive sink,
either in the current language or under an amended list. Since conservation activities do not
change stocks. rather, conservation maintains and protects current stocks.
This language may future inclusion of conservation activities in the list of qualifying activities.
"in each commitment period"
This phrase restricts qualifying sinks to those that occur in the budget period. So, for example, if
we deliberately burned down 1000 acres in 1998, those negative sinks (emissions) would not
count against us at any time. Likewise, if we replanted the forest as soon as we burned it down in
Sinkbil2.wpd
Page 6
1998, the carbon sequestered by the growth of the young forest over the budget period would
count as positive sinks. If we burned down 1000 acres in a budget period, the negative sinks
would count against us in that five year commitment period, but no other.
"In each commitment period" appears to rule out accounting approaches that annualize the
aggregate expected sinks from a given forestry activity, rather than counting the marginal
sequestration on a year by year basis.
Sinkbil2.
Page 7
Appendix B -- Other Important Sink Issues
Issue: Some forest and land management actions not included: The activity list is incomplete.
Domestically and internationally there are opportunities to sequester carbon and avoid emissions
through improved forest management, conservation, and agricultural soil management. We
cannot receive actions for these actions domestically and may not be able to receive credit for
these actions internationally (Although the language in the Clean Development Fund is ambiguous
on this point).
Issue: Potential incentives to clear cut lands -- since lands that were already in forests in 1990
and that have not been either reforested, afforested or deforested since 1990 cannot be given
credit for carbon sequestration, land owners could have incentives to harvest and "reforest"
counting the carbon stored from the reforestation activity. This could become more of a problem
in the future since the US is promoting sustainable forest management and selective harvesting.
Sustainable forest management systems continuously maintain forest cover and remove only a
portion of trees at any point int time. Lands managed sustainable may not qualify for credit since
they technically are not "reforested"
Issue: The magnitude of the benefits from this new method for including sinks is open to
interpretation. It is extremely likely that other countries will interpret this language differently.
This could cause several problems: 1) the proliferation of "paper tons"; 2) inconsistencies that will
prohibit international trading; and, 3) contentious review and assessment of Party's compliance
with commitments.
Issue: Credits for baseline trends on forests and land use change under certain interpretations of
the Kyoto Protocol language are so large that they will significantly undermine the need for any
action to reduce greenhouse gas emissions. Other countries, e.g. Russia and Canada may be able
to offset much of Annex I emission growth, depending on how forests under some of the
alternative accounting systems.
Sinkbil2.wpd
Page 8
Appendix C -- Options for Additional Activities to Include to the List in Buenos Aires
In Buenos Aires, the U.S. may propose to add additional activities to the list of qualifying forestry
activities, whose net contribution to sinks may be positive or negative. The primary purpose of
including additional forestry activities would be to (1) make the accounting more comprehensive
and scientifically sound, and (2) to eliminate perverse incentives created by leaving out key
carbon-influencing activities. Some examples of possible additional forestry activities:
1. Forest Management
2. Change the since 1990 to since 1900.
3. Conservation.
4. Agricultural soil management
5. Harvesting (only if we can get the other changes).
Harvesting
Instead of counting all of the harvested carbon, we could count a subset of it if
some is sequestered or supplants fossil fuel combustion, which
could add up to as much as 50% of the harvested biomass. Note
that properly accounting for the negative sink of dislodged soil
carbon in harvested areas may make even a 50% biomass reduction
too small.
Forest management
Positive sinks:
overall forest growth -- the most significant positive sink there is
Negative/neutral sinks:
selective harvest -- taking only selected trees, but leaving land "forested"
agroforestry -- thinning forest to crop the understory
controlled burns that don't officially deforest
fire and disease
Pros: creates incentive to manage forests to keep carbon sequestered
Cons: hard to determine whether directly human-induced
data limitations, especially in developing countries
Agricultural soils
Pros: could be significant positive sink
Sinkbil2.wpd
Page 9
Cons: very uncertain to measure
not obviously a "land use change" or a "forestry activity" so language
change would have to be more significant
Conservation
tricky to verify true additionality from preservation activities
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CC JF
RL
JA
A Meorig .
CLIMATE POLICIES AND PROGRAMS DIVISION
Office of Policy, Planning & Evaluation
U.S. Environmental Protection Agency
401 M Street SW, Washington, D.C. 20460
To:
David Sandalow / Adele Morris
Organization:
CEQ/CEA
Phone:
Fax:
456-2710 395-6870
From:
Bill Hohenstein
Phone:
202 260-7019
Fax:
202 260-6405
Date:
March 13, 1998
Pages including cover sheet:
7
David:
Here is a draft "Strategic Option" paper fonforests and land use change. We have not
yet circulated it. Your thoughts would be greatly appreciated.
Bill
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DRAFT
Predecisional draft. Do not cite or distribute.
Draft: March 13, 1998
SINKS
The U.S. government will need to make decisions in the near future about what it seeks to
achieve at COP4, and in the longer term, regarding use of sequestration to meet GHG
commitments (Articles 3.3 and 3.4). In this context, how the U.S. decides to move forward on
these provisions will influence other priority issues for the U.S., including progress on trading
and CDM provisions, as well as on perceptions/domestically and internationally of the
Administration's aggressiveness in addressing climate change. This paper identifies several key
concerns and, then, three options for how and when to improve certainty on the land use and
forest language.
I. Policy objectives relating to sinks:
1. Base policies on sound science.
The U.S. should employ the best practicable scientific methods for monitoring our carbon and
other greenhouse gas activity in land use and forestry, and ensure that the emissions and
sequestrations that we report are scientifically verifiable. Where data gaps and uncertainties
exist, we should move to improve our ability to understand and measure GHG activity. We
should work with other countries through the IPCC and other fora to spread the adoption of
rigorous measurements and methodologies, and where feasible, the treaty implementation should
provide incentives to obtain and report good quality measurements. Policies should adapt to new
science and technology, and be designed with the expectation that they will be updated.
2. Be consistent with the level of commitment the US agreed to for the first
commitment period. Establish subsequent targets knowing the role sinks will play in
making those targets more or less difficult to achieve.
Sink policy for the first commitment period should not produce a sharp departure from the targets
we understood were being negotiated in Kyoto! Our interpretations should also be fully)
consistent with recent public statements. Targets for subsequent periods should also be based on
net emissions. We should have a clear understanding of the effect sinks will play in the
calculation of our net emissions and the consequent economic implications of our new targets.
3. Create appropriate environmental and economic incentives.
To a large extent, the only way to provide the proper environmental and economic incentives is
to have an accounting system for sinks that is as comprehensive as possible. The Kyoto Protocol
limits sinks in several ways. Eligible sinks must result from:
1) afforestation, reforestation and deforestation
2) direct, human-induced activities
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3) activities since 1990
4) measured as verifiable changes in stocks
Important cost savings may be lost if certain land use activities sequester carbon more cheaply
than others, but are excluded from the treaty. Likewise, activities that emit carbon but do not
count as emissions, e.g. harvesting, will not be discouraged by the treaty.
Similar incentive problems are created by the Protocol's limitation of counting only sinks on
lands that have experienced the activities since 1990. Countries have the incentive to undertake
those activities, potentially including harvesting to replant, in order to get the sequestration on
those lands into the accounting system. Excluding non-human-induced sink activity, while not
penalizing Parties for circumstances beyond their control, may lower the incentive to prevent
natural disturbances that emit carbon. By counting sink effects as comprehensively as possible,
an accounting system would naturally produce the right incentives.
[Legal question: Would harvest-related emissions already count under Article 3.3 as "emissions
from sources?" Bill: Is going beyond human-induced unthinkable?]
4. Promote other environmental objectives related to land use, recognizing tradeoffs
and complementarities between environmental goals.
Land use changes and forestry have significant-environmental impacts beyond their effects on
greenhouse gases. In our domestic implementation, we should be alert to creating incentives that
affect the broader environment. For example, our implementation should implicitly encourage
sound forestry and agricultural management practices along with carbon sequestration. To the
extent that optimizing carbon sequestration conflicts with, say, improvements in biodiversity, our
policy should strike appropriate balances.
5. Implement sink policies that promote trading, joint implementation, and CDM
forest activities.
Implementation of the Kyoto Protocol should allow GHG sequestration to produce new credits,
either in the form of tradable credits, or as CDM credits from verifiable projects outside Annex
B. Sinks are the only avenue through which to "print new currency" in Annex B countries. If
such currency is to be tradable internationally, sink credits from each country should be
equivalent. This suggests a strong advantage to forming a common interpretation of eligible sink
activities and a common accounting methodology across countries. CDM projects, on the other
hand, may not be limited to the activities in Article 3.3, which raises the issue of whether those
credits can be treated as equal to tradable credits generated under Article 3.3. This issue is dealt
with in another paper, but we flag it here for its importance. Another advantage to a common
approach to sinks is that no Party can enjoy especially lenient targets by unilaterally interpreting
sinks to its particular advantage.
However, the current language does not meet all of these criteria. Problems with the current
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Draft: March 13, 1998
language include:
There could be potential "perverse" incentives to prematurely harvest lands;
Some actions (e.g. agriculture soils, forest conservation, forest management) have not
been included;
The magnitude of the benefits from sinks is open to interpretation; and
Lands managed sustainably may not qualify for credit.
II. Options for Moving Forward
1. Ask COP4 to Decide on an Interpretative Statement
Options: The U.S. could seek a COP4 Decision to interpret Art.3.3 language regarding
the definitions of "afforestation, reforestation and deforestation." Four interpretations
have been evaluated by the technical sinks sub-group. However, none of the alternatives
meet all of the U.S.'s objectives.
Process: Clarity and consensus among the Parties is desirable to facilitate use of forest
offsets in international trading and the CDM, and to have certainty regarding how
compliance will be judged (affecting the stringency of commitments). However, a
Decision could be overturned by future Decisions more easily than an amendment.
Timing: A number of other Parties have expressed reticence to reopen this issue at
COP4, prior to gaining more technical consensus, for example through the SBSTA and
IPCC. A Decision to interpret the language could occur at any time, or the US could
unilaterally express its own interpretation, although the latter would not necessarily
prevent difficulties in approval of trades or compliance reviews.
2. Addition of activities to the list
Options: Include the all or some of the following activities: forest management; forest
conservation; and soil conservation. Itis unclear that we could achieve all of the
objectives above by simply adding activities to the list.
Process: Since the FCCC COP and the Protocol COP/MOP may have different rules for
adopting decisions, there may be benefits to waiting until the Protocol enters into force to
add activities. Under COP rules, additional activities would require a consensus decision
by the Parties FCCC. If we waited until after ratification, decisions made by the MOP
require only the agreement of 3/4 of alli Parties to the Protocol. However, if changing the
activities list changes the nature of the US commitment, we would need to send the
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changes to the Senate for ratification.
Timing: Should we initiate substantive discussions on adding new activities under COP
rules? Alternatively, should we wait to add activities until the agreement enters into
force? The tradeoff is that if we choose to add additional activities before the Protocol is
ratified, we would be required to reach consensus with all Parties to the Convention. If
we wait until the Protocol enters into force, we will only need a 3/4 majority to adopt new
activities, but we will most likely need to send the changes back to Congress for
ratification.
3. Modify the language
Options: There are several alternatives to the "activity list" approach that are more
comprehensive and more technically sound. Comprehensive accounting of all human
induced changes in carbon stocks would be the most scientifically defensible approach.
However, since some countries (with large land-bases) have large amounts of carbon
sequestration, this type of accounting will change the nature of commitments for these
countries in the first budget period. Without changes to Parties' first budget period
commitments, this approach would reduce the overall environmental protection offered
during the first budget period. Also, these changes would alter the relative commitments
of Annex B countries.
Process: These changes would (most likely) require an amendment to the Protocol.
Timing: A modification of the language is more complicated than either of the first two
options and could be difficult to apply to the first budget period. We could pursue an
amendment either before or after ratification (see the above discussion regarding COP VS.
MOP procedures for amendments). It may be difficult to apply these changes to the first
commitment period. However, we could pursue a hybrid strategy that uses simple
interpretations in the first budget period, while pushing to resolve the issues in
subsequent budget periods.
III. The Time frame for Moving Forward
There are several questions that need to be resolved that will help to gauge when we need to act.
. -Which issues need to be resolved before the Protocol can be sent to the Senate for Ratification?
How will decisions we want resolved regarding emissions trading and CDM rules be affected by
uncertainties in how forests and land use change are accounted for? Can we implement early
CDM actions without resolution to forest sink issues?
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Are there domestic reasons for acting quickly to resolve uncertainties on forests and land use
change? Possible reasons for this include the relatively high level of concern over activities that
have been left off of the list.
The decisions on these issues will help determine what we need to accomplish this year, prior to
and at COP IV, and what we should accomplish over the next 2 years.
Key upcoming meetings:
Bi-laterals with Russia, Japan in March
-Umbrella Group meeting
ACAP, planning meeting by ACAP in April
IPCC Forest Inventory Sub-group meeting in Senegal, May 3-6
-Non-annex I countries, use bilaterals with key countries to further a mutual understanding on the
principles that should guide future decision making on sinks.
-Brazil was a key advocate for the "activity list" approach.- what are their concerns? How can
they be addressed?
-Bonn Climate Subsidiary body meetings in June to move a common view forward.
-November, COP IV Buenos Aires
IV. The Process for Moving Forward
The role for Bilateral Discussions and informal meetings: The ACAP, Umbrella, and bilateral
meetings offer the earliest and most informal opportunities for assessing where other countries
stand on sinks. We are currently in the mode of listening to other parties but we could also use
these meetings to forge a coalition of Parties to adopt an certain approach, interpretation, or
process.
The role for SBSTA: Japan has proposed a standing contact group be formed to address
definitional issues. Do we support this idea? What technical issues should the SBSTA task to
the IPCC (or other group)? When should this happen? When is additional technical information
needed? The full SBSTA is a cumbersome body and negotiations on forests and land use change
have gone slowly with a great deal of misunderstanding along the way. The Japanese proposal to
create a policy/technical standing committee could provide a way to address policy/definitional
issues. It has the advantage of being more informal than a full SBSTA meeting and could allow
for a fuller exchange of ideas. It also could address policy/politically relevant questions the
types of issues that the IPCC cannot (and should not) address.
The role for the IPCC: The IPCC has proposed addressing the following: terminology
(definitions of Protocol language); uncertainties; stocks and flows; verification. The IPCC
proposed producing a short report on a 1-2 year time line. The IPCC plans to brief the next
session of SBSTA on these issues. The current role for the IPCC is limited to providing GHG
inventory methods and guidelines. The IPCC is a scientific and technical organization and is not
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the appropriate organization to evaluate how the Kyoto Protocol language should be interpreted.
The IPCC has, in the past, had great difficulty in assessing policy-significant issues (e.g. they
were unable to develop a workable definition of "what constitutes anthropogenic?"). They also
tend to work on the time frame of 1-2 years (at a minimum). Some of the more policy relevant
questions may need to be addressed sooner than that. The IPCC would also need to work in
close coordination with the SBSTA to ensure that they receive sufficient guidance and feedback.
Given that these problems can be addressed, the IPCC could help in the following areas:
Continue to develop comprehensive forest and land use change emissions and
sequestration methodologies and guidelines.
Guidance on how/if activities can be measured;
Identify structural problems with some interpretations;
Could address the issue of leakage at the project and country level (WG III has addressed
energy related leakage between Annex I and Non-Annex I countries);
Evaluate uncertainties in emissions and sequestration estimates; and
Assess the need and operation of monitoring and verification systems for forests and land
use change emissions and sequestration estimates.
EPA
Draft Technical Memo
U.S. Environmental
Internal Review Copy
Protection Agency
Climate Change Policies
And Programs
Division
An Impact Assessment of
Climate Change Mitigation Policies and Carbon
Permit Prices on the U.S. Agricultural Sector
Prepared by:
Bruce McCarl, Ph.D.
McCarl and Associates
College Station, TX
and
Marcia Gowen, Ph.D.
Trevor Yeats
ICF Incorporated
Washington, D.C.
Prepared for:
Climate Change Policies and Programs Division
Office of Policy and Program Evaluation
U.S. Environmental Protection Agency
Washington, D.C.
October 1997
U.S. Agricultural Sector Impacts from Carbon Permit Prices
An Impact Assessment of
Climate Change Policies Mitigation and Carbon
Permit Prices on the U.S. Agricultural Sector
Executive Summary
The U.S. government is considering various climate change mitigation policies that may result
in economy-wide impacts. One policy option to reduce greenhouse emissions in the U.S. is to
establish a carbon cap and trade system, under which carbon permit prices would emerge and
eventually be internalized into the farm and non-farm sectors through higher energy prices.
This study explores potential impacts on the U.S. agricultural sector from the imposition of
various carbon permit prices. Specifically, it examines economic welfare, commodity price, and
environmental impacts associated with introducing three levels of carbon permit prices ($25,
$50, or $100 per ton carbon) in 2000, 2005, 2010, 2015, or 2020. A national agriculture model
(ASMSOIL) is used to assess these impacts. The findings of this study suggest relatively small
agricultural sector losses result in any of the years from the introduction of carbon permits,
while positive local environmental benefits occur in terms of lower soil erosion and water use.
The major observations are that when carbon permit prices are internalized through higher
energy and chemical prices:
(1) the U.S. agricultural sector is not very sensitive to these prices because the resulting
higher energy prices make up a relatively low part of the total cost of production for the
U.S. farm sector;
(2) soil erosion and irrigation water use declines but cropland and chemical (pesticide and
fertilizer) usage expands slightly initially;
(3) achieving U.S. soil erosion goals becomes cheaper but the implementation cost of
expanding or maintaining the U.S. CRP acreage;
(4) carbon price revenues are large and more than offset any higher CRP costs;
(5) U.S. farm sector results are largely stable over the 2000-2020 time period and do not
imply that, within agriculture, any one time period of implementation is better than any
other for introducing a carbon trading system; and,
(6) potential small farm welfare losses will be offset by environmental gains to the country in
terms of increased soil erosion control and greater greenhouse gas emissions reduction.
The results of this analysis demonstrate the important environmental co-benefits - soil
erosion control and greenhouse gas emissions reductions - that a carbon permit trade and
caps system could stimulate in the U.S. agricultural sector, while causing far less welfare
impacts - less than one percent - than most of the recent changes in U.S. farm support
policies.
EPA Climate Change Policies and Programs Division
1
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Background
Climate change policies are being considered by the U.S. government to voluntarily meet a
national goal to reduce anthropogenic greenhouse gas emissions¹ towards 1990 levels and
fulfill international obligations under the United Nations Framework Convention on Climate
Change (UNFCCC). The climate change policies could impact many sectors of the U.S.
economy. This study examines potential impacts on the U.S. farm sector due to the imposition
of various carbon permit prices, which may raise farm energy prices. The goal of the study is to
analyze such impacts in respect to how the U.S. agricultural sector might respond and adapt to
a variety of potential climate change mitigation policies. The key impacts assessed in this
report are changes in farm (producer) and consumer welfare, commodity prices, and land
management practices at the national and regional level. In addition, the study looks into the
ability to recycle any permit-induced revenues back into the farm sector through on-going
agricultural support and land conservation programs.
If climate change policies result in higher energy prices due to the imposition of greenhouse
gas emissions caps and/or a trading system, U.S. farmers are likely to face higher energy
prices that will increase production costs. Farmers will respond as relative price changes occur
for several key farm inputs -- diesel fuel, nitrogen, and electricity prices -- after these prices
internalize the societal costs associated with greenhouse gas emissions externalities. Some of
the potential responses in the U.S. agricultural sector might be increased fuel efficiency, lower
fertilizer consumption, and changes in the mix of other factors of production (e.g., land, labor,
and capital). The U.S. government could mitigate any detrimental effects on U.S. farmers
through a variety of policy and economic instruments, including recycling revenues from an
emissions cap-and-trade system back to the farm sector.
This report presents the findings and implications of this impact assessment, assuming three
levels of potential carbon permit prices ($25, $50 and $100 per ton of carbon) and the
imposition of the permit prices in the year 2000, 2005, 2010, 2015, or 2020. The first section of
this report covers the methodology and assumptions for conducting the assessment, along with
a brief description of the U.S. farm sector assessment model (ASMSOIL) that was used in the
analysis. The results follow in the next section, which discusses the potential impacts of carbon
permit prices on total (societal), farmer, and consumer welfare, farm commodity prices, and
natural resource use (e.g., land and water). The final section summarizes the key impacts and
their implications for the U.S. farm sector and national climate change policy.
Analysis Approach and Assumptions
This study relies on current and future technological, farm supply and consumer demand
relationships that exist in the national Agricultural sector Model (ASMSOIL), with the only major
changes being the introduction of different energy price assumptions due to the internalization
of carbon permit prices at various time periods, as discussed below. Five potential years at
1 Greenhouse gases (GHGs) include carbon dioxide, methane, nitrogen oxides, ozone, water
vapor, chloroflurorcarbons, hydroflurorcarbons, and perfluorinated carbons. These gasses have
the potential to change the globe's climate patterns due to their radiative forcing impacts, which
allow them to reflect heat back down to earth. Findings by the International Panel on Climate
Change (IPCC), which consists of over 200 international scientists, suggest that the contribution
from man-made (anthropogenic) sources of GHG emissions such as fossil fuel burning and
loss of carbon sinks (forests) -- may be contributing to global climate changes.
EPA Climate Change Policies and Programs Division
2
U.S. Agricultural Sector Impacts from Carbon Permit Prices
which point these permit prices might be imposed on and internalized into the economy are
considered in the study the years 2000, 2005, 2010, 2015, or 2020.
The U.S. Agricultural Sector Model: ASMSOIL
The findings of this study are derived from running a soil version of the national Agricultural
Sector Model (ASMSOIL), which will allow an examination of potential shifts in U.S. tillage
systems, cropping patterns and many other farm sector items in response to the incidence of
carbon permit prices. The model, developed and maintained by Texas A & M University for the
U.S. Department of Agriculture Natural Resource Conservation Service (USDA/NRCS), is an
equilibrium nonlinear programming model with thousands of variables (e.g., farm inputs,
outputs, prices, resource endowments, demand and supply constraints). The model is used
extensively for the agricultural sector to project sector crop mixes and future impacts under
varying sets of sector price and policy scenarios. As such, it allows an analyst to assess farm
sector as well as natural resource (e.g., soil use, erosion and water demand) impacts by region
and nationally. This methodology was chosen to provide consistency and comparability with
other national agricultural sector assessments.
A few characteristics of the ASMSOIL model and the nature of their ramifications on the results
are useful for accurate interpretation of the output from the analysis. These include:
1. The results arise from a model in which supply has sufficient time to adjust to
demand and production costs. Thus the solution is not short-run but rather
intermediate-run, in which, for example, livestock herds have sufficient time to
adjust to potential changes in feedstock prices due to the internalization of higher
energy costs.
2. The carbon permit price implications are simulated as if they are fully in place
during the time period. No path of adjustment is assumed or simulated.
Farm Energy Prices Under Various Carbon Permit Prices
The four potential carbon permit prices introduced in the analysis are zero, $25, $50, and $100
per ton carbon, with a zero price implying no change in current U.S. climate change policy that
would result in changes in future energy prices. This latter price scenario (no permit price) sets
the baseline at each time period in terms of future farm sector prices, welfare and natural
resource use.
The introduction of carbon permit prices is expected to result in raising input prices for several
key cost items in the farming sector, in particular all energy (i.e., diesel, electricity, natural gas)
and fertilizer prices. As the ASMSOIL model does not endogenously determine these relative
price changes, an estimate of the percentage change in such energy-related inputs was
determined and entered into each run of the model for the respective year. Described below
are the two steps for determining and entering these potential price changes into the model.
These include: (1) the procedures for developing estimates of the percentage change in energy
prices that would be paid by farmers if the carbon permit prices were implemented; and (2) the
process for applying these prices to the ASM production data.
The study used two different procedures to develop data on the implications of carbon permit
prices for farm energy prices, depending on the data available. These approaches include:
EPA Climate Change Policies and Programs Division
3
U.S. Agricultural Sector Impacts from Carbon Permit Prices
1. Farm energy prices: The first and simplest approach involved using the results
from an EPA study of the three potential carbon permit prices on U.S. household
energy costs, which gave the projected effects on the prices of gasoline, natural
gas, and electricity given various carbon permit prices. Diesel price sensitivity
was added simultaneously.
2. Fertilizer and agricultural chemical costs: The second set of procedures
involved the use of U.S. input-output data to derive the effects on fertilizer and
agricultural chemical costs.
Procedure for Determining Farm Energy Prices:
This study looked to an earlier EPA analysis for determining potential farm energy price rises by
extrapolating from the values of resulting household energy prices at different carbon permit
prices, which the EPA study provided. The procedure for using the U.S. EPA spreadsheet data
for obtaining farm energy prices for ASMSOIL was as follows:
Step 1
Diesel price sensitivity was included in the spreadsheet by multiplying the
projected gasoline price sensitivity times by the ratio of the carbon content per gallon
of diesel to carbon content per gallon of gasoline (1.17) to derive an estimated effect
on the diesel price.
Step 2 Base price levels for farm energy were developed. These were
developed with the aid of a) the recent DOE energy outlook; b) calls to input
suppliers and farmers regarding current prices and sales tax exemptions and c)
consultation with energy experts. It was found in that process that farmers paid
commercial prices for natural gas and gasoline but paid a discounted price for off-
road diesel use where they received tax exemptions. The prices were $2.57 per
thousand cubic feet for natural gas, $0.80 per gallon for diesel, $0.065 per kilowatt-
hour for electricity and $1.25 per gallon for gasoline.
Step
3
Percentage changes in prices paid by farmers were calculated by dividing
the carbon permit price level dependent forecasts of energy price sensitivity from the
EPA spreadsheet by the base prices. The resultant percentage changes in energy
prices are attached in Table 1.0 below.
Procedure for Determining Fertilizer and Other Chemical Costs
A second procedure was used for determining the costs of agricultural chemical inputs, namely
for nitrogen, potassium, and phosphate fertilizers as well as other chemicals (e.g., herbicides,
pesticides). This process involved using factor intensity data derived from the national input-
output (I/O) tables used by the USDA and other government agencies. In particular, input-
output data came from the transactions matrix in the IMPLAN model was used.
The methodology to derive these potential changes in factor prices for these particular farm
sector inputs is as follows. According to the I/O results from IMPLAN, $0.08 of natural gas is
used to make a dollar worth of nitrogen/phosphate fertilizer, which before being sold to farmers
goes through the fertilizer mixing sector where $0.20 worth of nitrogen/phosphorus fertilizer is
used for each dollar of fertilizer sold to farmers. Thus, using these factor-price co-efficients
means that $0.016 of natural gas is used per dollar worth of fertilizer sold to farmers. Hence, in
EPA Climate Change Policies and Programs Division
4
U.S. Agricultural Sector Impacts from Carbon Permit Prices
the ASMSOIL model the analysts assumed that a 1.6% rise in natural gas price is to be added
to the fertilizer price paid by farmers model to internalize the energy price impact of carbon
permit prices.
Similar steps are employed to derive an estimate for other chemical costs (e.g., pesticides and
potassium) where the agricultural chemical-manufacturing sector was examined and the natural
gas and electricity cost change factored in. In turn, the nitrogen/phosphorous number is used
for the increase in nitrogen and phosphorous fertilizer prices and the other chemical cost is
used for potassium fertilizer and pesticide costs, which in the model are referred to as "other
chemicals."
A composite table of the farm energy price adjustments entered in the model due to the
imposition of a variety of potential carbon permit prices appears in Table 1. Notably, because
of the nature of agricultural input usage patterns the incremental price changes for diesel and
fertilizer costs are the most significant when carbon permit prices are internalized. The results
of these energy-related farm price adjustments show that diesel prices go up by almost one-
third under the imposition of a $100 carbon permit price, while nitrogen prices rise by less than
one percent.
Table 1.
Assumptions of Percentage Increase in ASMSOIL Input Values for
Key Farm Goods under Varying Carbon Permit Prices
Farm Input
Alternative Carbon Permit Price
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
NITROGEN
0.22
0.44
0.87
POTASSIUM
0.08
0.16
0.33
PHOSPHOROUS
0.22
0.44
0.87
CHEMICALCO
0.08
0.16
0.33
DIESEL
8.26
16.53
33.06
GASOLINE
4.52
9.04
18.08
NATURAL GAS
13.13
26.26
52.53
ELECTRICITY
8.26
16.53
33.06
Projected Energy Price Changes Relative to Other Farm Prices and Programs
The relative impacts of these projected percentage changes in agricultural sector energy costs
due to the internalization of carbon permit prices can best be put in perspective by examining
the total U.S. crop production budget data and sectoral impacts of recent changes in other farm
support programs. Box 1 provides the perspective on how much corn production costs might
increase if $100 per ton C permit prices were to be introduced into the farm sector.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Box 1.
An Illustrative Example: Internalizing Carbon Permit Prices into Iowa Corn
Production Costs
For example, suppose that we examine the relative impact on farm production costs due to an
increase in energy costs for the largest U.S. crop in its major production area, which is corn in
lowa. In lowa, one uses about $50 dollars worth of fertilizer per acre, $15 worth of drying and
about $11 worth of diesel fuel per acre of corn production in order to produce the state average
of 150 bushels of corn per acre, which brings the farmer a gross revenue of $375 per acre at
an average sales prices of $2.50 per bushel. If one internalizes the highest potential carbon
permit price under consideration (e.g., a $100 carbon price) into the production costs for corn
in lowa, the resulting energy prices add only about $3.30 to the total diesel costs per acre,
$7.50 to natural gas based drying, and about $0.50 to the per acre fertilizer cost, which in
relative terms is only about a three percent increase in cost relative to the value of per acre
corn production.
Box 2.
U.S. Agricultural Sector Income and Other Economic Characteristics
General Information
Total Farm Income (1996)
$ 49 billion
Farm Sector Subsidy Phase-Out Program Losses (1996)
$ 7-10 billion
National Cropped Acreage (1996)
330 million acres
1997 Conservation Reserve Program Target
16 million acres
Potential Farm Price Increases with $100 Carbon Permit Price
Energy Costs as Percentage of Corn Production Costs
3%
When reviewing the model results presented below, it is important to keep in perspective the
impacts of such carbon permit price adjustments relative to other impacts from recent U.S. farm
support program changes. In Box 2, for example, the 1996 farm bill began phasing out direct
commodity-based U.S. farm support program payments, and it has been estimated to cost the
farm sector in this country a loss of anywhere from seven to ten billion dollars over time, i.e.,
possibly equal to a 20 percent loss in net farm income. Such payments amounted to a loss
equal to almost 20 percent of the price of corn.
Further, as a preview of the kinds of farm sector adjustments that will go on in the model
results, let us also examine the energy intensity of tillage systems. A switch from the current
mix of tillage to predominantly zero-till systems allows one to reduce the diesel energy used for
lowa corn by around 20 percent. As the results show, farmers should be expected to move to
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
zero tillage if carbon prices are imposed, which may more than mitigate the effect of the
increasing diesel price.
Implementing Energy Price Rises into the U.S. Farm Budgets
The analysts altered the budgetary costs of energy inputs in ASMSOIL across a set of
comparative runs to internalize the permit-induced energy price increases by taking the original
ASM tillage budgets and augmenting these farm budgets with information on the diesel, natural
gas, gasoline, and electricity use recently developed by USDA/NRCS. In turn, the estimated
increase in the per acre production costs under the different permit prices were added to the
cost of production for all the crops, and tillage systems in the ASMSOIL model (in excess of
10,000 budgets) and the model was solved. This was done for conditions in years 2000, 2005,
2010, 2015, and 2020. During these time periods, dynamic updating was done to reflect
technological progress in yields and increases in consumption and exports stimulated by
changes in population and other economic conditions.
Measuring National, Farmer/Producer, and Consumer Welfare
This study assesses four measures of social welfare changes in the U.S. agricultural sector due
to the introduction of carbon permit prices. These measures include:
Producers' Surplus (PS): Producers' surplus represents the economic value
that, in this study, the farming sector receives from sale of farm products.
Mathematically, it equals the area under the equilibrium market price line (market
clearing price) but above the farm product long run supply curve for all farm
goods. It represents a producers' "surplus" as it is the income gain above the
supply curve prices that is distributed across all U.S. farmers. It is a concept
analogous to net farm income for the sector.
Consumers' Surplus (CS): The change in consumers' surplus is generally
equivalent to the change in the income of consumers due to farm commodity
price increases or decreases, which result in economic welfare losses or gains,
respectively, to the farm product consumer. Mathematically, it is the area above
the equilibrium price and below the demand curve. Changes in consumers'
surplus may also be used to reflect the satisfaction or dissatisfaction that
consumers realize when having to pay a different (lower or higher, respectively)
price for the farm commodities that they consume. In this study, consumers'
surplus will represent the welfare gain or loss to the U.S. farm product buyer (as
distinguished from the Foreign Surplus, defined below)
Foreign Surplus (FS): An analogous concept of CS but refers to the gains or
losses to foreign farm product consumers or buyers.
Total Social Welfare (TSW): The sum of the producer plus consumers' surplus
in both the domestic and international markets is commonly called the total social
welfare (TSW).
In this report, Total Social Welfare does not include the addition of any potential positive or
negative environmental externalities, such as reduced soil erosion and/or lower global
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
warming benefits, that may be associated with the imposition of a carbon trading and cap
systems.
Determining Soil Erosion and Water Impacts of Carbon Permits
Raising farm sector input prices due to the internalization of carbon permit prices may have
important impacts on the U.S. agricultural sector's land management practices and U.S. soil
erosion control policy. As part of the farm sector impact analysis, land management impacts
due to the imposition of potential carbon permit prices were assessed in terms of the potential
ramifications of alternative carbon permit price scenarios for the country's two major land
management programs. These programs include the Conservation Reserve Program (CRP)
and the ability of the U.S. Department of Agriculture Natural Resource Conservation Service
Program (USDA/NRCS) to meet its national and regional soil erosion control goals. This
environmental assessment allows you to examine the extent to which permit-induced impacts
might make attainment of other environmental agricultural goals easier or more difficult.
The CRP sets national acreage goals for retiring, or setting aside, farm lands with high soil
erodibility indices. This study examined two set-aside acreage targets for our CRP:
Land Management Policy Option 1: Impact on Current CRP Set-Aside Targets
The analysis uses the current U.S. farm policy set-aside target of 16 million acres.
Land Management Policy Option 2: Impact on Higher CRP Set-Aside Target
A higher CRP set-aside target is used which assumes that 19 million acres are set-
aside under the U.S. CRP program.
Also, a USDA/NRCS national soil erosion target goal was examined in which:
Land Management Policy Option 3: Impact on Moderately Erodible Farm Lands
The incidence of production systems on moderately eroding soils with erosion rates
in excess of the rate of natural soil formation (commonly called T) are to be cut by
one-third.
Land Management Policy Option 4: Impact on Highly Erodible Farm Lands
The incidence of production systems on highly erodible soils with erosion rates in
excess of 2T, which are also cut by one-third.
A land management impact analysis for meeting these CRP and USDA/NRCS goals was made
in this study where the base case was assumed to be the 16 million acre CRP target set-aside
coupled with no enhanced erosion goal. In turn, policy-induced welfare reductions were
examined looking at different combinations of the USDA/NRCS erosion goals and a larger CRP
set-aside target. This land impact analysis was conducted under each level of carbon permit
price to see how the welfare costs of these other environmental policies changed as carbon
prices were altered.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Analysis Results: Potential Impacts of Carbon Permits on the U.S.
Agricultural Sector
The results of the impact analysis conducted for EPA are presented in the following sections.
The fundamental question raised by the imposition of carbon permit prices as a potential U.S.
climate change policy instrument in the context of this analysis is its general economic impact
on the agricultural sector.
Interpretation of ASMSOIL Analysis Results
In summary, the agricultural sector impact analysis of potential carbon permit prices involved
making over eighty model runs for the vary combinations of farm sector impact scenarios:
Permit Price Levels: four carbon permit prices (zero, $25, $50, or $100);
Permit Price Time Lines: five time periods for the initial start-up date of imposing a
carbon trading and cap system on the U.S. (at years 2000, 2005, 2010, 2015, 2020);
and
Farm Land Management Options: the four environmental policy combinations
(Options 1 to 4).
Given that under such solution, a compact binary file of ASM results requires in excess of 21
megabytes of storage, the analysts focused on the important sector impacts, which are
summarized in the next section in three ways:
1. Results Overview: A summary of how carbon prices affect total welfare over time is
given in the report to provide a general picture of the magnitude and importance of
these proposed carbon permit-induced impacts on the U.S. agricultural sector. This
sections gives a picture of these impacts over time to have a broad view of potential
temporal differences in the imposition of any U.S. carbon trading and caps system.
2. Comparison of Carbon Permit Impacts by Year: An in-depth analysis of the results
for the years 2000, and to a lesser extent 2010, is provided since it was concluded that
the impact results for the year 2000 are typical of the results under all the other years,
and these closer years have the least extrapolative error. The results look at the farm
sector effects of the carbon permit prices in the absence of other farm policy changes,
e.g., under the 16 million acre CRP with no enhanced NRCS goals to look at regional
and other distributional consequences of the energy program.
3. Farm Policy and Land Management Interactions: The final sections of the report
provide the potential effects of imposing a carbon trading and caps system under
alternative farm policy and land management interactions.
All analyses only consider climate change policy impacts as they affect the U.S. agricultural
sector, including consumers of agriculture products. Additional EPA studies assess the impacts
on the non-agricultural sectors of the economy from the imposition of any carbon trading and
caps system.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Study Results Overview: Welfare Impacts
From the tables and the findings presented below, some general observations emerge about
the potential impacts of carbon permits if imposed on the U.S. agricultural sector in the future.
This study suggests that:
1. Increasing Welfare Losses Occur with Higher Carbon Permit Prices
A $25 permit price will cost agriculture somewhere around $450 million annually,
or less than one percent of 1996 total farm income, across almost any of the
years in which the carbon permit system is imposed (e.g., 2000 up to 2020)
A $50 dollar permit price somewhere around $850 million annually again across
almost any of the years in which the carbon permit system is imposed (e.g.,
2000 up to 2020), and
A $100 permit price somewhere around one billion U.S. dollars annually, similarly
across all years.
2. Consumers' Surplus Impacts Larger than Producers' surplus Impacts
The results show that consumers lose more than farmers from the imposition of
a carbon permit system, and that at some low permit prices farmers may actually
increase producers' surplus due to price rises. This result implies that the farm
sector is able to push any input price increases on through to consumers.
these projected impacts on producers' surplus are small relative to total farm
gross income, which, for example, in 1996 was $49 billion.
3. Welfare Costs To Sector Not Dependent on Year of Carbon Permit System
as noted above, the year at which one drops a carbon permit trading system into
the U.S. farm economy does not appear to have much effect on the total (as well
as producers', consumers', and foreign) surplus results, which show quite
minimal variability in quantitative or relative terms across the years.
4. Farm Sector Welfare Losses from Carbon Permit System Quite Minimal
These changes in TSW, CS, PS and FS are relatively small if one puts them in
context of the totality of U.S. agriculture. For example, if we compute a
percentage change by dividing the change in consumers' surplus by consumers'
expenditures on food and producers' surplus by the base producers', we find that
the $100 million dollar permit price amounts to around 1/2 of 1% of the welfare in
the base situation for the year 2000.
Furthermore, for perspective one should note that estimates of $7-10 billion have
been generated for the effect of changes in the farm program that were recently
enacted in the 1996 farm bill. Similarly, annual fluctuations in net farm income
as reported by USDA have varied during the decade from $20-40 billion per year
and that does not include the changes in consumers' surplus.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
These observations are substantiated by the following results based on the output from over 80
ASMSOIL model runs and alternative carbon permit price scenarios. Table 2 gives the results
(in millions of dollars) for potential changes in the total societal welfare in million dollars under
the four carbon permit prices at the selected time periods. The net changes in TSW are given
in Table 3, and represent the net change between having no carbon permit system (zero price)
to the price under consideration (e.g., difference from zero to $25/ton C, zero to $50/ton C, or
zero to $100/ton C).
Table 2.
Potential Total Social Welfare Impacts on U.S. Agriculture
under Alternative Carbon Permit Prices by Year
($U.S. millions¹)
Initial Year
Alternative Carbon Permit Price
Zero
$25 per ton
$50 per ton
$100 per ton
2000
1,406,264
1,405,783
1,405,296
1,404,541
2005
1,452,115
1,451,676
1,451,273
1,450,510
2010
1,501,224
1,500,849
1,500,784
1,499,854
2015
1,553,832
1,553,384
1,552,974
1,552,208
2020
1,608,196
1,608,751
1,608,338
1,607,559
1
Dollars are in constant terms based on 1997 values.
Note: Environmental externalities are not included in the total social welfare.
Table 3.
Incremental Total Social Welfare Impacts on U.S. Agriculture
from Introduction of a Carbon Permit Prices
($U.S. millions¹)
Initial
Alternative Carbon Permit Price
Year
$25 per ton²
$50 per ton
$100 per ton
2000
-482
-968
-1,723
2005
-440
-842
-1,606
2010
-376
-440
-1,370
2015
-448
-858
-1,624
2020
-445
-858
-1,637
1
Dollars are in constant terms based on 1997 values.
2
Values represent the incremental welfare difference between going
from zero carbon permit price to the price under consideration.
Note: Environmental externalities are not included in the total social welfare.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 4 gives the estimates of the amount of revenue raised for the government or other
agencies under the varying permit price systems. Notice that under a $25 permit price we have
around $400 million being raised, with about $770 million raised under the $50 permit price and
$1.5 billion under the $100 permit price, respectively. This also shows a net social loss as the
amount of welfare foregone in the agricultural sector exceeds the revenue raised from
application of the permit price. However, this policy would also lead to a reduction in carbon
emissions and erosion, as shown below. Consideration of the value of these could make the
policy socially beneficial. The results give permit price revenue if the permit price was in place
at the specified level during the identified time period.
Table 4.
Potential Revenue Raised from the U.S. Agricultural Sector
under Alternative Carbon Permit Prices
($U.S. millions¹)
Initial Year
Alternative Carbon Permit Price
$25 per ton
$50 per ton
$100 per ton
2000
408
775
1,478
2005
413
782
1,498
2010
428
802
1,509
2015
414
805
1,521
2020
443
810
1,529
1 Dollars are in constant terms based on 1997 values.
Potential Agricultural Sector Impacts for 2000 and 2010
The results above estimate the way that the implementation of a carbon permit system would
affect overall welfare in the U.S. agricultural sector. In this section, we take a more detailed
look at the results for the year 2000, and to a lesser extent for 2010. In-depth analysis of the
2000 model runs are made for two reasons. First, the farm sector impacts on welfare,
commodity prices, and land management are basically the same across each of the time
periods. Second, the time extrapolation error in the results is compounded when moving further
and further out into the future. Under year 2000 conditions, the model gives the best
representation of the economy. The detailed results can be looked at in many different ways.
Here we will look at welfare of consumers', producers' and foreign interests, price and quantity
indices, regional welfare, the use of major inputs both nationally and regionally, commodity
prices, changes in tillage methods and erosion control.
Welfare Impacts: Producer, Consumer, and Society
Tables 5 through 6 give results on the distribution of welfare for the year 2000. They show that
most of the cost of the permits is borne by consumers as the higher prices under the permitting
system are passed on through farm commodity prices. In addition, a substantial amount of the
burden is borne by foreign interests, again through higher prices and decreased levels of
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
exports from the US. In terms of percentage changes, Table 6 shows that these are relatively
small percentage changes across the parties. If the government introduced carbon permit
prices in 2010, similar magnitudes of welfare tradeoffs and small farm sector impacts occurs as
shown by Tables 7 and 8.
Table 5.
Potential National Welfare Impacts
By Group for 2000
($U.S. millions¹)
Welfare
Alternative Carbon Permit Price
Group
Zero
$25 per ton
$50 per ton
$100 per ton
CS
1,217,591
1,217,170
1,216,890
1,216,457
PS
51,497
51,511
51,408
51,241
FS
137,177
137,102
136,998
136,844
TS
1,406,264
1,405,783
1,405,296
1,405,541
1 Dollars are in constant terms based on 1997 values.
Note:
CS is consumers' surplus -- a measure of consumers' welfare
PS is producers' surplus -- a measure of producer net income or farm
welfare
FS is foreign surplus -- a measure of welfare for trading partners
TS is a measure of total social welfare
Table 6.
Potential Percentage Welfare Changes
in the U.S. Agricultural Sector
by Group for 2000
(in percentage)
Welfare
Alternative Carbon Permit Price
Group
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
CS
-0.15
-0.25
-0.40
PS
0.03
-0.17
-0.50
TSW
-0.14
-0.29
-0.51
Note: The results for consumers give change in consumers' surplus
divided by the consumption expenditures in the base (zero permit
price) and the results for producers give change in producers'
surplus divided by the base (zero permit price) producers' surplus.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 7.
Potential National Welfare Impacts
by Group for 2010
($U.S. millions¹)
Welfare Group
Alternative Carbon Permit Price
Zero
$25 per ton
$50 per ton
$100 per ton
CS
1,270,208
1,269,878
1,269,991
1,270,488
PS
85,201
85,224
85,058
83,554
FS
145,815
145,747
145,735
145,812
TS
1,501,224
1,500,849
1,500,784
1,499,854
1 Dollars are in constant terms based on 1997 values.
Note:
CS is consumers' surplus -- a measure of consumers welfare
PS is producers' surplus -- a measure of producer net income or welfare
FS is foreign surplus -- a measure of welfare for trading partners
TS is a measure of total social welfare
Table 8.
Potential Percentage Welfare Changes
in the U.S. Agricultural Sector
by Group for 2010
(in percentage)
Welfare
Alternative Carbon Permit Price
Group
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
CS
-0.10
-0.07
-0.09
PS
0.03
-0.17
-1.97
TSW
-0.09
-0.11
-0.34
Note: The results for consumers give change in consumers' surplus
divided by the consumption expenditures in the base (zero permit
price) and the results for producers give change in producers'
surplus divided by the base (zero permit price) producers' surplus.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Farm Commodity Prices and Consumer Purchasing Impacts
While the farming sector is able and likely to pass on higher energy prices to the consumer, an
analysis of farm commodity price changes and consumer purchasing power impacts puts these
increases in perspective. This study looks at two distinct measures of farm commodity price
impacts, actual projected changes in product prices and the Fisher Price Index, which shows
how the consumers' purchasing power is affected by the introduction of carbon permit prices.
Tables 9 and 10 give more detailed looks at commodity price implications in the years 2000 and
2010, respectively. under the various carbon permit price scenarios, where we see potential
price changes for the individual farm commodities. In each year, the projected base prices in
the years 2000 and 2010 are represented by the values under "zero" carbon permit price.
Again even with a $100 carbon permit price these model results suggest that the projected U.S.
farm product price effects are relatively small across the whole portfolio of farm goods.
To confirm this apparent small economic impact of a potential carbon permitting system on the
farm sector, the study also calculated a consumer purchase price index through estimating a
set of Fisher Price Indices for the primary commodities in the model. Table 11 gives these
results, and, again the zero permit price being the baseline. Note that only under the highest
carbon permit price, at $100 per ton C permit price, grain consumption by domestic consumers
go up by 2.5% while livestock prices go up by 0.7%, cotton fiber by about 1.2%, and vegetables
by about 0.25%. These are also counter matched as displayed in Table 11 by quantity changes
where the price goes up the quantity goes down by a couple of tenths of a percent. The largest
price changes are seen in the vegetable commodities, but again these are relatively small
impacts. In the 2010, these similar patterns occurred, implying that no substantive changes in
farm product prices result due to the imposition of carbon permit prices, and for this reason
these tables are not shown.
Regional Welfare Impacts
An assessment of potential regional impacts on the farm sector from the introduction of a
carbon trading system in the U.S. also was conducted. Again, the results of this analysis show
a relatively small change across regions of the country, as shown in Tables 10 and 11. The
regional incidence of these impacts is largest in the U.S. Corn Belt, but is still relatively small
when one considers the magnitude of income and the number of people living in that region.
Impacts on the Use of Land, Water, Chemicals and Labor in the Farm Sector
A sensitivity analysis of farm input use due to a carbon permit system, as shown in Tables 13
and 14, provides a small increase in crop land use while decreasing irrigation. There are mixed
results on farm labor and increases in the use of nitrogen, potassium, phosphorous, and
pesticides (chemicals labeled "Co" in the analysis results). Regional effects are relatively small
here and are reported in Table 15.
EPA Climate Change Policies and Programs Division
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U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 9.
Projected Changes in National Farm Commodity Prices
under Alternative Carbon Permit Prices for 2000 and 2010
($U.S. millions¹)
Commodity
Alternative Carbon Permit Price
Alternative Carbon Permit Price
Year 2000
Year 2010
Zero
$25
$50
$100
Zero
$25
$50
$100
COTTON
281.83
282.41
283.66
285.09
351.73
349.75
349.09
349.97
CORN
2.50
2.52
2.54
2.57
3.52
3.54
3.55
3.53
SOYBEANS
6.39
6.39
6.42
6.45
8.23
8.23
8.23
8.23
WHEAT
4.27
4.30
4.32
4.34
7.18
7.22
7.24
7.17
SORGHUM
2.13
2.14
2.16
2.16
2.87
2.88
2.89
2.91
RICE
7.04
7.10
7.21
7.39
11.08
11.08
11.08
11.08
BARLEY
2.96
2.95
2.98
3.00
5.10
5.08
5.01
4.97
OATS
1.67
1.70
1.70
1.70
1.71
1.71
1.71
1.71
SILAGE
11.31
11.37
11.44
11.64
11.89
11.97
12.06
12.28
HAY
95.20
96.02
97.07
98.25
138.62
140.02
140.68
140.16
SUGARCANE
216.10
217.99
219.34
219.93
302.86
303.13
302.44
299.36
SUGARBEET
216.10
217.99
219.34
219.93
302.86
303.13
302.44
299.36
POTATOES
8.61
8.61
8.61
8.61
12.92
12.75
12.21
12.10
TOMATOFRSH
11.66
11.66
11.66
11.66
15.53
15.62
15.70
14.97
TOMATOPROC
53.60
53.68
53.73
53.75
60.42
60.38
60.17
61.79
ORANGEFRSH
6.62
6.68
6.73
6.92
10.23
10.23
10.23
10.23
ORANGEPROC
6.91
6.93
6.95
6.89
7.03
7.03
7.03
7.03
GRPFRTFRSH
3.31
3.28
3.26
3.15
3.15
3.15
3.15
3.15
GRPFRTPROC
4.45
4.58
4.65
4.49
4.49
4.49
4.49
4.49
OTHERLIVES
867.24
874.84
882.88
892.20
1218.53
1228.69
1233.23
1229.01
NONFEDSLA
41.31
41.47
41.47
41.47
50.43
50.70
50.81
50.77
FEDBEEFSLA
72.53
72.76
72.84
72.98
84.75
85.04
85.14
85.02
BEEFYEARLI
72.83
73.00
73.00
73.00
83.46
83.77
83.91
83.85
CALFSLAUGH
63.02
63.03
63.12
63.14
62.57
62.58
62.58
62.70
CULLBEEFCO
41.31
41.47
41.47
41.47
50.43
50.70
50.81
50.77
MILK
14.26
14.29
14.32
14.37
15.83
15.86
15.87
15.87
CULLDAIRYC
41.31
41.47
41.47
41.47
50.43
50.70
50.81
50.77
FEEDERPIG
103.57
103.77
103.87
104.16
113.26
113.37
113.36
113.33
HOGSLAUGHT
45.08
45.23
45.32
45.53
52.34
52.44
52.44
52.36
CULLSOW
35.91
36.01
36.07
36.22
40.92
40.98
40.98
40.93
LAMBSLAUGH
68.05
68.27
68.09
67.35
69.63
69.93
69.93
69.93
LAMBFEERDE
54.17
54.17
54.17
54.17
69.93
69.93
69.93
69.93
CULLEWES
40.22
40.22
40.22
40.22
43.76
44.18
44.38
43.89
WOOL
1.53
1.53
1.53
1.53
1.53
1.53
1.53
1.53
WOOLINCPAY
1.66
1.66
1.66
1.66
1.66
1.66
1.66
1.66
UNSHRNLAMB
4.92
4.92
4.92
4.92
4.92
4.92
4.92
4.92
BROILERS
0.33
0.33
0.33
0.33
0.36
0.36
0.36
0.36
HEIFCALVE
70.14
70.37
70.37
70.59
83.38
83.76
83.93
83.96
STEERYEARL
80.43
80.74
80.58
81.30
95.95
96.32
96.50
96.24
HEIFYEARL
65.47
65.68
65.68
65.88
77.73
78.07
78.23
78.25
EGGS
0.60
0.60
0.60
0.61
0.67
0.67
0.67
0.67
VEALERS
61.03
61.04
61.13
61.15
60.58
60.59
60.59
60.71
DCALVES
38.23
38.23
38.23
38.23
38.23
38.23
38.23
38.23
BEEFHYEARL
68.07
68.23
68.23
68.23
77.19
77.46
77.57
77.53
BEEFSYEARL
72.83
73.00
73.00
73.00
83.46
83.77
83.91
83.85
TURKEYS
0.40
0.40
0.40
0.40
0.44
0.44
0.44
0.44
1
Dollars are in constant terms based on 1997 values.
EPA Climate Change Policies and Programs Division
16
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 10. Projected Changes in National Farm Commodity Prices
Under Alternative Carbon Permit Prices for Year 2000
(Percentage)
Commodity
Alternative Carbon Permit Price
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
COTTON
0.21
0.65
1.15
CORN
1.09
1.66
2.94
SOYBEANS
-0.03
0.39
0.84
WHEAT
0.56
1.09
1.69
SORGHUM
0.62
1.52
1.49
RICE
0.99
2.51
5.10
BARLEY
-0.36
0.58
1.15
OATS
1.69
1.69
1.69
SILAGE
0.47
1.17
2.92
HAY
0.86
1.96
3.20
SUGARCANE
0.87
1.50
1.77
SUGARBEET
0.87
1.50
1.77
POTATOES
0.00
0.00
0.00
TOMATOFRSH
0.00
0.00
0.00
TOMATOPROC
0.15
0.24
0.27
ORANGEFRSH
0.95
1.65
4.49
ORANGEPROC
0.33
0.52
-0.26
GRPFRTFRSH
-0.91
-1.58
-4.78
GRPFRTPROC
2.94
4.48
1.06
OTHERLIVES
0.88
1.80
2.88
NONFEDSLA
0.37
0.37
0.37
FEDBEEFSLA
0.32
0.42
0.62
BEEFYEARLI
0.24
0.24
0.24
CALFSLAUGH
0.01
0.15
0.19
CULLBEEFCO
0.37
0.37
0.37
MILK
0.21
0.40
0.78
CULLDAIRYC
0.37
0.37
0.37
FEEDERPIG
0.19
0.28
0.56
HOGSLAUGHT
0.34
0.53
1.00
CULLSOW
0.29
0.46
0.86
LAMBSLAUGH
0.32
0.05
-1.03
LAMBFEERDE
0.00
0.00
0.00
CULLEWES
0.00
0.00
0.00
WOOL
0.00
0.00
0.00
WOOLINCPAY
0.00
0.00
0.00
UNSHRNLAMB
0.00
0.00
0.00
BROILERS
0.17
0.33
0.58
HEIFCALVE
0.33
0.33
0.64
STEERYEARL
0.39
0.19
1.08
HEIFYEARL
0.32
0.33
0.63
EGGS
0.22
0.40
0.70
VEALERS
0.01
0.16
0.20
DCALVES
0.00
0.00
0.00
BEEFHYEARL
0.22
0.22
0.22
BEEFSYEARL
0.24
0.24
0.24
TURKEYS
0.20
0.40
0.70
EPA Climate Change Policies and Programs Division
17
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 11.
Consumer Purchasing Power Impacts as Determined by
Fisher Quantity Indices under Alternative Carbon Permit Prices for Year 2000
Commodity
Consumed by
Permit Price
Group
Zero
$25 per ton
$50 per ton
$100 per ton
GRAIN
MARKET
100.00
99.89
99.72
99.70
GRAIN
DOM-DEMAND
100.00
100.00
100.00
100.00
GRAIN
EXPORT
100.00
100.00
100.00
100.00
LIVESTOCK
MARKET
100.00
100.09
100.14
100.03
LIVESTOCK
DOM-DEMAND
100.00
100.00
100.00
100.00
LIVESTOCK
EXPORT
100.00
100.00
100.00
100.00
MEATS
MARKET
100.00
99.98
99.96
99.91
MEATS
DOM-DEMAND
100.00
99.98
99.96
99.90
MEATS
EXPORT
100.00
100.00
100.00
100.00
FIBER
MARKET
100.00
100.00
100.00
100.00
FIBER
DOM-DEMAND
100.00
100.00
100.00
100.00
FIBER
EXPORT
100.00
100.00
100.00
100.00
SUGARS
MARKET
100.00
100.00
100.00
100.00
FEEDS
MARKET
100.00
99.96
99.92
100.19
FEEDS
EXPORT
100.00
100.00
100.00
100.00
PROCESSED
MARKET
100.00
100.00
100.00
99.99
PROCESSED
DOM-DEMAND
100.00
100.00
100.00
100.00
PROCESSED
EXPORT
100.00
99.95
99.92
99.84
PROCESSED
PROCESSED
100.00
100.00
100.00
99.99
OTHERINPUT
MARKET
100.00
101.61
102.82
106.36
FORAGE
MARKET
100.00
99.93
99.85
99.65
VEGETABLES
MARKET
100.00
99.99
99.95
99.30
VEGETABLES
DOM-DEMAND
100.00
99.61
99.91
98.38
VEGETABLES
EXPORT
100.00
105.25
100.00
104.84
EPA Climate Change Policies and Programs Division
18
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 12.
Projected Regional U.S. Agriculture Welfare Impacts
by Group under Alternative Carbon Permit Prices
($U.S. millions¹)
Region
Welfare Group
Alternative Carbon Permit Price
Zero
$25 per ton
$50 per ton
$100 per ton
NORTHEAST
Cs
276,288
276,192
276,129
276,031
Ps
2,005
2,006
2,003
1,999
tsw
278,293
278,199
278,132
278,030
LAKESTATES
CS
91,029
90,997
90,976
90,944
PS
5,404
5,401
5,377
5,328
TS
96,433
96,399
96,353
96,272
CORNBELT
CS
177,781
177,719
177,679
177,615
PS
13,400
13,413
13,379
13,299
TS
191,181
191,133
191,057
190,914
NORTHPLAIN
CS
26,996
26,987
26,980
26,971
PS
7,438
7,454
7,469
7,464
TS
34,434
34,441
34,449
34,434
APPALACHIA
CS
115,061
115,021
114,995
114,954
PS
2,856
2,855
2,849
2,841
TS
117,917
117,876
117,844
117,794
SOUTHEAST
CS
132,407
132,361
132,331
132,284
PS
2,146
2,159
2,164
2,146
TS
134,554
134,521
134,495
134,430
DELTASTATE
CS
47,598
47,582
47,571
47,554
PS
2,155
2,148
2,159
2,163
TS
49,753
49,730
49,730
49,717
SOUTHPLAIN
CS
102,770
102,735
102,711
102,675
PS
3,726
3,702
3,637
3,645
TS
106,496
106,436
106,348
106,320
MOUNTAIN
CS
68,196
68,172
68,157
68,132
PS
5,033
5,036
5,034
5,021
TS
73,229
73,208
73,191
73,154
PACIFIC
CS
179,465
179,402
179,361
179,297
PS
7,332
7,335
7,336
7,334
TS
186,796
186,738
186,697
186,632
1
Dollars are in constant terms based on 1997 values.
EPA Climate Change Policies and Programs Division
19
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 13.
Projected Impacts Use of Selected Farm Sector Inputs
under Alternative Carbon Permit Prices for Year 2000
(in thousand units)
Farm Input
Alternative Carbon Permit Price
Zero
$25 per ton
$50 per ton
$100 per
ton
CROPLAND ('000 acres)
282,524
282,686
281,266
281,142
WATER ('000 acre-ft)
97,351
97,265
97,349
97,164
LABOR ('000 hours)
3,929,898
3,929,231
3,928,962
3,925,881
NITROGEN (mill. dollars)
4,105
4,113
4,100
4,101
POTASSIUM (mill. dollars)
2,384
2,382
2,379
2,376
PHOSPHOROUS (mill. dollars)
1,399
1,401
1,399
1,398
CHEMICALS (mill. dollars)
3,905
3,909
3,908
3,919
Table 14.
Potential Change in Use of Selected Farm Inputs
under Alternative Carbon Permit Prices for Year 2000
(percentage)
Farm Input
Alternative Carbon Permit Price
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
CROPLAND
0.06
-0.45
-0.49
WATER
-0.09
0.00
-0.19
LABOR
-0.02
-0.02
-0.10
NITROGEN
0.20
-0.13
-0.10
POTASSIUM
-0.05
-0.18
-0.33
PHOSPOROUS
0.15
0.00
-0.07
CHEMICALCO
0.11
0.08
0.38
EPA Climate Change Policies and Programs Division
20
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 15.
Projected Percentage Changes in Regional Farm Land and Water Use
under Alternative Carbon Permit Prices for Year 2000
(percentage)
Region
Farm Input
Alternative Carbon Permit Price
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
NORTHEAST
CROPLAND
0.07
0.11
0.31
WATER
0.00
0.00
0.00
LAKESTATES
CROPLAND
0.00
0.00
0.00
WATER
0.00
0.00
0.00
CORNBELT
CROPLAND
0.00
0.00
0.00
WATER
-0.01
-0.01
0.42
NORTHPLAIN
CROPLAND
0.11
0.04
-0.21
WATER
0.00
0.00
0.00
APPALACHIA
CROPLAND
0.00
-0.05
0.00
WATER
0.00
-0.06
-0.06
SOUTHEAST
CROPLAND
0.00
0.00
0.00
WATER
0.00
0.00
0.10
DELTASTATE
CROPLAND
-0.05
-0.09
-0.24
WATER
-0.14
-0.18
-0.84
SOUTHPLAIN
CROPLAND
0.36
-4.09
-4.09
WATER
-0.39
0.36
0.15
MOUNTAIN
CROPLAND
-0.06
-0.06
0.07
WATER
-0.07
-0.12
-0.12
PACIFIC
CROPLAND
0.00
0.00
0.01
WATER
0.00
-0.03
-0.42
EPA Climate Change Policies and Programs Division
21
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Affects on National Land Management Policies
Impacts on U.S. Farm Tillage Practices
One result of introducing higher energy prices through imposing a carbon permit system in the
country is a shift in tillage methods (Tables 16 to 18). The results indicate that:
1. Farmers Shift to Conservation and, Primarily, Zero Tillage
Conventional tillage, which is the current use of tillage methods throughout the
U.S. farm sector, declines significantly, while increased use of conservation
and/or zero tillage occurs uniformly across the results. In fact, most farmers in
all regions appear to shift directly to zero till practices, which are probably only
slightly more expensive than conservation tillage (USDA 1993).
For some soil types, conservation tillage is replaced by zero tillage so in general
less energy intensive tillage methods are used as a consequence of the permit
system.
2. U.S. Farm Sector Soil Erosion Losses Decrease
This shift to low tillage practices has immediate implications for erosion as given
in Table 18, where soil erosion is reduced by 5%, 10% and 15% at all three
carbon price levels.
If one considers that soil erosion costs the U.S. about $0.56 per ton of soil lost in
the agricultural sector (updated from Ribaudo USDA 1996 by NRCS), then one
may conclude that the off-site environmental benefits to the U.S. economy in the
farm sector alone from the introduction of a carbon permitting system may be in
the order of $35 million, $75 million, and up to $109 million via the reduced
incidence of erosion in water ways, ditches etc.
Meeting National CRP and USDA/NRCS Target Goals
The United States is engaged in a number of policies regarding soil erosion control and
resource conservation on agricultural lands. Here, we examine some interrelationships
between carbon permit price policies and the cost of achieving these U.S. farm and land
management conservation measures. In particular, as explained above, we examine whether
the introduction of a carbon permit system will benefit or adversely impact alternative acreage
set-aside targets under the U.S. Conservation Reserve Program (CRP) and the implementation
of erosion control goals for various land-class categories under the USDA Natural Resource
Conservation Service. In this analysis, focusing on the year 2000, the analysis examined the
welfare lost in U.S. agriculture when you:
expand the CRP program from 16 to 19 million acres; and,
adopt the NRCS goal discussed in their strategic plan, with such welfare losses giving
the minimum costs that would be incurred in implementing these alternative improved
U.S. land management policies.
EPA Climate Change Policies and Programs Division
22
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 16.
Project Changes in Usage of Tillage Methods by U.S. Farm Sector
under Alternative Carbon Permit Priced for Year 2000
(in 1000 acres)
Land Type
Tillage
Alternative Carbon Permit Price
Method
Zero
$25 per ton
$50 per ton
$100 per ton
W3-8LAND
VENT
24,835
21,448
20,890
19,638
CONS
2,277
3,934
3,951
4,254
ZERO
7,519
9,250
9,765
10,801
LOEILAND
VENT
120,633
90,883
85,089
77,844
CONS
38,627
49,011
40,443
34,885
ZERO
27,298
46,707
60,854
73,633
MDEILAND
VENT
28,012
26,896
22,248
17,893
CONS
8,435
6,754
7,048
8,469
ZERO
8,296
11,210
14,394
17,182
SVEILAND
VENT
10,825
8,847
7,835
7,568
CONS
4,673
5,218
4,407
4,399
ZERO
1,094
2,528
4,344
4,576
Note:
Vent identifies existing tillage system
Cons identifies acres shifted to more conservation tillage
Zero identifies acres shifted to no till
w3-8 land is proxy for wetlands
loeiland is land with low erodibility index
mdeiland is land with medium erodibility index
hieiland is land with high erodibility index
EPA Climate Change Policies and Programs Division
23
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 17.
Project Percentage Changes in Usage of Tillage Methods by U.S. Farm Sector
under Alternative Carbon Permit Priced for Year 2000
(percentage)
Land Type
Tillage
Alternative Carbon Permit Price
Method
Zero
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
(%)
W3-8LAND
VENT
0.00
-13.64
-15.89
-20.93
CONS
0.00
72.72
73.47
86.80
ZERO
0.00
23.01
29.86
43.64
LOEILAND
VENT
0.00
-24.66
-29.46
-35.47
CONS
0.00
26.88
4.70
-9.69
ZERO
0.00
71.10
122.92
169.74
MDEILAND
VENT
0.00
-3.98
-20.58
-36.12
CONS
0.00
-19.93
-16.44
0.41
ZERO
0.00
35.12
73.51
107.11
SVEILAND
VENT
0.00
-18.27
-27.61
-30.09
CONS
0.00
11.66
-5.70
-5.86
ZERO
0.00
131.03
296.97
318.17
Table 18.
Projected Net Changes in National Soil Erosion in U.S. Farm Sector
under Alternative Carbon Permit Prices for Year 2000
Measure
Alternative Carbon Permit Price
Zero
$25 per ton
$50 per ton
$100 per ton
Quantity
(1000 tons)
1,251,515
1,189,896
1,116,802
1,057,241
Change
(1000 tons)
0
-61,618
-134,712
-194,274
Percent Change
0.00%
-4.92%
-10.76%
-15.52%
Offsite cost Chg (mill $)
0
-35
-75
-109
Note : Offsite cost figured at $0.56 per ton via USDA estimates (Ribaudo 1996).
EPA Climate Change Policies and Programs Division
24
U.S. Agricultural Sector Impacts from Carbon Permit Prices
The results of the land management policy analysis are in Table 19. The model results show
that, relative to a zero carbon permit price, the cost of achieving the alternative polices is
affected as follows:
1. Meeting NRCS National Soil Erosion Goals is Easier with a Carbon Permit System
achieving the NRCS strategic planning goal is made easier by a carbon permit
system and
2. Meeting CRP Targets is Somewhat More Difficult
the cost of expanding CRP acres is slightly higher because of the increased land
usage stimulated by the incidence of the carbon permit prices.
3. Farm Sector's Permit Price Revenues are Sufficient to Fund CRP Expansion and
Partly Meet NRCS Goals
Table 20 shows that the permit price revenue stimulated under policies and shows
that the carbon permit price revenues are large enough to fund an expansion in the
CRP or partially fund a program to achieve the NRCS policy soil erosion goals.
4. Carbon Permit Soil Erosion Benefits Greater than Gains from Expanding CRP
Target
Tables 21 to 22 show the effects of the carbon permit policy on erosion by land type.
Note the $25/ton carbon price has more positive soil erosion implications in the U.S.
farm sector than would a policy initiative calling for the expanding the CRP program
from 16 to 19 million acres. Similarly, a $100 carbon permit price has almost the
same erosion results as adopting the NRCS conservation goal.
Table 19.
Project U.S. Farm Sector Welfare Costs of Attaining Land Management Goals under
Alternative Carbon Permit Prices for Year 2000
($U.S. millions¹)
CRP
USDA/NRCS
Alternative Carbon Permit Price
Erosion Goal
Zero
$25 per ton
$50 per ton
$100 per ton
16
None
0
0
0
0
19
None
-224
-262
-273
-268
16
NRCS
-393
-345
-256
-255
19
NRCS
-644
-616
-526
-521
1
Dollars are in constant terms based on 1997 values.
EPA Climate Change Policies and Programs Division
25
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 20.
Potential Revenue Raised Under Alternative Carbon Permit Prices
from Attaining U.S. Farm Land Management Policy Targets for Year 2000
($U.S. millions¹)
CRP
USDA/NRCS
Permit Price
Erosion Goal
$25 per ton
$50 per ton
$100 per ton
16
None
408
775
1478
19
None
407
769
1465
16
NRCS
407
773
1471
19
NRCS
405
766
1460
1
Dollars are in constant terms based on 1997 values.
Note all computed in departure from a 16 million acre CRP with no erosion goal at the
relevant carbon permit price
Table 21.
Projected U.S. Farm Sector Soil Erosion Differences
under Alternative Carbon Permit Prices with Different Farm Land Management Policy
(in 1000 tons)
CRP
USDA/NRCS
Permit Price
Erosion Goal
Zero
$25 per ton
$50 per ton
$100 per ton
16
None
1,251,515
1,189,896
1,116,802
1,057,241
19
None
1,225,409
1,166,439
1,082,222
1,025,301
16
NRCS
1,050,971
985,935
943,805
892,933
19
NRCS
1,039,170
987,826
943,163
892,572
Note all computed in departure from a 16 million acre CRP with no erosion goal at zero carbon
permit price
EPA Climate Change Policies and Programs Division
26
U.S. Agricultural Sector Impacts from Carbon Permit Prices
Table 22.
Projected U.S. Farm Sector Soil Erosion Differences
under Alternative Carbon Permit Prices with Different Farm Land Management Policy
(percentage)
CRP
USDA/NRCS
Alternative Carbon Permit Price
Erosion Goal
Zero
$25 per ton
$50 per ton
$100 per ton
(%)
(%)
(%)
(%)
16
None
0.00
-4.92
-10.76
-15.52
19
None
-2.09
-6.80
-13.53
-18.08
16
NRCS
-16.02
-21.22
-24.59
-28.65
19
NRCS
-16.97
-21.07
-24.64
-28.68
Note all computed in departure from a 16 million acre CRP with no erosion goal at zero carbon
permit price.
Conclusions of Carbon Permit Price Impacts on U.S. Farm Sector
The conclusions and implications of this study are instructive for U.S. climate change policy
makers due to the minimal farm sector impacts detected by the model from the introduction of a
carbon permit caps and trading system. In general, this study found that:
Minimal Welfare, Commodity Price, and Farm Factor Use Impacts: Across
the analysis, it appears that the U.S. agricultural sector is not found to be very
sensitive to the introduction of carbon permit prices because the resulting higher
energy prices make up a relatively low part of the total costs of production for the
farming sector. The results show that the permit price revenues generated
under the most extreme $100/ton carbon permit price are about $1.5 billion,
which causes an agricultural sector welfare reduction of about $1.7 billion. All of
these results are relatively small when compared with the projected farm sector
income effects of the 1996 farm bill, which, once payments are fully phased out,
is expected to induce losses four to six times as large as these potential permit
system impacts.
Important National Environmental Benefits Gained in Soil Erosion Control
and Water Use: Soil erosion across all farming states in the U.S. is substantially
reduced when carbon permit prices are internalized into the farm sector. In
addition, irrigation water use declines. However, cropland and chemical
(pesticide and fertilizer) use are marginally expanded, at least initially. Since the
model does not show changes in chemical use over time, one might expect this
initial increase in chemical use to fall eventually below current use as zero till
practices reduce their dependence on such applications. Carbon prices would
EPA Climate Change Policies and Programs Division
27
U.S. Agricultural Sector Impacts from Carbon Permit Prices
make attainment of U.S. soil erosion goals cheaper but would increase the
implementation costs of expanding the U.S. CRP acreage. The carbon permit
price revenues that would be raised are large enough to fund expansion in soil
conservation or CRP programs.
Impacts not Affected by Year Carbon Permit System Introduced: Although
assessments were conducted for the years 2000, 2005, 2010, 2015, and 2020,
no significant changes in these farm sector results appear to occur when the
timeline for introducing a carbon trading system is altered.
Given the consistency of these results across time and farm impact, this study suggests that
the farm welfare impacts will be partially and or wholly compensated by environmental gains in
terms of land management, factor use, erosion control, and greenhouse gas emissions
reductions.
EPA Climate Change Policies and Programs Division
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