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61
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Larry 617-353-4449 Kotlikorr
B
Background Paper
THE
BROOKINGS
INSTITUTION
WASHINGTON, DC
THE NEXT STEP FOR CLIMATE CHANGE POLICY
Warwick McKibbin and Peter J. Wilcoxen
Do you guys? know these
Warwick J. McKibbin is a Nonresident Senior Fellow in Economic Studies at the Brookings
Institution, and Professor of International Economics at The Australian National University. He is also
head of their Department of Economics.
Peter J. Wilcoxen is a Nonresident Senior Fellow in Economics at the Brookings Institution, and an
Assistant Professor in the Department of Economics at the University of Texas.
The Next Step for Climate Change Policy
2
I. INTRODUCTION
The Kyoto Protocol to the United Nations Framework Convention on Climate Change
(UNFCCC), which was negotiated in Kyoto in December 1997, is yet to be ratified. There are still
many unresolved problems with implementing this convention-not least is the problem that the
Kyoto Protocol is fundamentally unsustainable. Little progress in implementation of the Kyoto
Protocol was achieved at previous meetings in Buenos Aires and Bonn. The next major negotiations
will be held in The Hague in November 2000, although there will be intense activity leading up to
this meeting, which will be the last serious chance for countries to implement the Kyoto Protocol.
Rhetoric will not achieve the tight targets of the Kyoto Protocol and at some stage either actual
policies must be implemented or the Kyoto Protocol must be jettisoned. The irony of the current
state of climate change policy is that the Kyoto Protocol is actually raising greenhouse emissions
because some corporations are postponing taking low-cost actions until it is clear what actions will
be given credit in future abatement systems.
Before taking the next step, it is worth reflecting on what a sustainable and realistic climate
change policy. should look like. First, the policy should slow down carbon dioxide emissions where it
is cost-effective to do so, but only as an insurance policy until further information on climate change
is accumulated. Second, the policy should involve some mechanism for compensating those coun-
tries who will be hurt economically without requiring massive transfers of wealth that could under-
mine economic stability. Third, since climate change is potentially a global problem, any solution will
require a high degree of consensus both domestically and internationally. Few countries want to
relinquish sovereignty, especially when the policies in question can have large economic effects. A
system that does not ultimately include developing countries will do little to achieve the goals of the
UNFCCC because these countries are large future emitters of carbon and because the cheapest
reductions will be found where carbon-intensive capital investments have not yet been made.
Fourth, the regime must allow new countries to enter with minimum disruption and also allow a
core group of countries to continue to participate even if other countries exit the system at certain
times. A system involving many countries that doesn't survive changing composition over time is
destined to fail since the reality is that a country's commitment to the regime is a function of the
commitment of political incumbents at any point of time.
Given these criteria, the next step in climate change policy should not be in the direction
taken by the negotiators at Kyoto. We propose here a different approach: one that sets the price of
emission permits in the short run, but over the longer run, allows the market to determine the price
of emission allowances.
2. WHAT IS WRONG WITH THE KYOTO PROTOCOL?
The objective of the Kyoto Protocol is to impose binding greenhouse gas (GHG) emission
targets for the world's industrial economies and former communist economies of Europe ("Annex I"
countries) to be achieved by the period 2008-2012. By directly binding emissions, policymakers
presumably believed that they could achieve the goals of the UNFCCC through political commit-
ment. Given that fixed targets for emissions by Annex I countries have been agreed, although not yet
ratified in key countries,² the main issues currently being debated are how to minimize the costs of
the Kyoto Protocol and how to bring developing countries into the agreement.
I See McKibbin and Wilcoxen (1997a, 1997b, 1999).
2 As of October 5,1999, 84 countries have signed but only 15 have ratified.
The Next Step for Climate Change Policy
3
The issues of cost minimization and developing country participation are clearly recognized
in the Kyoto Protocol. Costs are addressed through provision for international trading of emission
allowances among the countries that accept binding targets. In addition, the Protocol provides for a
Clean Development Mechanism, under which agents from industrial countries can earn emission
credits for certified reductions from investments in "clean development" projects in developing coun-
tries that have not taken on binding targets.
The first problem with the Kyoto Protocol is the focus on achieving rigid "targets and timeta-
bles" for emissions reductions at any cost, rather than substantial reductions in emissions at reason-
able cost. The problem with fixed targets was understood by some negotiators at Kyoto and flexibility
mechanisms, such as permit trading, were thus included in the Protocol. A crucial but mostly
ignored issue is that any fixed targets for the world or for a group of countries, even differentiated
targets, are likely to be inefficient because we really don't know what
these will cost over the long period of time being discussed.³ If the actual
costs of abatement turn out to be much larger than estimated, it is
both politically and
unlikely that countries will continue to voluntarily adhere to the Kyoto
economically, there
Protocol. Some form of extreme enforcement mechanism needs to be
designed to hold the Protocol together. Imposing arbitrary but binding
may be potential
targets on developing countries is even more problematic because there is
even greater uncertainty about what the appropriate targets should be. An
problems with the
overly tight target will cause countries to depart from the agreement and
Kyoto Protocol
an overly loose target will mean that low cost opportunities will have been
lost.
involving the possibly
Permit trading within the Kyoto Protocol is essential to minimize
these problems. However even a permit trading system could be problem-
large wealth transfers
atic. In a series of papers (McKibbin and Wilcoxen (1997a, 1997b)) we
between economies.
have pointed out that under some plausible scenarios for the future
evolution of the global economy, the economic pressures caused by the
large transfers of wealth internationally that underlie the claims over permits could cause severe
fluctuations in real exchange rates and international capital and trade flows. Whether this actually
emerges as a future problem is highly uncertain but will depend on a number of factors including
the ultimate price of permits and the initial allocation of permits. In particular, international wealth
transfers may be a problem if permit allocations are used excessively as a way of persuading coun-
tries to participate in an agreement. Although there is uncertainty about whether this effect is large
or small, the main point is that we can't be sure that the economic problems we highlight will not
emerge in the future.
Another problem with permit trading under the Kyoto Protocol is that the price of permits
for all countries depends on the demand and supply of permits by large countries. If one large
country cheats, then the value of permits for all countries will be affected and the system will likely
collapse. There is currently no international rule of law that can prevent this from happening, nor is
it easy to see what credible penalties could be imposed to prevent this from happening under all
possible scenarios. It is also hard to imagine why developing counties would want to participate in a
3 See McKibbin and Wilcoxen (1997a) and Kopp, et al., (1997) for arguments about the difference
between price and quantity caps under uncertainty.
The Next Step for Climate Change Policy
4
centralized system like the Kyoto Protocol, especially once the enforcement mechanisms are made
explicit and without knowing the possible costs of accepting a binding emissions target.
Overall it seems that both politically and economically, there may be potential problems with
the Kyoto Protocol involving possibly large wealth transfers between economies. More fundamen-
tally, the incentives of key players are not clearly consistent with the protocol under extreme develop-
ments without some as yet to be identified enforcement (and monitoring) mechanism.
3. AN ALTERNATIVE APPROACH
Our proposal is an attempt to design a decentralized but coordinated system that gives
participating countries the incentive to participate as well as giving appropriate incentives to house-
holds and firms to change the amount of carbon emissions where it is cost effective to do so. We also
build in the notion that developing countries should not incur the same costs in the short run as
industrialized economies. But investment decisions in the developing countries need to be condi-
tioned on expected future costs of abatement in these countries.
The basis of our system is the creation of two new assets (in each economy) as a part of
establishing a clear system of property rights with respect to carbon emissions. The two assets are
emission permits and emission endowments. An emission permit is an asset that is required every
year to be held by a carbon producer in order to produce a single unit of carbon. The price of the
permits will be equal to the marginal cost of reducing an additional unit of carbon for every carbon
emitter in an economy.
An emission endowment gives the owner an annual emission permit that can be used in a
given country every year forever. The endowment reflects a country's longer term commitment to
emissions reductions but is not a binding constraint in the short run. There would be markets
created domestically for both permits and endowments. The holder of an emission endowment can
either decide to claim an emission permit and use it for current activities, or to sell that permit on
the current market or to sell the endowment depending on the price they currently see versus the
price they expect in future years. The price of the emission permit will be the marginal cost of abate-
ment in a given year whereas the price of the emission endowment will be the expected future
marginal cost of abatement.
As under the earlier forms of our proposal, in Annex I countries, rather than setting targets
for emissions, we propose setting targets for the marginal abatement costs-we make the cost of
cutting emission certain (i.e., the fixed permit price) and the environmental outcome uncertain.
Specifically, the domestic price of permits would be guaranteed within each Annex I country for a
period of 10 years at a maximum of $US10 per ton of carbon.4 This fixed price is achieved by each
government in each Annex 1 market selling as many emission permits as required to keep the price
from rising above $US10 per ton. There is no cap on permits and therefore no cap on emissions but
the marginal cost of abatement is known for a fixed period. Many studies estimate that the permit
price in 2010 associated with the Kyoto targets, range from $US65 to many hundreds of dollars.
Thus in Annex I countries there is likely to be an initial excess demand for permits and the permit
price of $US10 per ton will be binding. The price of emission endowments on the other hand would
be flexible (given a fixed quantity of endowments) and would reflect expected future prices of
emission permits.
+ Both the period between negotiations and the price would be the subject of negotiation.
The Next Step for Climate Change Policy
5
The dilemma facing developing countries is that they are yet to emit the substantial amounts
of carbon that have been essential to the development strategies of Annex I countries. Yet to go down
the high carbon path of Annex I countries implies possibly very large future costs for developing
countries if climate change becomes as fundamentally important as some scenarios would imply.
Most of the costs of climate change abatement occur because existing economic structures have to
be changed to be less carbon intensive. Most of this cost is a capital loss given that physical capital,
which is largely fixed, is expensive to change quickly. Changing economic structures is far less expen-
sive to do before the capital stock is in place rather than after it is in place. Just as there are different
costs of carbon abatement across countries, there are also
different costs across time. It is clear that a low-cost option for
investment
abatement over future years will be found in changing the
decisions in the
future energy intensity of developing economies. This issue is
recognized in our proposal by the use of endowments versus
developing countries
permits in developing countries in a different way to that in
Annex I countries. A developing country would be included in
need to be
our regime by negotiating an initial endowment allocation that
conditioned on
allows for the fact that rapid growth is likely during develop-
ment.
expected future
For example an endowment of (100+X)% for each
participating non-Annex I country would allow a large expan-
costs of abatement
sion in fossil fuel use before the constraint becomes binding. If
in these countries.
the government in the non-Annex I country were to distribute
all of this endowment, the price of permits would be zero in the
first year because there would be an excess supply of permits.
Thus a developing country would face no short run cost of emitting carbon. However, the price of
endowments would be non-zero because the future expected price of permits would be expected to
rise as the constraint becomes binding. We have introduced a price signal to current firms and
households within non-Annex I countries that future carbon emissions will be priced. Thus they
have the incentive to begin investing in low carbon emitting technology so that they can sell their
future permits or their endowments and make a future profit from planning low-cost abatement over
time. There are no direct costs introduced into the economy in the short term because the annual
price of permits will initially be zero. However, there is a price signal through the price of endow-
ments. Thus decisions about future energy use can incorporate the cost of carbon emissions without
imposing short run costs. Of course, the price of the emission endowments in any economy will
reflect the credibility of that government's commitment as well as the expected future growth
prospects of the economy.
Another important aspect of this approach, is that developing economies that grow slowly
will hit a binding emissions constraint much later than rapidly growing economies. Thus, countries
begin to contribute to the global reduction of carbon emissions when a country's capacity to pay is
higher.
In the long run, all countries are paying the same price for carbon whereas we have allowed
a transition path with differential abatement between Annex I and non-Annex I economies. This is
The Next Step for Climate Change Policy
6
an important difference to the Kyoto Protocol because there is currently no firm commitment by
developing economies. Once a developing country joins the Kyoto permit trading system, its price of
carbon and hence marginal cost of abatement would be the same as in industrial economies, which
some argue is not equitable. No amount of initial permit allocation within a multi-country permit
trading system would change the fact that they incur short run costs for carbon emissions-the same
as industrial economies. This is precisely why developing countries have
not committed to the Kyoto Protocol.
We believe it should be up to individual countries how they
In the long run, all
allocate the emission endowments. Once the endowments are created
countries are paying
the system then evolves over time with the annual price of permits being
set every ten years by international agreement. There is no need for
the same price for
international trade in emission permits because the price of permits is
the same in all markets by construction. There is no reason for a
carbon whereas we
Japanese firm to buy an emission permit from Russia when they can get
have allowed a
a permit from the Japanese government for the same price. There is no
trade allowed in emission endowments even though the values of these
transition path with
may differ across countries-this is the tradeoff of short run efficiency
for equity.
differential abatement
The net effect of this policy would be to raise the current and
between Annex I and
expected future price of emitting carbon in Annex I countries. This
would discourage increases in emissions, and encourage reductions in
non-Annex I
emissions where they are cost-effective, but without levying a sudden
multi-billion dollar burden on fuel users. This also creates a mechanism
economies.
for banking and renting emission rights that is internally consistent and
credible. To temporarily raise emissions above an initial endowment holding, a firm can buy a short
term emission permit from the permit market. To bank emission reductions for future use a firm can
sell permits in the permit market (just like renting the emission endowments annually) but hold the
emission endowment for future emission increases. No special institutional constructions are
required outside the creation of the two assets and a domestic mechanism that ensures the value of
these assets through monitoring and enforcement mechanisms and a rule of law that exists within
each economy. It is true that techniques of monitoring and enforcement will likely will differ across
countries, but this difference does not directly harm the effectiveness of a given outcome in another
country.
A key feature of the policy is that it is flexible. The permit price could be adjusted by interna-
tional negotiation at a regular interval (we propose every decade) or as needed when better informa-
tion becomes available on the seriousness or otherwise of climate change and the cost of reducing
emissions. Equally important, it would be easy to add countries to the system over time: those inter-
ested in joining would only have to adopt the policy domestically and no international negotiations
would be required. This flexibility is crucial because it is clear from current negotiations that only a
small subset of countries would agree to be initial participants in a climate change treaty. Also, coun-
tries can defect from the scheme without debasing the value of the permits for the remaining coun-
tries. Although the defection of a country would be undesirable, the system is sustainable.
The Next Step for Climate Change Policy
7
Since the policy does not focus on achieving a specified target at any cost (indeed the cost of
our proposal is known with certainty), such a system would be far more likely to be ratified, and by
more countries. The political attractiveness of our proposal is that it is a decentralized, coordinated
system implemented by individual countries within national rather than supranational institutional
structures.
The system we advocate is flexible enough to adapt to changing political, economic and
climate circumstances. Most importantly, we believe that the system we have designed, although
simple in concept, solves many of the insurmountable problems of the Kyoto Protocol and delivers
an outcome in which global emissions will be lower than otherwise would be the case.
The Next Step for Climate Change Policy
8
Key elements of the McKibbin Wilcoxen Proposal
All countries create two assets:
- an emission permit which is required by fossil fuel industries to supply a unit of carbon
annually;
- an emission endowment which gives the owner an emission permit every year forever.
All countries create two domestic markets:
- a domestic emission permit trading system with a fixed price of $US10 per ton of carbon
in Annex I countries and a cap price of $US10 in non-Annex I countries;
- a domestic emission endowment trading system with a flexible price.
In 2000, all countries are allowed to make a one time only allocation of emission endowments
domestically based on Kyoto targets for Annex I countries and current emissions plus x% for
non-Annex I countries. Trading in both markets begins in January 2001.
Permits must be reconciled against production or imports of carbon at an annual basis at the
top of the carbon production chain-coal mines, oil refineries, gas refiners. Production that is
exported is exempted.
Every decade there is a meeting of the Conference of the Parties to the UNFCCC to evaluate
the extent of abatement and the climate science and to negotiate a new price for permits.
REFERENCES
Kopp, R., R. Morgenstern, and W. Pizer, Something for Everyone: A Climate Policy that Both
Environmentalists and Industry Can Live With, September 29, 1997, Resources for the Future,
Washington, D.C.
McKibbin, W., M. Ross, R. Shackleton and P. Wilcoxen (1999). "Emissions Trading, Capital Flows
and the Kyoto Protocol," The Energy Journal Special Issue, "The Costs of the Kyoto Protocol: A
Multi-model Evaluation," pp.287-334.
McKibbin, W., and P. Wilcoxen (1997a). "Salvaging the Kyoto Climate Change Negotiations,"
Brookings Policy Brief no. 27, November 1997, The Brookings Institution, Washington D.C.
McKibbin, W., and P. Wilcoxen (1997b). "A Better Way to Slow Global Climate Change," Brookings
Policy Brief no. 17, June 1997, The Brookings Institution, Washington D.C.
McKibbin, W., and P. Wilcoxen (1999). "Permit Trading Under the Kyoto Protocol and Beyond."
Paper prepared for the United Nations University Conference on "The Sustainable Future of the
Global System" held on February 23-24 in Tokyo and presented at the EMF/IEA/IEW workshop
held June 16-18, 1999 at the International Energy Agency, Paris. Brookings Discussion Paper in
International Economics #150, The Brookings Institution, Washington D.C.
Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a publication.
Publications have not been scanned in their entirety for the purpose
of digitization. To see the full publication please search online or
visit the Clinton Presidential Library's Research Room.
WORLD RESOURCES INSTITUTE
CLIMATE
PROTECTION
CLIMATE NOTES
INITIATIVE
U.S. COMPETITIVENESS Is NOT AT RISK IN THE CLIMATE
NEGOTIATIONS
BY ROBERT REPETTO AND CRESCENCIA MAURER, WITH GARREN C. BIRD
If the climate negotiations in Kyoto
(FDI) in energy-intensive sectors
*
Energy reforms in developing
set different commitments for devel-
have not been flowing to countries
countries are generating signifi-
oped and developing countries to
with low energy prices.
cant trade and investment oppor-
reduce emissions of greenhouse
tunities for U.S. firms that can
gases, U.S. industries can still main-
*
Energy costs are an insignificant
help provide cleaner and more
tain strong international competi-
share of the value of most trade-
efficient energy sources.
tiveness. A comparison of trends in
able goods and services. More
trade, investment, energy costs and
than 80 percent of output and 90
These facts indicate that differenti-
energy pricing between the United
percent of employment in trade-
ated commitments for developed
States and key developing
and developing countries
countries point to few
can work without com-
adverse trade impacts and
Differentiated commitments do not
promising U.S. economic
significant opportunities
mean that the Framework Convention
competitiveness. Differ-
for U.S. business.
on Climate Change (FCCC) signed in
entiated commitments
1992 lets developing countries off the
do not mean that the
B
usiness groups have
hook.
Framework Convention
warned that U.S.
on Climate Change
actions to limit greenhouse
(FCCC) signed in 1992
gas emissions, without parallel steps
ables are in industries in which
lets developing countries off the
by developing nations, will under-
energy costs represent no more
hook. The FCCC explicitly recog-
mine the international competitive-
than 3 percent the value of sales.
nizes that all countries must cooper-
ness of American industry. These
ate in stabilizing the world's climate
arguments-that limits on U.S. emis-
*
Energy prices are climbing in
because no country can solve the
sions will drive energy-intensive
most of the developing world.
problem alone. But the Convention
industries off-shore, generate signifi-
Since 1990, real energy prices
does call for developed countries-
cant unemployment, and limit the
in key developing countries and
including the United States-to do
ability of U.S. business to compete²-
economies in transition have risen
more at the outset because of their
ignore important facts. For example:
and energy subsidies fallen rela-
historic responsibility for the build-
tive to those in the United States.
up of greenhouse gases in the atmos-
*
National differences in energy
Motivated by economic self-inter-
phere, and because developing coun-
prices do not drive international
est, these market reforms are
tries must meet basic development
investment flows. Furthermore,
likely to continue even without
needs even as they take action to
U.S. foreign direct investments
formal climate commitments.
limit emissions.³
1709 New York Avenue NW
202.662.2554 Telephone
http://www.wri.org/wri/climate/
OCTOBER 1997
Washington, DC 20006
202.638.0036 Fax
Printed on recycled paper
OFFICERS
Chairman: Dr. Charls E. Walker
former Deputy Secretary of the Treasury,
Chairman, Walker and Walker LLC
President: Mark A Bloomfield, Esq.
Senior Vice President. Mari Lee Dunn
ACCF
Senior Vice President and Director of Research Dr. Margo Thorning
DISTINGUISHED FELLOWS OF THE
ACCF CENTER FOR POLICY RESEARCH
AMERICAN COUNCIL FOR CAPITAL FORMATION
Environmental Policy Fellow, 1998-99
November 15, 1999
Prof. Henry D Jacoby
CENTER FOR POLICY RESEARCH
Pounds Professor of Management
Sloan School of Management
Massachusetts Institute of Technology
TCW Fellow, 1998-99
Dr. Gary C. Hufbauer
former Director of the International Tax Staff
U.S. Department of the Treasury
Reginald Jones Senior Fellow
Mr. Roger Ballentine
Institute for International Economics
Deputy Assistant to the President
BOARD OF SCHOLARS
For Environmental Initiatives
Dr. B Douglas Bernhem
Professor of Economics
Stanford University
115 Old Executive Office Building
Hon. Michael I Boskin
Tully M. Friedman Professor of Economics
Washington, D.C. 20502
and Senior Fellow, Hoover Institution
Stanford University
Hon David F. Bradford
Professor of Economics and Public Affairs
Dear Mr. Ballentine:
Princeton University
Dr. Lawrence H. Goulder
Associate Professor of Economics
Stanford University
Your remarks on global climate change at the November 12 meeting hosted
Dr John D. Graham
Professor of Policy and Decision Sciences
by Chemical Manufacturer's Association were extremely interesting and
Harvard School of Public Health
Dr. Robert E. Hall
insightful. As you know I spoke following your remarks. I am sorry you
Professor of Economics and
Senior Fellow, Hoover Institution
Stanford University
were unable to stay to hear my presentation; it provided an overview of the
Prof. Arnold C. Harberger
Professor of Economics
analysis of numerous credible climate policy scholars on the Kyoto
University of Cahlornia at Los Angeles
Dr. Dale W. lorgenson
Protocol's severe economic impacts and minimal environmental benefits.
Frederic Eaton Abbe Professor of Economics
Harvard University
My remarks included discussion of the U.S. EIA's important work in this
Dr. Alan S Manne
Professor Emeritus, Operations Research
area as well.
Stanford University
Dr. Charles McLure, Ir.
Senior Fellow, Hoover Institution
Stanford University
I would very much appreciate the chance to meet with you to exchange
Dr Roger B. Porter
Professor of Government and Business
views. Enclosed please find some of our recent climate policy reports,
John F. Kennedy School of Government
Harvard University
including my testimony before the Senate Committee on Energy and
Dr. lames M. Poterba
Mitsui Professor of Economics
Massachusetts Institute of Technology
Natural Resources, The Impact of the Kyoto Protocol on U.S. Economic
Dr. John B Shoven
Charles Schwab Professor of Economics
Growth and Projected Budget Surpluses; a special report by Mary Novak,
Stanford University
Hon Richard L. Schmalensee
senior vice president, WEFA, Inc., The Kyoto Protocol: Can Annex B
Dean, Sloan School of Management
Massachusetts Institute of Technology
Countries Meet Their Commitments?; a monograph by the ACCF Center for
Hon. Murray L Weidenbaum
Mallinckrodt Distinguished University Professor
Policy Research, Climate Change Policy: Practical Strategies to Promote
Washington University
Hon Ed Zschau
Economic Growth and Environmental Quality; and background on the
Professor of Management
Graduate School of Business Administration
ACCF. You can find additional research we have sponsored on climate
Harvard University
policy at our website: ACCF.org.
BOARD OF TRUSTEES
Thomas D Campbell
President
Thomas D Campbell and Associates
I will call your office in the near future to schedule this dialogue.
Dr George N. Carlson
Partner
Aithur Andersen & Co
Maxine C. Champion
Sincerely,
Vice-President, Government and
International Relations
Nestle USA, Inc.
Ernest S. Christian, Jr., Esq
Attorney-at-Law
Mago
Dr Kathleen B. Cooper
Them
Chief Economist
Exxon Corporation
Margo Thorning, Ph.D.
Paul R. Huard
Executive Vice President,
Senior Vice President and Director of Research
Finance and Management
National Association of Manufacturers
Hon Manuel H. Johnson
former Vice-Chairman
Board of Governors of
MT/mtb
the Federal Reserve System
Dr Rudulph G Penner
Enclosures
former Director
Congressional Budget Office
Larry W. Pollock
Vice-President and Director of Taxes
Weyerhaeuser Company
Thomas White
Vice Chairman
Enron Energy Services
1750 K Street, N.W., Suite 400, Washington, D.C. 20006-2302
202/293-5811; 202/785-8165 FAX; [email protected] E-MAIL
www.accf.org
Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a publication.
Publications have not been scanned in their entirety for the purpose
of digitization. To see the full publication please search online or
visit the Clinton Presidential Library's Research Room.
AMERICAN COUNCIL FOR CAPITAL FORMATION
CENTER FOR POLICY RESEARCH
SPECIAL REPORT
October 1999
The Kyoto Protocol:
Can Annex B Countries Meet Their Commitments?
by Mary H. Novak*
The Kyoto Protocol sets the ambitious target of reducing greenhouse gas emissions to 5 percent below 1990 lev-
els by 2008-2012 for 38 industrialized countries including the United States. A review of five recent govern-
ment studies and one independent report by WEFA Energy analysts in Europe shows that the industrialized
countries of North America, the Pacific region, and Western Europe cannot meet their emission targets without
exorbitant carbon taxes. In addition, the use of "Kyoto mechanisms" would only reduce the cost if the emissions
credits were plentiful relative to the total requirement of countries vying for them. At issue is whether Eastern
Europe's plans for economic growth will leave them with any surplus credits to sell. While Western Europe's lead-
ers have adopted the "spirit" of Kyoto, their primary goals are job growth and economic expansion.
INTRODUCTION
ARE ANNEX B EMISSIONS
TARGETS ACHIEVABLE?
The Kyoto Protocol to the Framework Convention
on Climate Change, a proposed amendment to the
Many previous analyses have shown that the indus-
international treaty on mitigating the risk of global
trialized countries of North America and the Pacific
warming, sets the ambitious greenhouse gas emission
region who are signatories of the Framework Conven-
target of 5 percent below 1990 levels by 2008-2012 for
tion on Climate Change cannot achieve their Kyoto
38 industrialized countries including the United
targets without extensive use of the "Kyoto mecha-
States. Many studies have shown that it would be
nisms" (i.e., international emissions trading). A
extremely costly for the United States to achieve its
review of five recent government studies and an inde-
target. Even under the assumption that the United
pendent report by WEFA Energy analysts in Europe
States could take advantage of the flexibility mecha-
supports the conclusion that the emissions targets can-
nisms proposed in the Protocol to reduce the cost of
not be achieved without exorbitant carbon taxes or
compliance, the impact on U.S. consumers and busi-
extensive use of Kyoto mechanisms.² The range of
nesses would still be substantial.
estimates of the required reductions in emissions from
The United States is but one of the 38 countries in
baseline levels for North America is -21.3 percent to
Annex B to the Kyoto Protocol that face the challenge
-29.8 percent (see Table 1 and Figure 1a). The esti-
of meeting the targets established for reducing green-
mates for the Pacific region (Japan, Australia, and
house gas emissions by the end of the next decade if
New Zealand) are equally draconian: -18.5 percent to
the Protocol is ratified. 1 Proponents of the Protocol
-28.5 percent (see Table 1 and Figure 1b).
have claimed that these countries can achieve their
The assessments of Western Europe's potential for
targets at a low cost.
reducing carbon emissions from its energy sector as
*Mary H. Novak is senior vice president, WEFA Energy Services. This Special Report is based on a paper prepared for an October 13,
1999, policy conference, and will be published in the ACCF Center for Policy Research's upcoming book, The Kyoto Commitments:
Can Nations Meet Them With the Help of Technology? The ACCF Center for Policy Research is the education and research affil-
iate of the American Council for Capital Formation. Its mandate is to enhance the public's understanding of the need to promote eco-
nomic growth through sound tax, trade, and environmental policies. For further information, contact the ACCF Center for Policy
Research, 1750 K Street, N.W., Suite 400, Washington, D.C. 20006-2302; telephone: 202/293-5811; fax: 202/785-8165; e-mail:
[email protected]; Web site: www.accf.org.
Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
marker by the William J. Clinton Presidential Library Staff.
This marker identifies the place of a publication.
Publications have not been scanned in their entirety for the purpose
of digitization. To see the full publication please search online or
visit the Clinton Presidential Library's Research Room.
iN COUNCIL CAPITAL FORMATION
CONG RESSIONAL TEST MONY
March 25, 1999
The Impact of the Kyoto Protocol on
U.S. Economic Growth and
Projected Budget Surpluses
ACCF Senior Vice President and Chief Economist Dr. Margo Thorning testified as a committee-invited expert witness on March 25,
1999, before the Senate Committee on Energy and Natural Resources. The executive summary and full text of the ACCF's testimo-
ny are presented here.
EXECUTIVE SUMMARY
Macroeconomic Effects of CO₂ Emissions Limits
which appears to assume costless capital adjustments
Are Significant. A wide range of economic models
to energy price changes.
predict that reducing U.S. carbon dioxide (CO₂)
emissions to either 1990 levels or to the Kyoto target
International Emissions Trading Issues Are
(7 percent below 1990 emission levels) would reduce
Major. Emissions trading could substantially reduce
U.S. GDP and slow wage growth significantly, worsen
the cost of complying with the Kyoto targets, especial-
the distribution of income, and reduce growth in liv-
ly if developing countries participate. Major obstacles
ing standards. If the United States is not able to take
to trading include securing developing country partic-
advantage of "where" flexibility (reducing emissions
ipation, allocating CO2 emissions rights, and distribut-
wherever it is cheapest globally) through internation-
ing the resulting revenue.
al emissions trading to meet the Kyoto target, the cost
in terms of lost output will range from about 1 percent
Conclusion: The Kyoto Approach Isn't the
to over 4 percent of GDP.
Answer. U.S. goals in international climate policy
In addition, near-term emissions reductions would
meetings should include finding ways to involve devel-
reduce U.S. competitiveness in energy-intensive man-
oping countries in emissions reduction, clarifying flex-
ufacturing industries as well as in agriculture. Meeting
ible mechanisms, and avoiding trading caps. Voluntary
the Kyoto emission targets would make it much more
measures to reduce U.S. CO₂ emissions should include
difficult to sustain tax cuts or "save" social security,
modifications to U.S. tax policy that reduce the cost of
and could require sharp changes in fiscal policy to
capital for energy-efficient investment. Moreover, the
avoid deficit spending.
introduction of carbon capture and sequestration tech-
niques from central power facilities, soil sequestration,
The Administration's Analysis Is Questionable. The
and reforestation could radically change both the cost
Administration's estimates of economic damage
and character of carbon mitigation. Adopting a
from CO₂ emission reductions are far below those of
thoughtfully timed climate change policy-based on
other models due to unrealistic assumptions that
science, improved climate models, and global partici-
global trading of emissions will be available in the
pation-is essential, both to U.S. and global econom-
near term and that developing countries will partic-
ic growth and to the eventual stabilization of carbon
ipate, and the use of an economic model (SGM)
concentrations in the atmosphere.
The mission of the American Council for Capital Formation is to promote economic growth through sound tax, trade, and
ACCF
environmental policies. For more information about the Council or for copies of this testimony, please contact the ACCF,
1750 K Street, N.W., Suite 400, Washington, D.C. 20006-2302; telephone: 202/293-5811; fax: 202/785-8165; e-mail:
25
YEARS
[email protected]; Web site: www.accf.org.
Joseph E. Aldy
08/26/99 05:36:38 PM
Record Type:
Record
To:
David B Sandalow/CEQ/EOP@EOP
CC:
roger S. ballentine/who/eop@eop
Subject: Re: WWF/Tellus
Several weeks ago when this analysis was first announced, Eliot D. and Jeff S. asked me to take a look at
the WWF study. This study combines some dubious analytic assumptions with some very aggressive
policies to achieve the outcome. For example, the study appears to assume off-line that significant
increases in CAFE (1.5 mpg per year for 12 years), new appliance standards, and new building standards
would have no costs to the economy. Further, the study makes off-line assumptions about renewables: 1)
10% RPS by 2010 -- it is assumed to have a much lower cost than DOE projects for the Administration's
7.5% RPS proposal; 2) 10% cofiring of biomass in coal plants -- with no detail on how the costs were
estimated, and how the costs vary with the demand for biomass associated with the ethanol assumption;
and 3) 10% of transportation fuels comprised of cellulosic ethanol -- it is difficult to see how the fuel
system could handle this, since the very optimistic 5 Labs Study claims that cellulosic ethanol could
comprise no more than 3.5% of the transportation fuels because of economic and technical problems
associated with blending. In the industry sector, they assume that unspecified policies could reduce the
discount rate used by firms for investment decisions by more than half. While I have seen such an
assumption before (the 5 Labs Study), I have yet to see an economic justification for such an assumption
or a detailed description of the policies that could influence firms' rates of time preference.
By making off-line assumptions about many of the big-ticket policies pushed in this analysis, the study has
effectively assumed away the costs of reducing emissions. Thus, it can assume that reducing emissions
is better for the economy. The bottom line is that I seriously doubt any mainstream economist would
defend such an analysis.
Joe
ECONOMY
Flat CO2 Emissions Give Experts Hope
Compliance With Pollution Curbs Seen More Likely
By JOHN J. FIALKA
Staff Reporter of THE WALL STREET JOURNAL
Thinning Carbon Dioxide
WASHINGTON-Despite a booming
Even while the U.S. economy roared, 1998 carbon dioxide emissions were flat.
economy, emissions of man-made carbon
easing allance with informational treatles
dioxide remained almost flat in the U.S.
last year, and global emissions appear to
EMISSION
INTENSITY
CHANGE
have dropped.
(millions of torts)
(tons/$millions of GDP)
FROM 1997
That has led some experts to believe the
1,606
199.1
+0.4%
economic shock of complying with interna-
tional pollution curbs aimed at stemming
China
883
213.4
-3.7
global warming may not be so jolting.
E.U.
603
116.6
-0.9
Until now, some government and pri-
vate industry projections have assumed
Russia
440
717.2
-1.3
economic growth is linked to energy con-
Japen
327
111.1
-2.5
sumption, particularly the burning of oil,
gas and other fossil fuels that release car-
India
304
178.2
+1.8
bon dioxide. CO2 is the main "greenhouse
World
6,950
168.3
-0.5
gas" many scientists believe is overheat-
ing the planet by trapping more of the
Relates how much carbon dioxiders country emits to the sue of its economy, as measured by
sun's rays in the atmosphere.
pross domestic product of economic output
Source: WorldWatch Institute
But in 1998, a year when the U.S. econ-
omy grew almost 4% and the price of gaso-
line dropped to records, CO2 emissions in
cult. The treaty, which the U.S. Congress
have to impose an economy-wrenching
the U.S. barely moved, rising only 0.04%,
has yet to ratify, requires the U.S. to cut
emissions cut of 30% to 40% by 2008, when
according to a Department of Energy re-
CO2 emissions, measured against 1990 lev-
the treaty's schedule of emissions curbs
port. "I think there's a decent chance that
els, by 7% starting in 2008.
begins. One safety valve planned by the
we're seeing a significant change," said
"Kyoto is still going to be a stretch for
Clinton administration is emissions trad-
Christopher Flavin, vice president of
some countries," Mr. Flavin said, "but the
ing, which would let U.S. companies buy
Worldwatch Institute, a Washington envi-
amount of emissions trading needed and
permits-from other companies or coun-
ronmental think tank.
the degree of domestic effort may turn out
tries that have exceeded the treaty's tar-
Mr. Flavin's group sees the same phe-
to be significantly less than everyone ex-
gets-to emit additional CO2. This has pro-
nomenon happening globally. It believes
pected."
voked a fight with European nations that
the trend, if it continues, could make the
Because many experts assumed eco-
want emissions trading to be limited.
political decisions required by the Kyoto
nomic growth and CO2 emissions move in
But flat or slumping emissions could
Treaty to curb global warming less diffi-
lockstep, they had predicted the U.S. might
Please Turn to Page A6, Column 1
WALL STREET JOURNAL
Monday Aug 2, 1999
42
The F-22 funding cut, which caught
Lockheed and the Pentagon by surprise,
led to one session in which Mr. Coffman
Flat CO2 Emissions
Give Experts Hope
On Pollution Curbs
Continued From Page A2
defuse some of this tension. "Most of this is
due to market forces," said Howard Geller,
executive director at American Council for
an Energy-Efficient Economy, a nonprofit
Washington research firm that represents
It's
business and academic groups. He and Mr.
Flavin see the rise of the information sec-
runni
tor, which features industries with light
CO2 emission levels, and the increasing
sifting
use of more energy-efficient machines and
appliances as two major factors that ap-
to cla
pear to have caused emissions to remain
nearly level in 1998.
the CI
Roger S. Ballentine, a White House
learni
lawyer who handles the climate change is-
sue, says the full statistical picture of what
happened in the energy sector in 1998 is in-
complete. "What we've got so far is a snap-
It's
shot, but it certainly is consistent with
what we've been saying, which is you can
1-2-3
grow the economy and reduce emissions at
the same time."
forwa
Mr. Ballentine is about to depart for
China, a key player in the Kyoto delibera-
appro
tions. China also has produced some recent
statistical surprises. According to Mr.
watch
Flavin, China's economy grew 7% last
year, while its use of coal fell 5%. Mr. Bal-
lentine attributes the drop in coal use to ef-
It's
forts by Chinese officials to remove subsi-
dies that have favored lavish use of coal,
which has fouled the air of many Chinese
ready
cities.
The Clinton administration will need
busy :
China and other developing nations to be-
at cla
come involved in the Kyoto Treaty to get
Congress to ratify it. Lawmakers here are
borin
réluctant to put the U.S. at an economic
disadvantage with the emission cuts if
we're
other nations don't follow suit. But data of
energy use from China and Eastern Europe
also indicate emissions levels there are
dropping because industries are leaping
It's
into the information economy, too.
So far, the slump in emissions has been
teaser
documented by two studies. A preview of a
report by the DOE's Energy Information
from
Administration on use of fossil fuels in 1998
shows that despite the rapid growth of the
skills.
economy, emissions from the U.S. indus-
trial sector fell 1.2% last year. Separately, a
surpr
Worldwatch analysis of 1998 energy data
gathered by BP Amoco PLC shows global
emissions declined 0.5% last year while
the world economy expanded 2.5%
Senate Committee Delays
On Economic Nominations
WASHINGTON The Senate Banking
committee delayed action on several THE
conomic nominations because of objec-
dons alsed in the Senate floor.
Thecommittee was forced to adjourn at
Talking Points on EIA Economic Analysis
The Energy Information Administration's (EIA) recent analysis of the Kyoto Protocol is
significantly flawed. In modeling implementation of the Protocol, EIA fails to take into account
the Protocol's flexibility mechanisms, incorrectly assumes that most businesses will fail to take
action to address climate change until 2005 or later, and uses a model that underestimates the
dynamism of the U.S. economy. In contrast, the Administration's economic analysis of the
Protocol, released in July, demonstrates that with effective market mechanisms, meaningful
developing country participation, and a realistic ramp up period, the costs of meeting the Kyoto
target should be modest.
The EIA Analysis Fails to Model the Kyoto Protocol's Flexibility
The EIA analysis fails to model international trading. EIA's model is not capable of
modeling international emissions trading, even though this is a critical feature in reducing
the cost of compliance for the United States and other countries. By contrast, the
Administration explicitly modeled international trading, as has every modeling team
participating in the exercise assessing Kyoto conducted under Stanford's Energy Modeling
Forum - which includes virtually all of the leading energy economic modelers in the
world. These models have demonstrated that international trading among industrialized
countries could lower costs of emissions reductions by as much as half.
EIA does attempt to include scenarios which assume an amount of domestic reductions
intended to mirror the level of domestic reductions implied in the model used by the
Administration. However, these EIA scenarios still overstate the cost of permits because
they fail to take into account the way that an international market, bidding to a single
international permit price, lowers cost.
The EIA analysis fails to account for all six types of greenhouse gases. The EIA study
assumes that the United States would achieve its target only through carbon dioxide
reductions. In fact, the Kyoto Protocol covers all six major greenhouse gases, and permits
countries to achieve their targets through reductions made in any of these gases. This
flexibility allows countries and companies to make reductions in the most cost-effective
manner possible, reducing the cost of compliance.
EIA Assumes Firms Take Little or No Action to Address Climate Change before 2005
In EIA's study, most businesses do not take action to address climate change until 2005,
and therefore only have a short time until the 2008-2012 budget window to reduce
emissions. Studies have demonstrated that the amount of lead time a company takes has
dramatic economic implications. For example with EIA's model, a 5-year "ramp-up"
(starting in 2005) would result in economic costs 65% greater in 2010 than that associated
with a 10-year "ramp-up" (starting in 2000). Thus, EIA's assumption that many
businesses would fail to plan for the future results in higher projected costs.
1
Already businesses are taking action to address climate change. For example, on
September 18, British Petroleum announced its plan to reduce emissions of greenhouse
gases worldwide by 10% below 1990 levels by the year 2010. In July, United
Technologies announced their plan to reduce its worldwide energy consumption by 25%
by the year 2007.
The EIA Analysis Does Not Include Policy Elements That Will Lower Costs
In the Administration's analysis, additional elements of policy were recognized as having
the potential to significantly decrease the costs of compliance and increase the amount of
reductions that might be accomplished at home. These policies were not factored into the
illustrative model the Administration cited, but were qualitatively taken into account in
reaching the conclusion that the United States could meet its Kyoto target for a relatively
modest cost. The EIA analysis, however, ignores elements such as forestry activities
(covered under the Kyoto Protocol) and the Administration's electricity restructuring
proposal, which could significantly lower compliance costs.
Studies put out by the Department of Energy's National Laboratories (the so-called Five
Lab and Eleven Lab studies) demonstrate that there are many viable technology pathways
to reduce greenhouse gas emissions at low cost.
The EIA Study Ignores the Dynamism of the U.S. Economy
The EIA study uses a macroeconomic model -- a short-term forecasting tool that is
inappropriate to use for making forecasts going out a decade or more -- as opposed to a
general equilibrium-type model that would incorporate the dynamism and flexibility that is
the hallmark of the American economy. (For example, the American economy has
adopted the Internet in the past decade, leading to industries and services that could not
have been imagined a decade ago.) A study by the World Resources Institute indicates
that this one factor is often enough to double the estimated costs of meeting a given
emissions reduction goal.
The EIA study assumes that in their use of energy, consumers and businesses are much
less responsive to price changes than is commonly assumed in the economics literature. A
more moderate choice of price responsiveness would reduce the estimated permit prices
and reduce the economic costs estimated by EIA.
The EIA Study is Pessimistic About the Role of Technology
The EIA study is pessimistic about the potential of technology and market innovation. It
assumes no direct effect of substantially higher fuel prices on the availability of more
advanced technology or more innovative uses of technology, both of which could
contribute significantly to reducing emissions.
2
Economic Impact of the Kyoto Protocol
June 9, 1998
1.
The WEFA study was funded by the Global Climate Coalition, a corporate group of fossil
fuel and other interests that is leading the opposition to taking responsible action on global
climate change.
2.
The model used to derive the WEFA numbers is flawed. It omits all the flexibility
mechanisms included in the Kyoto Protocol and the Administration's policies.
The WEFA analysis omits international emissions trading. This study assumes that no
countries undertake emissions trading, even though the right to trade is explicitly stated in the
Kyoto agreement. International trading among industrialized countries could reduce costs of
emissions by half.
The WEFA study does not include developing country participation in emissions
reduction. This study assumes developing countries do nothing to reduce greenhouse gas
emissions. However, the Kyoto Protocol establishes the Clean Development Mechanism, and
even if developing nations only participate in this mechanism the costs to the United States
could be 20 to 25% lower. If key developing countries participate more fully, for example by
taking on emissions targets and undertake emissions trading, the costs to the United States could
be reduced even more.
The WEFA study does not account for six categories of greenhouse gases. This study
assumes that emissions reductions would occur only through carbon dioxide reductions, even
though all six major greenhouse gases are covered by the Protocol. Since the Kyoto agreement
requires countries to reduce emissions to specific targets, on average across all kinds of
greenhouse gases, the flexibility is available to reduce emissions of some gases more than others
if it is cost-effective. Allowing for trading across gases could lower costs by about 10%.
The WEFA analysis omits carbon sinks. This study assumes that no carbon sink
opportunities for absorbing greenhouse gas emissions are available, even though the Kyoto
agreement explicitly includes forestry activities. Low-cost carbon sink options provide another
opportunity to achieve emissions targets at a modest cost.
By ignoring these flexibility mechanisms, this analysis fails to assess accurately the Kyoto Protocol
as well as the Administration's efforts to reduce greenhouse gas emissions. The Administration has
always said that reducing emissions can be done smart or dumb. By failing to account for these
flexibility mechanisms, the WEFA analysis illustrates the costs of doing it dumb. The
Administration believes that by including market mechanisms it can be done smart.
The costs of meeting the challenge of climate change will be modest. The Administration is working
to ensure that greenhouse gas emissions that contribute to global warming are reduced in common
sense, cost-effective ways. The Administration believes that with effective market mechanisms --
international emissions permit trading, the Clean Development Mechanism joint implementation, timing
flexibility during the commitment period, opportunities to trade across greenhouse gases, and carbon
sinks -- as well as with meaningful developing country participation and flexible timetables, the
economic cost to the United States of meeting the Kyoto targets will be modest.
1
3.
The potential costs of waiting too long to address the threat of climate change exceed the
costs of acting now. The threats climate change presents are widespread and range from
potential increases in asthma and infectious diseases to increasingly frequent and severe storms.
Despite the challenge of putting a price tag on the risks of inaction, economists have nonetheless
developed troubling cost estimates of the risks of global climate change -- ranging in the tens of
billions of dollars per year for the United States.
Human health. Warmer temperatures are projected to increase fatalities attributable to
heat waves in the U.S. of the kind that killed 400 in Chicago in 1995. The incidence of
asthma and other respiratory illnesses, particularly among children and the elderly, is
expected to increase from the additional smog caused by warmer temperatures. In a
warmer, wetter world, the geographic ranges for infectious diseases could significantly
expand. The incidence of malaria, for example, could increase by 50 million or more
cases a year by 2100.
Extreme weather. Warmer, wetter weather is projected to increase the frequency and
intensity of extreme events such as floods and drought. The 1993 Mississippi River
flood alone caused damages of $10-20 billion, while the Pacific Northwest floods in
1996-97, and the 1997 Ohio River and Red River floods resulted in substantial costs to
business and homeowners. Global warming may also mean increased drought in the
U.S., particularly in the Great Plains and other arid areas.
Sea level rise. Scientists project that sea level will rise by an additional 6-38 inches by
2100. A 20 inch-rise could inundate 7,000 square miles of the U.S. coastline, with
Florida and the Gulf Coast at greatest risk. Changes in rain and snowfall could affect
water supplies and water quality, posing threats to irrigation, fisheries, and drinking
supplies
Agricultural impacts. Changes in growing seasons, water availability, soil moisture and
precipitation could cause significant regional shifts in food productivity, with decreases
in food production.
4.
The President's plan protects the environment and grows the economy. In October 1997,
President Clinton put forward a responsible, balanced approach to begin meeting the challenge
of global warming, while protecting our economy and maintaining our international
competitiveness. This plan emphasizes win-win initiatives designed to cut emissions by
increasing energy efficiency; developing new, cleaner energy technologies; working with
industry and others to promote sensible solutions; and relying on market-based mechanisms to
ensure cost-effective reductions.
The plan includes a $6.3 billion package of tax incentives and R&D aimed at cutting
greenhouse gas emissions and building partnerships with industry to remove barriers to
the development and widespread use of energy efficient technologies and practices.
5.
Enabling environmental protection and economic growth to go hand-in-hand. For the past
25 years, efforts to protect the environment, whether by cleaning our air and water, eliminating
acid rain or closing the ozone hole, have been repeatedly assailed as a threat to our economy.
Yet today we have the cleanest environment in a generation and the strongest economy in a
generation. President Clinton's balanced approach to the challenge of climate change will allow
us to grow the economy and protect the environment at the same time.
2
ADMINISTRATION ECONOMIC ANALYSIS:
MEETING THE CHALLENGE OF CLIMATE CHANGE AT A REASONABLE COST
July 31, 1998
The Administration's economic analysis of the Kyoto Protocol concludes that the costs of
meeting our Kyoto target for reducing greenhouse gases should be modest; that taking
action to address global warming amounts to an insurance policy against a serious
threat; that there are significant opportunities for lost cost reductions both at home and
abroad; and that the benefits of averting climate change could be very large.
There is a powerful scientific rationale for taking action on global warming; taking action
amounts to an insurance policy against a serious risk. Greenhouse gases are rapidly building
up in the atmosphere and at current rates will reach levels not seen in 50 million years by 2100.
The nine hottest years on record have occurred since 1987, 1997 was the hottest year ever, and
1998 has been hotter still. Our leading scientists warn of serious consequences, like severe
droughts and floods and health problems, if global warming is ignored. In 1992, the National
Academy of Sciences said: even given the considerable uncertainties in our knowledge of the
relevant phenomena, greenhouse warming poses a potential threat sufficient to merit prompt
responses Investment in mitigation measures acts as insurance protection against the great
uncertainties and the possibility of dramatic surprises."
The costs of meeting our Kyoto target should be modest. Even without counting the impact of
domestic policies or the benefits of acting to mitigate climate change, estimates derived using the
Second Generation Model (SGM) suggest an emissions price in the range of $14 to $23 per ton
of greenhouse gases. In 2010, that would translate into an increase of $70-$110 per year for an
average family's energy bill, although such increase would be substantially offset by the decline in
electricity prices resulting from restructuring the electricity industry, as the Administration and
others have proposed.
Domestic actions -- which are not factored into the SGM model -- can further reduce costs
and substantially increase the amount of reductions made at home. These include federal
electricity restructuring; efforts to increase the rate of technology improvement, such as the
President's $6.3 billion budget package; activities, like forestry activities, which can sequester
carbon; industry consultations; and initiatives to reform federal energy use and procurement.
Doing it smart: The Kyoto Protocol is based upon flexibility measures that reduce costs. At
U.S. insistence, the Kyoto Protocol allows emissions to be reduced where and when such
reductions are cheapest. Key provisions include international trading of emissions permits as well
as measures that allow our companies to share credit for emissions reducing projects abroad.
The benefits of acting to address climate change could be very large. Noted economists have
estimated the environmental, health, and economic costs of global warming projected to occur
during the next century to be 1% of GDP or more -- over $80 billion a year in today's terms. In
the short term, ancillary benefits of reducing greenhouse gas emissions such as reduced air
pollution -- could produce savings equal to one quarter of the costs of meeting our Kyoto target.
PAGE
6
62ND STORY of Level 1 printed in FULL format.
Copyright 1998 The Detroit News, Inc.
The Detroit News
July 07, 1998, Tuesday
SECTION: LetterstotheEditor; Pg. Pg. A8
LENGTH: 495 words
HEADLINE: Rebuttal: WEFA report spins worst-case scenario
BODY:
The June 17 editorial "Kyoto's Impossible Targets" failed to recognize that
the WEFA economic report on the Kyoto Protocol on Climate Change provides a
worst-case -- indeed, an impossible case -- analysis of the costs of U.S.
compliance. As the WEFA analysts acknowledge, their model omits all of the
flexibility mechanisms included in the Kyoto Protocol and in the Clinton
administration's stated policy positions.
First, the WEFA study assumes that no countries undertake emissions trading,
even though the right to trade is stated in the Kyoto agreement. Stanford
University's highly regarded Energy Modeling Forum studies indicate
international trading among industrialized countries could reduce U.S. costs of
emission reductions by 50 percent.
Second, the WEFA study assumes that developing countries do nothing to reduce
greenhouse gas emissions. But the Kyoto Protocol establishes the Clean
Development Mechanism, which could lower U.S. costs by an additional 20 percent.
More important, if key developing countries participate more fully, for example
by taking on emissions targets and participating in international trading, the
U.S. costs could be reduced even more.
Third, the WEFA study assumes that emissions reductions would occur only
through carbon dioxide reductions. But all six major greenhouse gases are
ed by the protocol. Moreover, the Kyoto agreement gives nations the
bility to choose which greenhouse gases to reduce. Allowing for "trading"
USS gases could lower costs by another 10 percent.
Finally, the WEFA study assumes that no carbon sink opportunities for
absorbing greenhouse gas emissions are available. But the Kyoto agreement
explicitly includes forestry activities and counts them in a way that is
particularly attractive for the United States. Including low-cost carbon sink
options reduces U.S. compliance costs even more.
By ignoring these flexibility mechanisms, the WEFA analysis fails to assess
accurately the costs of complying with the Kyoto Protocol. As the administration
has stated over and over again, reducing greenhouse emissions can be done smart
or it can be done dumb. The WEFA analysis calculates the costs of doing it dumb.
Greenhouse gas emissions that contribute to global warming can be reduced
cost-effectively by employing market mechanisms -- all with meaningful
developing country participation and flexible timetables. The result is that the
economic cost to the United States of complying with the Kyoto Protocol targets
can be 90 percent less than the WEFA study claims.
PAGE
7
The Detroit News, July 07, 1998
The president and vice-president have made it clear that the Kyoto Protocol
will not be submitted to the Senate until there is meaningful participation by
leveloping countries. Thus, the WEFA study, which the editorial so
.siastically embraces, is not only a worst-case analysis, it is essentially
an .mpossible-case analysis.
Robert N. Stavins
Harvard University
Cambridge, Mass.
LOAD-DATE: July 07, 1998
FOR REVIEW PURPOSES ONLY: NOT TO BE CITED
April 12, 1999
This manuscript has been reproduced in this form for
the purpose of review. It has not been approved as an
official publication of the U.S. Department of Agriculture
Economic Analysis of the Impacts of the Kyoto
Protocol on U.S. Agriculture
This analysis was prepared by the Roy Darwin, Robert House, Jan Lewandrowski, Howard
McDowell, and Marc Peters of the Economic Research Service (USDA) under the direction
of the USDA's Global Change Program Office.
Table of Contents
Executive Summary
11-111
Introduction
iv-viii
Chapter I. Climate Change and Agriculture
The Effects of Climate Change on Agriculture
1-8
Agriculture's contribution to GHG emissions
8-9
Chapter II. Climate Change Policies and U.S. Agriculture: Economic Impacts
10-18
Chapter III. USDA's Economic Analysis of the Kyoto Protocol on U.S. Agriculture
19-34
IV Opportunities for Agriculture:
Carbon Sequestration
35-41
Mitigation Opportunities
41-42
Tables
43-56
References
57-62
Appendix 1. Impacts Under Alternative Carbon Prices
63-67
Appendix 2. Energy Use in Agriculture
68-77
Appendix 3. USMP Regional Agricultural Model
78-81
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Executive Summary
USDA's analysis of the economic impacts of the Kyoto Protocol on agriculture concludes that the
impacts are relatively small. Our core analysis is consistent with the Kyoto Protocol and the
Administration's estimation of the impacts on energy prices when all the key provisions including
emission trading, a multi-year commitment period, allowance for forestry carbon sinks, joint
implementation, and the Clean Development Mechanism are taken into consideration. Other
analyses may arrive at larger impacts but these analyses fail to model energy price increases that
are consistent with the Kyoto Protocol's cost-reducing provisions or the resulting adjustments to
these increases made by farmers and consumers
The Kyoto Protocol will primarily effect U.S. agriculture through its effect on energy prices.
Rising energy prices will cause the cost of agricultural production to rise slightly as input costs
(fuel, fertilizer, chemicals and other energy intensive inputs) increase. This will in turn cause
production and net farm income to fall. As production falls commodity prices will increase
partially offsetting the increase in the cost of production. At the same time the increase in prices
reduces the quantity demanded. The extent of these changes and their impact on farm income will
depend on the magnitude of the increase in energy prices, farmers ability to reduce energy use,
and the demand for agricultural commodities. Some regions, particularly those more dependent
on energy-intensive irrigation, could be more negatively affected than others
For carbon prices consistent with the Kyoto Protocol, agricultural production declines from 0.1
percent for soybeans to 0.9 percent for rice. Prices increases range from about two cents per
bushel for feedgrains, one cent per bushel for wheat, and 11 cents per hundredweight for rice.
Rice prices increase more than other crops owing to its greater energy and carbon intensity in
production. Soybean, silage and hay prices rise less than 1 percent owing to lesser carbon
intensity in production. Livestock would be affected negligibly, with prices increasing about a
half percent or less and production declining a twentieth of a percent or less.
Farmers' expenditures on energy related inputs increase by 2.3 percent. Expenditures of fuel
increases 4.6 percent and expenditures for fertilizers increase by 2.1 percent. About 75 percent of
the changes in fertilizer expenditures are attributed to nitrogen, which is higher in carbon content
than potash and phosphates. Chemical expenditures increase by 1.2 percent while expenditures
on electricity increase by 2.6 percent. The significant increases in energy related costs cause
farmer's total variable costs to increase by 0.6 percent.
The increase in commodity prices partially offset the increase in production costs and as a result,
net cash returns to farmers fall by only 0.5 percent or $371 million and consumer welfare declines
0.05 percent. Declines in regional net cash returns to farmers range from 0.3 percent in the Corn
Belt to 2.3 percent in the Southern Plains. Most regions experience declines in net farm income
near the national average. The exceptions are the Southern and Northern Plains which experience
declines in net farm income greater than one percent.
The USDA analysis uses the U.S. Regional Agricultural Sector Model (USMP), which predicts
how changes in energy prices will affect the supply of crops and livestock, commodity prices,
consumer demand, use of production inputs, farm income, government expenditures, participation
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in farm programs, and environmental indicators. USMP is linked with regularly-updated USDA
production practices surveys, the USDA multi-year baseline, and geographic information system
databases such as the National Resources Inventory. USMP covers 10 crops, livestock, as well as
several dozen processed and retail products. Impacts are estimated by commodity for 10 farm
production region, and 45 land resource regions
Some have expressed concerns that increasing the costs of fossil fuels only in Annex-I countries
will increase the likelihood that agricultural production will shift to non-Annex-I regions. But
this is inconsistent with the Administration's position. The Protocol will not even be delivered to
the Senate unless it includes meaningful participation from developing countries. With developing
country participation- and one major competitor, Argentina is already committed to taking on a
emission reduction target-energy prices will increase similarly across regions.
We also look at how the agricultural sector is affected for every $50 increase in carbon prices. But
even under higher carbon prices-which are not consistent with the Administration's position on
climate change- we do not find significant negative impacts of American farmers. Why?
Because farmers respond to slightly higher input prices by changing the mix of inputs, reducing
output, and shifting to other commodities. Other analyses that show much larger impacts allow
no such adjustment to take place.
The effects of the Kyoto Protocol on U.S. agriculture depend on other factors still under
negotiation, such as whether certain types of agricultural and forestry activities are ultimately
included in the Protocol. Equally important is the economic potential of carbon sequestration:
while there may be significant physical potential to sequester carbon on agricultural lands, the
cost of actually sequestering must be taken into consideration. U.S. agriculture could benefit if
terrestrial carbon sinks are eventually included in the Protocol.
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Introduction
The international community is addressing climate change through the United Nations
Framework Convention on Climate Change, which the United States ratified in 1992 and has over
170 member countries. The Convention seeks to stabilize atmospheric concentrations of
greenhouse gases at safe levels. The Kyoto Protocol, which requires the advice and consent of the
Senate, formalizes this commitment and calls for the industrialized nations to reduce their
average national emissions over the period 2008-2012 to about five percent below 1990 levels.
Key elements of the Protocol include: 1) a multi-year commitment period: 2) the
inclusion of all six greenhouse gases (enabling reductions of one gas to be used to substitute for
increases in emissions of another); 3) allowing international emissions trading and joint
implementation among countries that take on binding targets; 4) a clean development mechanism
that allows industrial countries or firms to earn credits for projects in the developing world; and 5)
the inclusion of limited set of activities that sequester carbon (with provisions to expand the list of
carbon sequestering activities to include forestry and agricultural management practices). These
elements, particularly emissions trading, can significantly reduce the costs of meeting emissions
reductions targets.
Land-use change and forestry is an important element of the Kyoto Protocol. Net changes
in greenhouse gases and removals by sinks resulting from direct human-induced land-use change
and forestry activities, limited to afforestation, reforestation, and deforestation since 1990, are to
be used to meet emissions target commitments. The Protocol also provides that additional human-
induced activities related to change in greenhouse gas emissions by sources and removals by sinks
in the agricultural soils and the land-use change and forestry categories can be added by the
Parties to the Protocol.
The potential effects of the Kyoto Protocol on U.S. agriculture depend, in part, on the
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degree of energy price increases, the energy intensity of agricultural production, the ability of the
sector to adjust to changes in energy prices, and the degree to which international competitiveness
is affected by changes in energy costs.
In this analysis of the economic impact of the Kyoto Protocol on agriculture, we first
discuss how agriculture will be affected by climate change. We conclude that while climate-
induced changes are unlikely to impair the ability of the United States to produce enough food to
feed itself through the next century there are several limitations in the current understanding of the
impacts of climate change on agriculture. First, water resources are poorly linked with agronomic
and economic processes so that our understanding of climate-related impacts on flooding, water-
logging of soils, and the availability of irrigation water is limited. Changes in climate variability
and extreme weather events are also poorly understood. And many of the climate-sensitive
relationships between crops and livestock with pests and diseases are excluded from current
models. Consequently, there is still much we do not know about the impacts of climate change on
agriculture and our estimates will likely change as more research in undertaken.
We also examine how agricultural activities contribute to greenhouse gases gas emissions
In the United States, contributions result from emissions of methane (CH₄), nitrous oxide (N₂O),
and carbon dioxide (CO₂) due to biomass burning, ruminant animals, decomposition of soil
organic carbon from tillage practices, rice cultivation, fertilizer application, use of manure, and
degradation of wetlands. Indirect effects, which account for most of agricultural GHG emissions,
are attributed to emissions of nitrous oxides and other gases from concentrated livestock
operations and from microbial activities in soil and water following applications of fertilizers and
manures.
We then turn to a discussion of economic analyses of the Kyoto Protocol. We review
recent analysis on the impacts of the Kyoto Protocol on agriculture noting that these studies reach
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unreasonable conclusions either due to assumptions regarding carbon prices that are inconsistent
with the Kyoto Protocol or because agricultural markets are not modeled appropriately.
We analyze the effects of the Kyoto Protocol on agriculture in several steps For our core
scenario, we use the Administration's Economic Analysis (1998) carbon price of $23 per metric
ton (we also estimate the effects for every $50 increase in carbon prices). To accurately capture
the effects of carbon prices on agricultural inputs, we estimate the carbon embodied in agricultural
inputs for crop and livestock production by region. We then introduce the changes in input prices
into a detailed model of the U.S. agricultural sector, which estimates the corresponding impacts
on agricultural commodity price, supply, demand, income, erosion, nitrogen loss, and other
important agriculture sector indicators. We do not examine how the sector might be affected by
domestic policy actions to encourage reductions of emissions from agricultural sources. While
agricultural sources are an important source of some greenhouse gases, it is premature to
anticipate what policy options may be implemented to address these sources.
We use the U.S. Regional Agricultural Sector Model (USMP) which is designed for
general purpose economic, environmental, and policy analysis. USMP is linked with USDA
production practices surveys; the USDA multi-year baseline, and geographic information system
databases such as USDA's National Resources Inventory. USMP predicts how changes in farm,
resource, environmental, or trade policy, commodity demand or technology will affect regional
supply of crops and livestock, commodity prices and demand, use of production inputs, farm
income, government expenditures, participation in farm programs, and environmental indicators.
USMP incorporates agricultural commodity supply, use, and policy measures, and a wide range of
production practices: natural resource and environmental impacts are derived through biophysical
models.
USMP is a medium term model. We hold the energy efficiency of available production
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technology constant which means that farmers are not assumed to respond to increased energy
costs by adopting new, currently unavailable, technology. Farmer can switch among a wide range
of tillage practices, crop rotations, etc. We consider this an appropriate, although conservative,
assumption given the medium term nature of the USMP model. Because producers are routinely
observed to economize on scarce or more expensive inputs, over the longer term we would expect
to see increases in the adoption of more energy efficient production practices. We assume that the
prices of fuels, electricity, agricultural chemicals, and other inputs will increase by the value of
the carbon embedded in each input unit. This in effect assumes a perfectly elastic supply function
for each of the inputs. While conservative, our model is not yet capable of modeling the input
sector more precisely.
We take as a starting point that energy prices increase the equivalent of $23 per metric ton
of carbon. These rising energy prices increase the costs of production, which increases
commodity prices. Higher prices in a market with inelastic demand result in increased revenues
with a smaller quantity demand. While the net effect of net farm income depends on the relative
supply and demand elasticities in the input and commodity markets, higher farm production costs
are likely to at least be partially offset by higher revenues given the inelastic demand for food.
We find the $23 per ton carbon price leads to production declines ranging from 0.1 percent
for soybeans to 0.9 percent for rice. Prices increases range from about two cents per bushel for
feedgrains, one cent per bushel for wheat, and 11 cents per hundredweight for rice. Rice prices
increase more than other crops owing to its greater energy and carbon intensity in production.
Soybean, silage and hay prices rise less than 1 percent owing to lesser carbon intensity in
production. We find that the Kyoto Protocol would affect livestock products negligibly, with
prices increasing about a half percent or less and production declining a twentieth of a percent or
less.
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Fertilizers, particularly nitrogen, and chemicals are energy intensive inputs. Under the
Kyoto Protocol, farmers' expenditures for fertilizers increase by 2.1 percent. About 75 percent of
the changes are attributed to nitrogen, which is higher in carbon content than potash and
phosphates. Chemical expenditures increase by 1.2 percent while expenditures on electricity
increase by 2.6 percent.
We also look at how the agricultural sector is affected for every $50 increase in carbon
prices. But even under higher carbon prices-which are not consistent with the Administration's
position on climate change- we do not find significant negative impacts of American farmers.
This is because farmers respond to slightly higher input prices by changing the mix of inputs,
reducing output, and shifting to other commodities.
Our analysis briefly looks at the potential for including agricultural carbon sequestration
activities in the Kyoto Protocol, the role of biomass and other greenhouse gas mitigation options.
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CHAPTER I. CLIMATE CHANGE AND AGRICULTURE
The Effects of Climate Change on U.S. Agriculture
Global changes in climate and the level of atmospheric carbon dioxide (CO₂) could affect the
location and level of agricultural production in the United States (Adams et al., 1988, 1990, 1995,
and 1999; Darwin, 1999; Darwin et al., 1994 and 1995; Easterling et al., 1992; Kaiser et al.,
1993; Kane, Reilly, and Tobey, 1991; Mendelsohn, Nordhaus, and Shaw, 1994) or the world
(Darwin, 1999 and 1998a; Darwin et al., 1995; Rosenzweig and Parry, 1994). These studies and
others conclude:¹ Climate-induced shifts in agricultural possibilities and other effects of rising
concentrations of atmospheric CO₂ are unlikely to impair the ability of the United States to
produce enough food to feed itself through the next century. Climate-induced shifts are likely,
however, to reduce the ability of some communities to obtain their livelihoods from agriculture.
Climate Change and Agriculture. Climate is a major factor in agricultural productivity and
farming is located in those areas where potential agricultural productivity is consistently high.
The two most important climate-related indicators of agricultural productivity are length of
growing season and temperature regime (Food and Agriculture Organization of the United
Nations, 1996). Length of growing season is the length of time during the year that soil
temperature and soil moisture conditions are continuously suitable to crop growth. Temperature
regime is the average temperature during the growing season. Crops vary in their requirements
for these two variables, which depend on local temperature, precipitation, and solar radiation. In
areas where the timing and intensity of precipitation limits soil moisture, irrigation may be used to
extend the length of the natural growing season. The source of the water used in such localities
¹Other recent summaries include Adams, Hurd, and Reilly (1999), Intergovernmental Panel
on Climate Change (IPPC, 1996), Lewandrowski and Schimmelpfennig (1999), and
Schimmelpfennig, et al. (1996).
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may depend on local precipitation, precipitation in some distant location, or precipitation from the
distant past. Climate also affects livestock production. Temperatures that are too high or too low
can generate stress that lowers livestock productivity. Livestock also require a daily source of
drinking water, which like irrigation water depends on precipitation. Livestock production also
depends on the availability of crop feeds, such as hay or grain.
Climate is also related to extreme weather events such as floods, wind storms, and droughts;
to seasonal variability of frost-free periods, cold temperatures, and rainfall patterns; and to the
incidence and distribution of pests and pathogens. Changes in these variables also affect
agricultural productivity. Extreme weather events involving heavy precipitation are especially
important. They are responsible for most water-related soil erosion and for offsite deposition of
agricultural pollutants such as livestock wastes and chemicals leached from agricultural lands.
Global changes in climate, therefore, could affect the location and level of agricultural production
in many areas.
Direct CO2 Effects. The level of CO₂ in the atmosphere also affects agricultural productivity
directly. Plants combine solar energy with water (generally from the soil) and CO₂ from the air to
photosynthesize glucose, a simple sugar. Stomata, primarily on the leaves, control the passage of
water vapor and other gases to and from the plant to the atmosphere and vise versa. The size of
the stomatal openings are negatively correlated with the atmospheric concentration of CO2, that is,
the higher the level of CO2, the smaller the stomatal openings and the slower the rate of
transpiration (the loss of water vapor from the plant). Hence, elevated CO₂ increases plant water
use efficiency and would tend to reduce water requirements and yield loss due to water stress.
Leaf temperatures also rise. Crops are generally divided into two groups-C3 or C4-depending on
the number of carbon atoms in the first compound into which CO₂ is incorporated during
photosynthesis. Experimental yield responses for C3 crops (e.g. wheat, rice, barley, oats,
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potatoes, and most other crops) to a doubling (700 ppmv) of atmospheric CO₂ averages +30%,
with a range of -10% to +80% (IPCC, 1996). Factors known to affect the magnitude of the
response include the crop species, availability of water and plant nutrients, environmental factors
such as temperature, and differences in experimental technique. The yield response of C4 crops
(corn, millet, sorghum, and sugar cane) to a doubling of atmospheric CO₂ is lower (IPCC, 1996).
A commonly used estimate for corn's yield response to a doubling (555 ppmv) of atmospheric
CO₂ is 7 percent (Rosenzweig et al., 1993).
There remains considerable debate about whether such CO2-induced increases will be
observed under commercial conditions. First, estimates of CO₂ enhancement are from controlled
experiments and might be lower in a farmer's field. Second, incorporating yield changes into
economic models inappropriately also leads to overestimates of CO₂'s benefits (Darwin, 1997
and 1998b). Also, although higher levels of atmospheric CO₂ may have a beneficial effect on
plant growth, other gases released by burning fossil fuels (particularly ozone, sulfur dioxide, and
nitrogen dioxide) have detrimental effects on plant growth. In addition, differential effects on C3
versus C4 crops could alter the competitive advantage between crops and weeds-C3 weeds could
become more competitive with C4 crops. Finally, reduced transpiration and higher leaf
temperatures could affect climate, i.e., temperatures could be higher and precipitation lower than
those projected by general circulation models (Sellers et al., 1996).
Analyses of climate change cover a wide range of temperature and precipitation changes.
Some studies (Adams et al., 1995; Darwin et al., 1995; Rosenzweig and Parry, 1994) rely on
results from equilibrium climate change scenarios in which atmospheric CO₂ is doubled (2xCO₂
scenarios). Global mean changes in temperature (2.8 °C to 5.2 °C) and precipitation (7.8 percent
to 15.0 percent) are relatively large when compared with more recent IPCC conclusions on how
climate is likely to change through 2100. Darwin (1998a) relies on results from transient climate
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change scenarios that are consistent with emissions of greenhouse gases and tropospheric aerosols
projected by the IPCC business-as-usual scenario, IS92a, assuming a 2.5°C increase in global
mean surface temperature in response to a doubling of atmospheric CO₂ (Greco et al., 1994;
Schlesinger et al., 1997). In these scenarios, increases in global mean temperature range from
1.0°C to 1.8°C in 2050 relative to 1990, while increases in global mean precipitation range from
1.3 percent to 2.8 percent. Adams, et al. (1999) study the effects of scenarios that combine four
temperature changes (e.g., 0.0, 1.5, 2.5, and 5.0°C) with four precipitation changes (e.g., -10, 0, 7,
and 15 percent) and four levels of atmospheric CO₂ (e.g., 355, 440, 530, and 600 ppmv) on 1990
and 2060 agricultural economies.
Agricultural Impacts. Global analyses of climate change indicate that agricultural
productivity is likely to increase at higher latitudes and in alpine areas where climate temperatures
are relatively cool, but is likely to decrease in tropical areas where temperatures are relatively
warm or in dry areas where precipitation is relatively low (Rosenzweig and Parry, 1994; Darwin
et al., 1995; Darwin, 1998a). This means that reduced production potential in some areas is likely
to be offset somewhat by increased potential in other areas. Losses in productivity are also offset
by the direct effects of rising concentrations of atmospheric CO₂ (Rosenzweig and Parry, 1994;
Darwin, 1998a). The net effects on world agricultural production, accordingly, have been shown
to be relatively small and often positive, i.e., plus or minus 3 percent for world cereal production
in 2xCO2 scenarios with limited adaptation and CO₂ fertilization (Rosenzweig and Parry, 1994),
plus or minus one percent for crop production and livestock production in 2xCO₂ scenarios with
extensive adaptation and no CO₂ fertilization (Darwin, 1995), and less than plus four percent for
crop and livestock production in transient scenarios with moderate adaptation and CO₂
fertilization (Darwin, 1998a). As expected, world prices generally move in the opposite direction
of production, increasing when production decreases and decreasing when production increases
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(Rosenzweig and Parry, 1994; Darwin et al., 1995; Darwin, 1998a). Prices are lower when CO₂
fertilization is included in the scenarios (Rosenzweig and Parry, 1994; Darwin, 1998a)
The effects of climate change on U.S. agricultural productivity are similar to those on world
productivity-agricultural productivity is likely to increase at higher latitudes and in alpine areas,
but may decrease in relatively warm or dry areas (Adams et al., 1995; Darwin et al., 1995; Adams
et al., 1999; Darwin, 1998a). The net effects on U.S. production, however, are larger than those
on global production, i.e., from 0 to -11 percent for agricultural commodities in 2xCO2 scenarios
with limited adaptation and CO₂ fertilization (Adams et al., 1995), from -0.8 to -3.4 percent and
from -0.5 to -1.3 percent for crop and livestock production, respectively, in 2xCO2 scenarios with
extensive adaptation and no CO₂ fertilization (Darwin et al., 1995), from -0.7 to 27.1 percent and
from -4.7 to 32.3 percent for crop and livestock production, respectively, in 2.5°C and 5.0°C
temperature increase scenarios with moderate adaptation and CO₂ fertilization (Adams et al.,
1999), and from -1.3 to 4.2 percent and from -1.1 to -10.0 percent for crop and livestock
production, respectively in scenarios with moderate adaptation and CO₂ fertilization (Darwin,
1998a).
U.S. prices, too, are more variable than world prices under global climate change. They also
tend to move in the opposite direction of production, increasing when production decreases and
decreasing when production increases (Adams et al., 1995 and 1999; Darwin et al., 1995). In
Darwin (1998a), however, U.S. prices, like world prices, generally decline. U.S. prices, like
world prices, are lower when CO₂ fertilization is included in the scenarios (Adams et al., 1995 and
1999, 1998; Darwin, 1998a). These lower prices may be associated with lower returns to land,
labor, and capital employed in the agricultural sector as well (Darwin, 1998a).
Climate-induced impacts at the regional level are linked to shifts in agricultural productivity.
Under transient climate change scenarios, for example, reductions in soil moisture could shorten
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growing seasons in one or more of the U.S.'s highly productive agricultural regions such as the
Corn Belt, Lake States, Northern Plains, and Southern Plains by 2050 (Darwin, 1998a). In other
regions, however, growing seasons are likely to increase. Given these changes in growing season,
U.S. production of grains declines, while U.S. production of non-grains increases. These results
are consistent with the crop yield changes (in general declining for grain crops and increasing for
non-grain crops) used to simulate climate change by Adams, et. al (1999). Adams, et al. (1999),
also report decreases in crop production in the Northeast, Appalachia, Delta States, and Southern
Plains as well as in the Lake States, Corn Belt, and Southeast regions depending on the scenario².
Implications. These results suggest that, barring any unforseen catastrophic events,
climate-induced shifts in agricultural possibilities and other effects of rising concentrations of
atmospheric CO₂ are unlikely to impair the ability of the United States to feed itself through the
next century. Much depends, however, on how well farmers will be able to adapt to new climatic
conditions by selecting the most profitable mix of inputs and outputs on existing cropland as well
as by changing the amount of land under cultivation. The ability of U.S. farmers to adapt,
however, will be determined by how well they can foresee the climatic future, the costs of
adapting, and government programs. In the studies evaluated here, farmers and other economic
agents are assumed to know what the future climate will be at all locations and movement toward
that climate is assumed to proceed in a slow and smooth manner. In fact, we do not know what
2 These regional and sectoral changes are also likely to interact with changes in the
international competitiveness of U.S. agricultural products. In the absence of any effort to mitigate
climate change, Canada and northern Europe, for example, may become relatively more competitive
in grain and livestock production, while agricultural production in tropical regions, which tend to
specialize in non-grains products, is likely to decline. U.S. competitiveness in the production of
grains and livestock may decline, while U.S. competitiveness in the production of non-grains is
likely to increase (Darwin, 1998a). Adams et al. (1999) conclude that the demand for U.S. farm
commodities in foreign markets will increase under global climate change.
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the future climate will be in a given location, changes could occur relatively rapidly, and the
transition may be erratic, (i.e., locations that might be wetter in, say, 2050 might become drier at
some point before then). We know even less about future changes in seasonal variability and
extreme weather events. Given that U.S. farmers continuously adjust to interannual weather
variability and extreme events, however, these uncertainties are unlikely to significantly hamper
adaptation.
The studies evaluated here also generally ignore adjustment costs. It takes resources, for
example, to convert forest land into agricultural land, to add or expand irrigation and flood control
systems, or to establish new cropping systems. The costs associated with these adaptations will
be negligible only if changes in climate occur slowly enough so that the rate of capital turnover
assumed under some base case scenario is sufficient to make climate-induced adaptations without
incurring additional costs. If not, then adaptation might be hampered. Adjustment costs are likely
to be greater, however, in regions where the only viable adaptation would be to abandon farming.
Government policies and programs ranging from crop insurance and disaster assistance to
acreage reduction programs, tariffs and quotas, and the level of agricultural research and extension
will influence the farm sector's response to climate change by providing the economic incentives
(or disincentives) for farmers and other economic agents to adapt and by expanding the number of
technological options with which they can adapt. Given the greater uncertainty about weather
variability under global climate change, farmers need as much flexibility in choices of farming
practices and crops as possible.
Limitations. There are several limitations in the current understanding of the impacts of
climate change on agriculture.. First, water resources are poorly linked with agronomic and
economic processes. The major unknowns pertain to erosion, flooding, water-logging of soils,
and the availability of irrigation water. A related unknown pertains to sea level rise. Second and
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somewhat related to the first, changes in climate variability and extreme weather events are not
explicitly included in existing models. This limits our knowledge of how climate change might
effect the probability of crop failure in a given area. Third, many of the climate-sensitive
relationships between crops and livestock with pests and diseases are excluded from current
models. It is important to recognize that current understanding of climate change and agriculture
will probably be modified as research on these topics becomes available.
Agriculture's contribution to GHG emissions
Agricultural activities contribute to GHG emissions directly and indirectly. Direct
contributions result from emissions of CH₄, N₂O, and CO₂ are due to deforestation, biomass
burning, ruminant animals, decomposition of soil organic carbon (SOC) from tillage practices,
rice cultivation, fertilizer application, use of manure, and degradation of wetlands. Plowing or soil
turnover is the major cause of CO₂ emissions from cropland. Indirect effects, which account for
most of agricultural GHG emissions, are attributed to emissions of nitrous oxides and other gases
from concentrated livestock operations and from microbial activities in soil and water following
applications of fertilizers and manures.
In 1996, U.S. agricultural activities were responsible for 125.6 million metric tons of carbon
equivalent (MMTCE) or about 7 percent of total U.S. greenhouse gas emissions. (Table I.1)
Agricultural activities contribute carbon dioxide (CO₂). emissions through combustion of fossil
fuels, soil organic carbon (SOC) decomposition, and biomass burning. Although the farm sector
is energy-intensive, total energy use is small compared to other major industries. In the U.S.
carbon dioxide emissions from deforestation are small. Emissions of methane (CH₄) from
agricultural activities are primarily from enteric fermentation in ruminant animals, rice
cultivation, and biomass burning. The principal sources of nitrous oxide emissions (.N₂O) are
soils, fertilizers and manures, and biomass burning.
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Not included in the annual inventories are net emissions of carbon dioxide from agricultural
soils (croplands, rangelands, and pasture lands). Methane emissions from wetlands, grassland and
forest lands are also not included in the current inventory due to an inadequate scientific abases
for estimating net emissions from these sources. Further research and methodological research is
needed to accurately include these source in the national inventory of greenhouse gas emissions..
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CHAPTER II. CLIMATE CHANGE POLICIES and
U.S. AGRICULTURE: ECONOMIC IMPACTS
This section reviews several studies that focus on the economic impacts of the Kyoto
Protocol on U.S. agriculture. In evaluating the potential impacts of the Kyoto Protocol on U.S.
agriculture, the common approach is to exogenously specify a carbon price (either arbitrarily or
selected from a macroeconomic or energy model), and estimate the effects on energy intensive
farm inputs, agricultural production costs, supply, prices and farm income. Three recent studies
examine how energy price increases affect the agricultural sector: Francl (1997), McCarl, Gowen,
and Yeats (1997), and Sparks Companies, Incorporated (1999). The key features, assumptions,
and results of these studies are summarized in Table II.1. Input prices estimated by these studies
appear in Table II.2.
The studies reviewed here (as well as the subsequent USDA analysis) do not actually
estimate the carbon charges that would be necessary to reduce U.S. GHG emissions to those
specified in the Kyoto Protocol. Sparks Commodities, Inc., (1999) use a carbon charge estimated
by the DRI/McGraw Hill (1997) macroeconomic model while McCarl, Gowen, and Yeats (1997)
and Francl (1999) simply assume a range of different carbon prices and estimate the impacts for
various values within that range. The USDA analysis (Chapter III) uses the carbon permit price
reported consistent with the Kyoto Protocol as analyzed in the Administration's Economic
Analysis (AEA) (1998). 3
Because the analyses focus on agricultural energy use, it is important to review how energy is
used in the sector (see Appendix 2 for a more detailed discussion of energy use in the sector).
Agricultural energy use is comprised of on-farm direct uses of fuels and electricity to operate
vehicles, machinery, irrigation, and drying systems; indirect uses of energy in manufactured
; The Administration's Economic Analysis (1998) is discussed in more detail in Chapter III.
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fertilizers and pesticides; and uses of energy in hired or purchased services. Energy is included in
smaller proportion in other expenses such as commodity transportation, hired custom and machine
work, and purchased feed.
Increased input prices that result from a permit price on carbon or energy use would increase
these variable costs of production. The effect on agricultural supply, market prices and farm
income depend critically on: 1) the extent to which input prices increase, which in turn depends
on the ability of input suppliers to pass on higher energy prices to their agricultural customers; 2)
the degree to which farmers adjust to higher energy prices by reducing output and/or adopting less
energy intensive cropping systems; 3) the degree to which consumers respond to higher output
prices; and 4) the degree to which revenues transferred out of the agricultural sector by the carbon
charge are recycled back agricultural producers. Consequently, the incidence of the carbon permit
price depends on the supply and demand elasticities for primary, intermediate, and final goods,
which can vary over the short, medium and longer term. Assumptions made regarding carbon
prices, elasticities of supply and demand, technological change, and market adjustments are
crucial to an accurate assessment of the Kyoto Protocol on the agricultural sector.
Sparks Companies, Inc. (1999) and Francl (1997) are reviewed together because of their
similarity in the use of partial budgeting technique in analyzing the agricultural sector. Partial
budgeting focuses on an enterprise's revenue components, cost components, and calculates the
difference between these to compute net returns. It is partial in the sense that if cost component
changes-such as an increase in fuel costs-net returns are simply recomputed without taking
into consideration any farm level or market adjustments. Partial budgeting assumes that the full
cost of an input price increase is passed on to farmers from input suppliers, and that farmers are
unable to pass on any increase in costs and do not respond to changes in production costs. Partial
budgeting is a reasonable approach when looking at a single production period (producers have
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limited flexibility to make changes once crops are planted, for example) but will overstate the
impacts because adjustments are not taken into account. Partial budgeting also assumes that
changes in the firm or enterprise are so small as to not affect the market.
However, it is generally accepted that faced with rising production costs, producers reduce
quantities supplied which leads to increased market prices. In the case of many agricultural
commodities, demand is "inelastic" with the result that increases in production costs can actually
lead to increases in net returns. Because farmers would likely respond to higher energy prices by
and reducing output and/or shifting resources to other uses, commodity markets would clear at
higher prices for the reduced quantities. Consequently, partial budgeting approaches are likely to
overstate the actual effects of input price increases on the agricultural sector.
Francl (1997) estimates Kyoto Protocol impacts on farm income by calculating and summing
the increased costs of production and comparing them with average farm revenues. Sparks (1999)
estimates Kyoto Protocol impacts on farm income by calculating and summing up the increase in
1998 costs of production and the declines in 1998 revenues due to shifts in demand. Both Sparks
(1999) and Francl (1977) substantially overestimate the impacts because they leave out important
farmer and market responses. By employing partial budgeting techniques to the sector, Sparks
(1999) and Francl (1977) invalidate their results.
The Sparks (1999) analysis is shown graphically in Figure 1. Agricultural markets are
initially in equilibrium at point a where the aggregate supply function, s0, intersects the aggregate
demand function d0. The price level is p0 and the quantity is q0. Increased input prices increase
the variable costs of production and the agricultural supply function shifts from s0 to sl. Farmers
adjust to the higher cost structure by producing less and the market reaches a new equilibrium at
point b with a higher price (p1) and lower quantity (q1).
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Demand could shift (as assumed in the Spark's analysis) in response to both income declines
and reductions in export demand. As demand shifts from d0 to d1, a new equilibrium is reached
at point c, or at p2 and q2 where the new supply and demand functions intersect. The relative
shifts in supply and demand in this case result in a new price above the original.
The change in farm income is the sum of revenue and cost changes. Because the domestic
demand for agricultural commodities is generally inelastic, revenues increase when quantity
declines, and partially offset cost increases, and the change in income is the area c2p0ae.⁴ The
increased costs are distributed between producers and consumers according to their relative price
elasticities.
The Sparks (1999) analysis does
Figure 1. Market Effects of Supply and Demand Shifts
not include any adjustment to
dl
d0
sl
s0
quantity supplied by farmers and the
A
market to reach an equilibrium
psl
f
b
pl
solution such as C. Sparks (1999)'
c
p2
p0
a
d
quantity remains at q0 while supply
c
c2
and demand shift, thus Sparks
pdl
(1999) includes the area p0ps1fa in
the cost component, approximately
doubling the income loss estimation.
q2 ql q0
The Sparks (1999) cost increase of
ps1c2eaf does not correspond to a market result or an income loss that would result from the
Kyoto Protocol.
4 The increase in revenues for up to quantity q2 is p0p2cd, the increase in cost is c2p2ce, and
the net loss is c2p0de. For the remaining quantity up to q0, the revenue loss adq2q0, the cost
reduction is aeq2q0, for a net loss of ade. Adding the net income losses yields c2p0ae.
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Francl (1997) assumes that costs increase would be represented by the upward shift in the
supply function from s0 to sl in Figurel. But by assuming that revenues are a past average,
producers are assumed to not respond to higher input prices, and the quantity is not adjusted from
q0. Thus, Francl (1977) assumes that revenues remain at p0q0, and that the cost increase of
1p0af is the decrease in net farm income, roughly doubling the net income loss. Francl's
(1977) analysis is virtually no different from Sparks (1999), coming to the same basic result.
Sparks (1999) estimates that farm revenues would decline $5.3 billion (2.3 percent). $1.7
billion is estimated as a decline in domestic agricultural revenue in response to income declines⁵,
and $3.6 billion is from assuming U.S. agricultural export demand declines due to developing
countries expanding production and U.S. production costs increasing.⁶ Sparks (1999) estimates
that farm input expenditures would increase by $16.2 billion (8.8 percent).⁷ Sparks (1999)
estimates that manufactured input (chemicals, fuels, & electricity) expenditures increase by $13.0
5 Sparks (1999) estimates that domestic food expenditures would decline by $1.7 billion, by
applying an assumed income elasticity of 0.35 percent and 2010 income loss of 2.4 percent to
projected 1998 crop and livestock receipts of $202.7 billion. This $1.7 billion estimate is
overestimated by about $0.8 billion due to the choice of income elasticity. Sparks (1999) cited
income elasticity estimates by Huang for individual items in Table 15 of their report, but did not use
Huang's estimated aggregate food income elasticity of 0.28 for this calculation. If they had used the
DRI/McGraw Hill (1977) estimate of 1.6 percent GDP loss in 2010 (Sparks (1999) Table 3) and
Huang's estimated aggregate food income elasticity of 0.28, their income effect would be $0.9
instead of $1.7 billion.
6 Sparks (1999) assumes that increased U.S. production costs relative to those in Latin
America, Asia, and Africa would result in export losses of 6 to 7 percent. Applied to forecast 1998
U.S. agricultural exports of $55.0 billion, a loss of $3.6 billion is estimated. This is inconsistent with
the Kyoto Protocol which will not be delivered for ratification unless there is participation from
developing countries.
7 Sparks (1999) used energy price increases from DRI/McGraw Hill (1977), assumes input
energy component and price response (with citations), and calculates net input cost changes. The
exception is electricity, or which Sparks (1999) assumes a cost change of 100 percent instead of the
DRI/McGraw Hill (1977) increase of 54 percent, thereby increasing the cost impact from $1.3 billion
to $2.9 billion.
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billion (46 percent). Expenditure changes in the other input categories increase by a total of $3.2
billion.
Sparks (1999) arrives at an estimated income loss of $21.5 billion (38.9 percent of net cash
income) by summing their estimated increases in input expenditures and losses in revenues.
Sparks (1999) analyzes the problem as if it were a one period problem, as if farmers would not
adjust resource allocation in the face of input price changes and shifts in demand that would lower
prices. Sparks (1999) extends the estimated input price increase to typical farms using farm
budgets from U.S. Department of Agriculture, Economic Research Service (ERS) and the
University of Florida. Sparks (1999) assumes that price reductions of 2.4-2.5 percent would occur
for corn, soybeans, hogs, milk, cattle, and tomatoes. The estimated impacts are flawed in the
same way the aggregate analysis is flawed, over-stating impacts.
Francl (1977) estimates the effects of higher energy prices on farm input costs, and applies
the estimated input cost increases to 1995 U.S. farm production expenses to estimate cost
increases of $10.251 billion (5.8 percent) under the "low" scenario and $20.537 billion (11.7
percent) under the "high" scenario. Dividing these cost increases by the average 1991-95 U.S. net
farm income of $42.7 billion, Francl estimated decreases in net farm income of 24 percent in the
"low" scenario and 48 percent in the "high"energy price increase scenario. Francl does not
indicate which method he used to compute input price increases
In contrast to the partial budgeting approaches employed by Francl and Sparks (1999),
McCarl, Gowen, and Yeats (1997) use the Agricultural Sector Model (ASMSOIL) to assess the
farm sector impacts of carbon permits prices of $25, $50, and $100 per short ton (2,000 lbs)
implemented in years 2000, 2005, 2010, 2015, 2020⁸. ASMSOIL is a spatial equilibrium
8 The carbon price increases used by McCarl, Gowen, and Yeats (1997) are illustrative and
not the result of a macroeconomic analysis, such as DRI/McGraw Hill (1977) or AEA (1998).
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nonlinear programming model with multiple input and output regions and thousands of
production related variables. The model assumes that economic agents have sufficient time to
adjust consumption and production decisions in response price or policy shocks (i.e. adjustment
paths are not modeled). The simulation results reflect movements between market equilibriums.
Impacts of carbon permits on the costs of fertilizers and other chemicals are calculated using
information in the transactions matrix of the IMPLAN input-output model and incorporating price
increases for key energy inputs in the production of farm chemicals. McCarl, Gowen, and Yeats
(1997) estimates of energy price increases for diesel, gasoline, and natural gas are consistent with
the DRI/McGraw Hill (1977) energy price estimates used in the Sparks (1999) analysis. For
various farm chemicals, however, McCarl, Gowen, and Yeats (1997) estimate prices increases
that are all less than one percent. Hence, for farm chemicals, the cost increases associated with
carbon permits in McCarl, Gowen, and Yeats (1997) are significantly less than would be
suggested by the embodied fuel or carbon content of the inputs.
McCarl, Gowen, and Yeats (1997) report that the major farm sector adjustment to higher
energy costs would be a shift to less energy intensive practices such as conservation tillage. In the
$100 carbon permit simulation, for example, quantities used of cropland, water, and labor all
decline by less than one percent as do expenditures for nitrogen, potassium, and phosphorous;
expenditures for other chemicals increase less than one percent.
McCarl, Gowen, and Yeats (1997) present welfare impacts associated with the various
carbon permit prices in terms of changes in consumer, producer, and foreign surplus relative to a
scenario where no taxes are imposed. The results indicate that consumers will pay a significantly
larger absolute share of any carbon/energy tax, while producers will pay a larger relative share.
For example, the loss in producer surplus associated with a $100 carbon permit begun in 2000 is
$256 million, while the loss in consumer surplus is $1.134 billion. In percentage terms, however,
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the loss in producer surplus is about five times larger than the loss in consumer surplus (0.09
percent VS 0.50 percent). Producer surplus declines 0.17 percent with $500 carbon and increases
0.03 percent with $25.00 carbon.
With respect to the U.S. farm sector, McCarl, Gowen, and Yeats (1997) estimate that carbon
permit prices of $25, $50, and $100 per ton would cost (total surplus loss), respectively, $450
million, $850 million, and $1.6 billion annually, for years 2000 through 2020. Given that 1996
gross farm income was $49 billion, they conclude U.S. agriculture would be relatively insensitive
to carbon taxes or permits aimed at reducing U.S. GHG emissions. Additionally, McCarl,
Gowen, and Yeats (1997) (unlike Francl (1997) and Sparks (1999)) note that these costs could be
largely offset by returning carbon tax revenues collected from the farm sector to producers in the
form of lump-sum transfers. For carbon permit prices of $25, $50, and $100 per ton, these
revenues are estimated at $450 million, $800 million, and $1.5 billion, respectively.
Summary. Francl (1997) and Sparks (1999) conduct partial budgeting analyses of the effects
of carbon permits on the U.S. agriculture sector, and conclude that annual net farm income will
decline by 46-48 percent. Sparks (1999) analyzes the effects of carbon permit prices at $177-
$193 per metric ton. The large projected decline in net farm income is largely the result of
assuming that farmers do not respond to changes in input costs and net returns. It is more likely
that rising input costs lead to reduced quantities supplied which leads to rising market prices and
value of production. The effects of carbon permits on farm income are likely to be overestimated
by these studies. McCarl, Gowen, and Yeats (1997) use an agricultural sector model to analyze
the effects of carbon permit prices. Their calculation of effects of carbon prices on fuel costs
appear to be reasonable, but their calculation of carbon price effects on fertilizer and pesticide
costs less than one percent rise, which appears to be low given our knowledge of energy
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embodied in these inputs. McCarl, Gowen, and Yeats (1997) allow producers and markets to
respond to higher input costs, and project that income declines-about 0.5 percent with a $100/mt
carbon price -would be minimal. They further note that the income effects could be largely offset
by returning carbon revenues to the farm sector. Because this analysis seems to underestimate
chemical cost increases, their estimated shifts of crop acreage into chemical intensive
conservation tillage is likely to be overestimated.
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CHAPTER III. USDA ECONOMIC ANALYSIS OF THE
KYOTO PROTOCOL ON U.S. AGRICULTURE
Energy-economic models have evaluated the effects of the Kyoto Protocol on energy sectors
and the subsequent effect throughout the economy. These models have assumed that a permit
trading systems will impute a price for emitting carbon dioxide, which will be translated into
changes in energy prices. Producers and consumers will be affected according to how much
carbon they are absorbing in production and consumption. Products and inputs containing
relatively more carbon are likely to decline in use as-producers and consumers respond to price
signals.. All sectors of the economy would likely be affected, including agriculture, as the cost of
fuels, electricity, fertilizers and chemicals, and transportation services would all be affected.
Because USDA's analysis of the Kyoto Protocol relies on the AEA (1998) carbon price
estimates, we provide a review of the AEA (1998): key features, assumptions, and results of the
AEA study appear in Table III.1. 9 The AEA provides a discussion of the flexibility embodied in
the Kyoto Protocol across several dimensions. The Protocol's flexibility can be characterized as
"when", "what", and "where" flexibility. "When" flexibility refers to freedom in the timing of
emissions reductions. For example, the averaging over the five-year commitment period reflects
this kind of flexibility. "What" flexibility refers to the opportunities to substitute emissions
9
It is worth noting that results reported in the AEA are consistent with results reported in
several other macroeconomic assessments of the reducing GHG emissions to levels at or near that
required by the Kyoto Protocol. For example, assuming unrestricted international trading of
emissions permits Charles River Associates (1998) replicates the AEA carbon permit price of $14
per mt, while Edmonds et al. (1997) and the Energy Information Agency (1997) obtain prices of $38
and $40 per mt, respectively (the latter two studies consider reducing emissions to a level of 1990
minus 10 percent). Other studies such as DRI/McGraw Hill (1977) and WEFA (1998) do not take
into the consideration the flexibility mechanisms and result in larger impacts on energy prices. The
energy-economic modeling literature has pointed out the importance of flexibility in abating GHG
emissions at least cost (Jacoby et al. 1997; Manne and Richels 1997; Interagency Analytical Team
1997).
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reductions or sequestration of one kind of GHG for another GHG. "Where" flexibility refers to
opportunities to reduce emissions where it is least expensive to do so, for example, through
international trading and the Clean Development Mechanism. While no one model can
incorporate fully all of these flexibilities, the AEA (1998) did include parts of all three kinds of
flexibility. Regarding "when" flexibility, the Administration used the Second Generation Model
(SGM) which can evaluate the effects of emissions trading on the economy in 2010 and implicitly
averages out the effects of business cycles and weather-induced energy use fluctuations on permit
prices and subsequent economic effects. This smoothing out of short-term phenomena is
consistent with the averaging provided over 2008 to 2012 in the Protocol. Regarding "what"
flexibility, the AEA (1998) included all six GHGs in evaluating emissions targets and abatement
opportunities. However, the Administration did not quantitatively assess carbon sequestration.
Regarding "where" flexibility, the Administration evaluated various trading blocs and
participation by developing countries through the Clean Development Mechanism and trading. It
should also be noted that the AEA (1999) analysis did not incorporate the effects of several
Administration policies, including proposed electricity restructuring legislation, the Climate
Change Technology Initiative, and other Administration initiatives, which could further reduce
the cost of meeting greenhouse gas targets.
The AEA (1999) analysis provides a set of scenarios representing various trading blocs. An
assessment using the SGM model that accounts for an efficient international trading system and
developing country participation yields permit price estimates ranging between $14/ton and $23
per metric ton, and resource costs between $7 billion and $12 billion per year. The low permit
price assumes that the European Union does not engage in international trading, while the high
permit price assumes that all Annex I and some key developing countries engage in international
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trading.
The key assumption distinguishing the various economic impacts is the degree of
international trading in the emissions obligations. Among and within studies, costs are highest
when trading does not occur, lowest when all countries participate in emissions trading, and
somewhere in between when trading is limited to Annex I countries. The Protocol explicitly
provides for trading of emissions obligations among Annex I countries (Article 17) and for
project-based agreements between Annex I and non-Annex I countries through the Clean
Development Mechanism (Article 12). While the structure and procedures of an international
emissions trading system are still under negotiation, scenarios that assume no trading will occur
are overly pessimistic regarding the costs of implementing the Kyoto Protocol.
We analyze the effects of the Kyoto Protocol on agriculture in several steps. For our core
scenario, we use the AEA (1999) carbon price of $23 per metric ton (we also estimate the effects
for every $50 increase in carbon prices; these results appear in Appendix 1.) To accurately
capture the effects of carbon prices on agricultural inputs, we estimate the carbon embodied in
agricultural inputs for crop and livestock production by region. We then introduce the changes in
input prices into a detailed model of the U.S. agricultural sector, which estimates the
corresponding impacts on agricultural commodity price, supply, demand, income, erosion,
nitrogen loss, and other important agriculture sector indicators. We do not examine how the
sector might be affected by domestic policy actions to encourage reductions of emissions from
agricultural sources. While agricultural sources are an important source of some greenhouse
gases, it is premature to anticipate what policy options may be implemented to address these
sources.
Input Prices. The increase in input prices due to a $23 per metric ton carbon price is
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calculated by multiplying the carbon embodied in each input by the carbon price. Using the
Economic Research Service's Cost of Production (COP) survey data
(http://www.econ.ag.gov/briefing/fbe/car/car.htm). we calculated the physical quantity of each
input used in a production activity and then multiplied this quantity by estimates of the amount of
carbon embodied per unit of input. This approach is superior to the more arbitrary approaches
used by Francl (1977), Sparks (1999), and McCarl, Gowen, and Yates (1977). Embodied carbon
and input price increases are presented in (Table III.2).
Direct carbon costs for crops include expenditures on diesel, gasoline, LP gas, natural gas,
lubricants, and electricity used for the operation of machinery, vehicles, irrigation systems, and
crop drying. The most important categories of indirect carbon costs are "fertilizer, lime, and
gypsum", "chemicals" (pesticides), and "custom operations". "Custom operations" includes
custom field and other operations (and often involving machinery that farmers contract for),
technical services, and commercial drying. Other important indirect carbon costs categories are
"other variable cash expenses" which can include purchased irrigation water, baling, etc.
Remaining indirect carbon costs categories include "ginning" for cotton and "drying" for rice (see
Appendix 2 for a more detailed discussion of energy use in the sector).
Direct energy costs for livestock include expenses for diesel, gasoline, LP gas, natural gas,
lubricants, and electricity used for machinery, vehicles, equipment, manure handling systems,
feed systems, housing, and dairy parlor operation. Indirect energy cost sources include
"hauling," "marketing," and "custom services and supplies."
Modeling Carbon Price Impacts. To capture the full effects of carbon prices on the
agriculture sector we employ the USMP model which represents agricultural markets and
production enterprises in considerable detail with commodity, spatial, production practice and
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other particulars of the model validated to the latest baseline, geographic, and cost of production
data sources available (see Appendix 3, for a more detailed description). The USMP model
accounts for the most important effects of the carbon charges on U.S. agriculture. 10
USMP models production of 10 crops: corn, sorghum, oats, barley, wheat, rice, cotton,
soybeans, hay and silage (fruits and vegetable are not included in the USMP model) accounting
for XX percent of farm income and XX percent of farm output. (SOURCE). Some 16 primary
livestock production enterprises are included, the principal being dairy, swine, beef cattle, and
poultry. Several dozen processed and retail products such as dairy products, pork, fed and nonfed
beef, poultry, soy meal and oil, livestock feeds, and corn milling products are included. The
model incorporates domestic use, imports, exports, and inventory/stock product markets. USMP
includes government conservation, acreage, price, and income programs. Production,
consumption (demand), trade, and price levels for crop and livestock commodities and most
processed or retail products are endogenously determined within the model structure with
domestic consumption, commercial stock, export and other demand elasticities from the FAPSIM
model (SOURCE).
USMP is a medium term model: We hold the energy efficiency of available production
technology constant which means that farmers are not assumed to respond to increased energy
costs by adopting new, currently unavailable, technology. Farmer can switch among a wide range
10 The model results are "partial equilibrium" because they omit effects on agriculture which
pertain to interaction between the agriculture sector and the rest of the U.S. economy. These
interaction effects are minor enough that they are routinely ignored when evaluating policy impacts
on agriculture. They would include, for example, effects of changes in consumer good and
production input prices which result from how the carbon permit scenarios affect agriculture and
non-agriculture sector producers and consumers. If carbon permits reduce non-agriculture sector
income somewhat, specific examples might include declines in non-agriculture sector purchases of,
e.g., food and fertilizer for non-agriculture use. These changes would reduce agriculture sector
product sales revenue and input expenses somewhat, but the magnitudes are so small relative to the
direct impacts that they may be safely ignored.
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of tillage practices, crop rotations, etc. We consider this an appropriate, although conservative,
assumption given the medium term nature of the USMP model. Because producers are routinely
observed to economize on scarce or more expensive inputs, over the longer term we would expect
to see increases in the adoption of more energy efficient production practices. We assume that the
prices of fuels, electricity, agricultural chemicals, and other inputs will increase by the value of
the carbon embedded in each input unit. This in effect assumes a perfectly elastic supply function
for each of the inputs. While conservative, our model is not yet capable of modeling the input
supply sector more precisely to determine the degree to which energy price increases are passed
on the farm customers.
We apply the estimated input prices increases discussed above to each of the nearly 1,000
production systems contained in USMP. We then solve the model to return commodity and input
markets to a new equilibrium. The supply, use, acreage, price and other market indicators which
result then form the basis for determining the impacts of Kyoto on the agriculture sector. We
evaluate the impacts of the emissions reduction policy in 2010, the midpoint of the 2008-2012
period established for compliance with the Kyoto Protocol.
U.S. agriculture sector conditions in 2010 are based on the USDA Long-Term Agricultural
Baseline (February 1998). The official USDA baseline provides projections through the year
2007; for this analysis we extended the baseline estimates to 2010 with linear trends (of acreage
planted, prices, and other market variables). 11 The USMP model is then calibrated to crop and
livestock supply, demand, production, acreage, government program, input cost and other
conditions for 2010. USMP employs crop multi year rotation system enterprises and livestock
enterprise budgets based on the 1996 Economic Research Service's Cost of Production (COP)
11 This procedure to extend the baseline to 2010 was based on recommendations from ERS
baseline analysts.
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survey data (http://www.econ.ag.gov/briefing/fbe/car/car.htm). These costs are indexed to
baseline projections of variable costs for 2010.
The analysis is "comparative static" which means that it compares conditions in the initial,
base year, equilibrium situation with conditions after the economy has had several years to adjust
to a new, medium-run, equilibrium. This analysis follows the Baseline assumptions that no other
policy or market changes take place, so we can isolate the unique effects of implementing carbon
permit prices. Farmers respond to carbon prices by changing production levels or quantities, by
changing products produced, and by shifting among current production practices actually
observed in agricultural survey data. Producer response to changes in product and input prices is
ultimately determined by all producers adjusting so that the revenue and returns from their last
commodities produced just equal one another. Shifts among production practices-for example
reducing acreage under conventional tillage and increasing acreage under reduced tillage-incur
costs of acquiring new implements and learning new management practices which all enter into
the process of adjusting to the new equilibrium¹²
Effects on Crop Prices, Production, and Domestic Use. Increases in carbon prices causes
crop costs of production to rise, which reduces quantity demanded, increases crop price and leads
to declines in production. Relative crop impacts are influenced on the supply side by carbon
intensity in production. The $23 per metric ton carbon price leads to crop price increases of less
than three cents per bushel for feedgrains (corn, sorghum, barley, oats) and wheat (Table III.3).
Relative changes among feedgrains on the supply side depend on the relative energy and carbon
12
Conventional Tillage : use of disc in planting preparation. Moldboard Tillage: conventional plus use of moldboard
plow. No-till (slot planting): Soil is left undisturbed prior to planting; weed control is usually accomplished with a combination
of herbicides and cultivation. Ridge-till: soil is left undisturbed prior to planting; about one third of the soil surface is tilled with
sweeps or row cleaners at planting time; planting is completed on ridges; weed control with herbicides and cultivation. Mulch-till:
-total surface is tilled, using tools such as chisels, field cultivators, disks, sweeps, or blades; weed control with herbicides and
cultivation.
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intensity in production, and on the demand side depend on their relative protein and energy
content in constituting animal feed rations. Rice price increase more than other crops (about 11
cent per hundredweight) owing to its greater energy and carbon intensity in production. Soybean
prices increase about one cent per bushel owing to lesser carbon intensity in production. Soybean
production, in the Corn Belt for example, uses only about 40 percent of the carbon per acre (134
lbs) relative to corn (309 lbs).
Declines in crop production are also relatively small. Production of all 10 USMP crops
declines by less that 1.0 percent. Again, soybean production impacts are below those of
feedgrains owing to the lesser carbon intensity in production, while rice production declines
(about 0.9 percent) are greater due to its greater carbon intensity in production.
Effects on Crop Acreage. Charging a carbon permit price increases crop costs of production
and will tend to reduce acreage planted across crops, regions, and cropping practices in proportion
to how much carbon is embodied in the production process. The increase in the price of carbon
leads to a decline of 1.3 million acres planted to the 10 major field crops (Table III.4. Feedgrain
acreage declines about 400 thousand acres, while wheat and hay acreage decline 300 thousand
acres each. Soybean acreage declines about 100 thousand acres. Proportionally, acreage declines
are larger than average in the Mountain and Pacific regions and are the largest in the South
Plains-regions with substantial irrigated acreage. Virtually all of the acreage decline occurs in
acres farmed under conventional tillage as opposed to conservation tillage.
Effects on Livestock Price and Production. Charging a carbon permit price affects livestock
production on the supply side both through direct energy cost impacts and indirect cost impacts
including higher feed costs. Increased carbon prices affect livestock products negligibly, with
prices increasing less than a half percent and production declining a tenth of a percent or less
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(Table III.5).
Income and expense effects. The value of
Income Accounting Concepts
production and total variable costs are the major
+
Value of Production
components of farm income affected by the
Conservation Reserve Payments
Production Flexibility Payments
carbon charge scenarios. Charging for carbon
Total Variable Costs
Net Cash Returns
increases the costs of production, which
increases commodity prices. Higher prices
increase value of production, but also reduce quantity demanded and hence produced, which
serves to reduce value of production. The net effect on value of production depends on input
supply and commodity demand markets, but-given inelastic demand-agricultural product
values typically rise when production costs rise.
Total variable costs of production rises 0.6 percent ($821 million), while value of production
increases .2 percent ($450 million), netting out to a net cash returns decline of 0.5 percent ($371
million) (Table III.6) assuming that carbon permit revenues are not returned to the agriculture
sector. 13 Regional net cash returns range from a decline of 0.3 percent in the Corn Belt to 2.3
13
The redistribution of income resulting from a domestic carbon reduction policy would
depend on how the policy was designed and implemented. The value of tradeable carbon permits
auctioned by the government, or the revenues collected from sale of permits could be returned
entirely to the economy. For example, permit values or revenues could be redistributed to
agricultural producers according to historical carbon use, or according to some environmental or
stewardship "good," or on some other basis. Thus, the ultimate impact of the different mechanisms
on consumer and producer welfare would depend on how the revenues were employed (returned to
consumers or producers, or otherwise used). The specific emissions reduction mechanism used will
also affect the calculation of changes in agriculture sector net benefits. We currently treat the
increase in input costs paid by agriculture producers as a transfer payment from farmers to the
government or permit holders completely outside agriculture. The design of a carbon pricing
program goes beyond the agriculture sector. It is possible that under a scheme where carbon permits
are allocated to producers based on current carbon emission rates, that agriculture producers could
receive transfer payments from other sectors of the economy. These payments could be greater than
the associated increases in energy costs, resulting.in an increase rather than decrease in producer net
benefits.
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percent in the Southern Plains.
Effects on Agricultural Inputs A system of carbon permits will increase the prices of
agricultural inputs proportionally with carbon content. Farmers' responses to higher input prices
will determine the shifts in input uses and the ultimate effects of carbon charges on farmer
expenditures. Increased input prices result in reduced input use and reduced carbon embodied in
inputs and agricultural production. Over time, carbon charges would stimulate development of
new technology that would reduce the energy requirements for agricultural production and its
embedded carbon.
The effects of carbon permits on carbon content and energy-intensive input use and on energy
expenses by input are reported in Table III.7. Crop and livestock expenses for all energy increase
by 2.3 percent. The input industry as a whole, using "crops and livestock all energy" as a proxy¹⁴,
incurs a sales volume reduction of 0.6 percent.
Direct fuel and lubricant use by farmers and that embodied in custom use are affected most
directly by carbon permits. Direct use of fuel and lubricants by farmers declines by 1.4 percent
while custom service use declines by 4.4 percent. Fertilizers, particularly nitrogen, and chemicals
are energy intensive inputs. About 1.625 pounds of carbon are embedded in each pound of
nitrogen fertilizer and we estimate that about 5.633 pounds of carbon are embedded in each pound
of chemical pesticide. Fertilizer use declines by 0.4 percent while chemical (pesticide) use
declines by 0.5 percent. Electricity use increases by 1.1 percent reflecting electricity's smaller
carbon content relative to fossil fuels.
Changes in surplus measures and net social benefit. An increase in carbon prices causes net
¹⁴For this analysis the carbon content of inputs used in the available technologies (production
practices) is fixed, enabling reductions in carbon to be used to estimate reductions in input use. The
percent changes in each input's use can be approximated by its percent change in embedded carbon.
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social benefit from agriculture to decline, along with consumer and producer surpluses, reflecting
the adverse effects the resulting increases in production costs and food prices have on both
consumers and agricultural producer welfare (Table III.8). 15 Under the Kyoto Protocol, losses to
both consumers and agricultural producers decline by $791 million (0.04 percent). The losses are
split fairly evenly between consumers and producers, with consumer surplus declining by $374
million and producer surplus declining by $417 million. Net domestic benefit (consumer surplus
plus producer surplus plus revenues transferred out of sector) which measures the net impact on
agriculture or deadweight loss, declines by $67 million. This is considerably less than the direct
losses to consumers and agricultural producers, and indicates the potential for significantly
reducing agriculture sector losses by recycling revenues transferred out of the sector by the carbon
charge back to consumers and agriculture producers in the form of a lump sum transfer.
Changes in environmental indicators. The imposition of carbon permit prices leads to very
slight reductions in soil erosion (sheet, rill and wind) and nitrogen loss to water (surface runoff
and leach) (Table III.9). The reductions are brought about primarily by declines in acreage
planted, rather than substitution of less carbon intensive conservation tillage practices for
conventional practices. Both erosion and nitrogen loss decline imperceptibly (less than 0.5
percent) and these losses are fairly uniform across production regions. The insignificant changes
in the indicators reflects the negligible impact low carbon prices have on acreage planted and
technology (tillage practices) used.
¹⁵The various surplus and social benefit measures used in this analysis represent only partial
gains or losses from the imposition of carbon charges. They represent changes in consumer and
social welfare caused by changes in the agriculture sector alone. They don't take into account the
effect of increased energy prices on consumer income or the prices consumers pay for other goods.
As a result, the demand for agriculture products is only affected by changes in agricultural prices.
It also assumes that all input prices, excepting land and those directly affected by changes in energy
prices remain unchanged. It also leaves out any environmental benefits which may result from
reductions in acreage planted and conventional tillage and reduction in GHG emissions.
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Societal benefits (improved water quality) from reductions in erosion and nitrogen loss
largely accrue downstream (off-site) from the agricultural production activities causing them. As
a result, they are not included in calculations of consumer surplus, producer surplus or net social
benefits. Declines in the estimated offsite damages from soil erosion are estimated at about $4
million. These estimates suggest that the added environmental benefits, while important, will not
offset the loss to consumers and producers caused by the carbon charge.
Exports and Competitiveness Effects. Commodity exports are determined by the intersection
of the supply and demand curves for U.S. agricultural products in international markets. When
one or both of these curves shift, there is typically a change in the quantity of U.S. commodities
exported. Among the factors that can shift the supply curve of U.S. commodities in world
markets are changes in the domestic prices of agricultural inputs. Increases in these prices
generally raise the marginal cost of farm production-shifting the supply curve of U.S.
commodity exports upwards and decreasing the quantity of commodities exported. Among the
factors that can shift the demand curve for U.S. commodities in world markets are changes in the
relative costs of crop and livestock production elsewhere in the world. Decreases in the relative
costs of farm production in other global regions generally enhance the competitiveness of
commodities from these regions resulting in a downward shift of the demand curve of foreign
consumers for U.S. agricultural products and a decrease in U.S. commodity exports.
Under the Kyoto Protocol, the prices of energy intensive inputs such as diesel fuel, gasoline,
16 Reduced water quality has negative effects on navigation, recreational and commercial
fishing, and water for drinking, industrial, and irrigation uses. Reduced quality results in costs
incurred by individuals in avoiding or treating sub-quality water. Damage in dollar terms per ton
of erosion for these categories by agricultural region have been estimated by analysts at ERS using
procedures which approximate the physical, chemical, biological and economic links between soil
erosion and water quality. The estimates of off-site damage used in this report were derived by
multiplying the estimated damage per ton of erosion times tons of erosion for each production
region.
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electricity, fertilizers, and pesticides will increase. For the agricultural sector, a key question is
whether the carbon price would cause input prices to rise sufficiently to affect domestic
production and export levels and the degree to which carbon prices increase in the rest of the
world. USMP, which accounts for both the effects of increasing input prices and the responses
of foreign producers to higher world commodity prices, estimates that exports would decline by
less than 2.1 percent (for rice) or less (Table III.2)¹⁷
The USMP model evaluates market impacts over a medium-run time frame. If the higher
input prices associated with a carbon charge persist over time, the longer-run impacts could
include decreases in the relative costs of farm production in other global regions-particularly
vis-a-vis regions that do not implement a carbon charge. Conceptually, this cost advantage could
eventually manifest itself in the form of lower prices for commodities from these regions, which
in turn would reduce the demand for U.S. commodities in world markets. The USMP model does
not account for shifts in demand due to changes in production costs elsewhere in the world.
Whether or not the long-run competitiveness of U.S. farmers in world commodity markets
would be hurt by the implementation of a domestic charge on carbon is, at present, speculative.
As noted by AEA (1998), energy prices already vary significantly among Annex 1 countries and
between Annex 1 and non Annex 1 countries and yet there has not been any large scale migration
of energy-intensive industries to take advantage of the potential cost savings. While the prices of
some key farm inputs are likely to rise, the long-run effects of a carbon charge on U.S. agriculture
would be affected by many factors, most of which are beyond the scope of the present assessment.
17 Changes in crop exports in USMP are determined by the price change evaluated and the
export demand elasticities specified in the model. The export demand elasticities used in this
analysis are: corn, -0.53; sorghum, -1.17; barley, -0.65; oats, -0.65; wheat, -1.44; rice, -2.41;
soybeans, -0.73; and cotton, -1.26. These capture the medium-run impacts of a shock occurring 10
years in the future.
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These factors include differences in the rates and magnitudes of technical change, the relative
impacts of the carbon charge on other economic sectors, how long Annex 1 countries accept a
carbon charge, how long the global economy takes to fully adjust, and whether or not Annex 1
countries restrict the international migration of key industries.
If, as a result of implementing the Protocol, foreign producers incur smaller carbon charges
than domestic producers, U.S. agricultural commodities could become less competitive in global
markets and U.S. commodity export demands would fall. On the other hand, if foreign producers
incur higher production costs under the Protocol, U.S. competitiveness would be enhanced and
U.S. commodity export demands would increase. Lacking accurate estimates of the likely effects
of implementing the Protocol on the competitiveness of U.S. agricultural products, we do not shift
U.S. export demands from the levels projected in the extended USDA Long-Term Baseline.
At the same time, we acknowledge the concerns that some have expressed about the
possibility that increasing energy prices only in Annex-I countries will increase the likelihood of
agricultural production (primary and/or processing) shifting to non-Annex-I regions. Recent
evidence, however, suggests that the validity of such concerns may depend on the time-frame
being considering - specifically, whether or not one is allowing for limited or full adjustments on
the part of regional and world economies to the higher energy prices (i.e. a partial versus a general
equilibrium framework).
Summary and conclusions. USDA's analysis is consistent with the Kyoto Protocol and the
Administration's estimation of the impacts on energy prices when all the key provisions including
emission trading, a multi-year commitment period, allowance for forestry carbon sinks, joint
implementation, and the Clean Development Mechanism are taken into consideration. Other
analyses may arrive at larger energy price impacts but we believe these analyses do not model
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energy price increases that are consistent with the Kyoto Protocol's cost-reducing provisions.
We use the U.S. Regional Agricultural Sector Model (USMP), which predicts how changes in
energy prices will affect the supply of crops and livestock, commodity prices, consumer demand,
use of production inputs, farm income, government expenditures, participation in farm programs,
and environmental indicators. USMP is linked with regularly-updated USDA production practices
surveys, the USDA multi-year baseline, and geographic information system databases such as the
National Resources Inventory. USMP covers 10 crops, livestock, as well as several dozen
processed and retail products. Impacts are estimated by commodity for 10 farm production region,
and 45 land resource regions.
We take as a starting point that under the Kyoto Protocol, energy prices increase the
equivalent of $23 per metric ton of carbon. These rising energy prices cause the cost of
agricultural production to rise slightly and increase crop prices. Higher crop prices increase the
value of production, but also reduce quantity demanded of food and fiber. That leads to slightly
lower production. So we have a little less production being sold at a little higher prices. The net
effect on farm income is a slight decline. Some regions, particularly those more dependent on
energy-intensive irrigation, will be more negatively affected.
We also look at how the agricultural sector is affected for every $50 increase in carbon prices.
But even under higher carbon prices-which are not consistent with the Administration's position
on climate change- we do not find significant negative impacts of American farmers. This is
because farmers respond to slightly higher input prices by changing the mix of inputs, reducing
output, and shifting to other commodities. Other analyses that show much larger impacts allow
no such adjustment to take place.
We find the $23 per ton carbon price leads to production declines ranging from 0.1 percent
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for soybeans to 0.9 percent for rice. Prices increases range from about two cents per bushel for
feedgrains, one cent per bushel for wheat, and 11 cents per hundredweight for rice. Rice prices
increase more than other crops owing to its greater energy and carbon intensity in production.
Soybean, silage and hay prices rise less than 1 percent owing to lesser carbon intensity in
production. We find that the Kyoto Protocol would affect livestock products negligibly, with
prices increasing about a half percent or less and production declining a twentieth of a percent or
less.
Fertilizers, particularly nitrogen, and chemicals are energy intensive inputs. Under the Kyoto
Protocol, farmers' expenditures for fertilizers increase by 2.1 percent. About 75 percent of the
changes are attributed to nitrogen, which is higher in carbon content than potash and phosphates.
Chemical expenditures increase by 1.2 percent while expenditures on electricity increase by 2.6
percent.
Our analysis suggests that effects on producers and consumers are quite small when the
flexibility mechanisms of Kyoto are used. Assuming no income from carbon sequestering
activities, net cash returns decline 0.5 percent, and consumer welfare would decline 0.05 percent.
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IV. Opportunities for Agriculture
Carbon Sequestration. Land-use change and forestry is an important element of the Kyoto
Protocol: Net changes in greenhouse gases and removals by sinks resulting from direct human-
induced land-use change and forestry activities, limited to afforestation, reforestation, and
deforestation since 1990, are to be used to meet emissions target commitments (Article 3.3) The
Protocol also provides that additional human-induced activities related to change in greenhouse
gas emissions by sources and removals by sinks in the agricultural soils and the land-use change
and forestry categories can be added by the Parties to the Protocol (Article 3.4)¹⁸. The studies
described in section II do not account for the potential use of these additional activities in helping
the U.S. to meet its emissions reduction target under the Kyoto Protocol.
The potential effects of the Kyoto Protocol on U.S. agriculture depend on many factors,
including whether certain types of agricultural and forestry activities are ultimately included by
the parties and how the Parties decide to handle definitional issues related to sinks. Equally
important is the economic potential of carbon sequestration: while there may be significant
physical potential to sequester carbon on agricultural lands, the cost of actually sequestering must
be taken into consideration. U.S. agriculture could benefit if terrestrial carbon sinks are
18 The process of including additional human-induced activities occurs under the UN
Framework Convention on Climate Change (http://www.unfccc.de/). In addition to annual
negotiating sessions of the Conference of Parties and the twice yearly sessions of the Subsidiary
Bodies that advise the Conference of Parties, there are several technical venues for addressing land
use change and forestry issues. The Intergovernmental Panel on Climate Change (IPCC) is tasked
with preparing a Special Report on Land Use, Land Use Change, and Forestry
(http://www.uscgrp.gov/ipcc), which will be released in May, 2000. The Subsidiary Body on
Scientific and Technological Advice organized two workshops on land use change and forestry. One
workshop was held in Rome (September, 1998). Another workshop was held in Indianapolis,
Indiana (April, 1999). Both workshops addressed methodological and technical issues related to
Article 3.4 of the Kyoto Protocol.
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eventually included in the Protocol.
Carbon Sequestration Potential. Cropland and grassland pasture and range account for
almost half of all land in the contiguous 48 states and significant areas could be managed to
increase the quantity of carbon stored in the soils and above ground biomass. Numerous studies
of agricultural and rangelands sites in North America have documented changes in soil carbon
levels with changes in management practices (see Paustian et al. (1996); Reicosky, 1995;
Reicosky et al., 1995; Kern and Johnson, 1993). For undisturbed soils first brought into
production using conventional tillage practices, soil carbon losses typically range from 30-50
percent over the first 20 years of cultivation, after which, soil carbon levels generally stabilize at a
new equilibrium. In the Great Plains, soil carbon losses due to cultivation have been estimated to
range from 24-60 percent and take as long as 30 to 43 years to stabilize. In studies of sites that
have been shifted out of conventional tillage and into permanent grasses or no-till systems, results
show rates of soil carbon buildup between 0 and 2,000 lbs. per acre with accumulation typically
taking 5 to 12 years to become measurable. Studies of former cropland sites either abandoned or
reseeded with natural grasses indicate that about 50 years is needed to return soils to their
maximum carrying capacity (Gephart et al., 1994; and Lal et al., 1998).
The rate of carbon accumulation/release in agricultural soils varies with many site specific
factors-including chemical and physical characteristics of the soil, precipitation, above- and
below-ground biology, temperature, solar radiation, atmospheric chemistry and processes,
landscape characteristics, site history (including past management practices), time, and current
land use (Johnson and Kern, 1991). Developing a framework that accounts for these influences in
a systematic and verifiable fashion across national and international regions is an important step
in including agricultural soils under Article 3.4 of the Kyoto Protocol.
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Soils having the greatest potential to sequester carbon are those that are below their carbon
carrying capacity, meaning young soils and soils that have been depleted of carbon due to
management practices (Johnson and Kern, 1991). Because the large majority of U.S. cropland has
been in production for several decades, their large initial releases of carbon have already occurred
and current releases are now very low-estimates range between 2.7 and 15 MM mt annually
(Gephart et al., 1994; and Lal et al., 1998). Collectively then, U.S. agricultural soils have a
relatively high potential for being managed to store additional carbon.
Converting agricultural lands to forests. For 1996, EPA estimates that due to improved
management practices and regeneration, U.S. forests represented a net carbon sink of about 208.6
MM mt. This is about 14 percent of total U.S. carbon emissions and 12 percent of total emissions
of gases (in carbon equivalents) covered in the Kyoto Protocol. The potential to further offset
U.S. GHG emissions by shifting millions of acres of marginal cropland and pasture into forests
has been analyzed by Moulton and Richards (1990), Adams et al. (1993), Parks and Hardie (1995
and 1996), and Stavins (1998). We focus here on the works by Parks and Hardie (1995 and 1996)
and by Stavins (1998) because the studies by Moulton and Richards (1990), and, Adams et
al. (1993), while frequently cited, are now understood to have significantly overstated the amount
of carbon sequestered in new forests (Richards, 1992).
Table III.1 (part A) presents selected results from Parks and Hardie (1995). These results suggest
that a land retirement program like the current Conservation Reserve Program (CRP), funded at a
level of $456.2 million annually, would sequester about 48.6 MM tons of carbon per year (or 44.2
MM mt) and require some 22.2 million acres. The carbon sequestered is a little over 3 percent of
current U.S. carbon emissions and about 7.9 percent of the emissions reduction AEA (1998)
estimates will be required to meet our obligations under the Kyoto Protocol in 2010. Also clear in
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Table III.1 is that most of the land converted to forests would be pasture land-note that when
only cropland is considered, acres enrolled fall to 9.4 million, carbon sequestered drops to 21.6
MM tons, and per acre costs more than double (to $48.53). Parks and Hardie (1996), consider the
goal of sequestering 10 percent of U.S. carbon emissions in new forests. Achieving this level of
sequestration by converting marginal croplands and pasture to new forests is estimated to require
116.1 million acres and cost $8.31 billion annually.
Stavins estimates a marginal cost function for carbon sequestration through forestry that
extends to 342 million acres of land sequestering 518 million tons (470 million metric tons) of
carbon per year. Stavins' results at lower levels are similar to those of Parks and Hardie. But
upon reaching 342 million acres of land, annual average costs are $106 per acre and $70 per ton
($77 per metric ton) of carbon, and marginal costs are $200 per acre and $136 per ton ($150 per
metric ton) of carbon. Stavins estimates that marginal costs are roughly linéar until reaching
about $66 per ton ($73 per metric ton) or $100 per acre, after which marginal costs increase
rapidly. Thus, Stavins demonstrates the need for caution in extrapolating costs from relative low
levels of land conversions to higher levels.
While forests generally have more primary production and above ground biomass than
grasslands, grassland soils often have more carbon than forest soils (Johnson and Kern, 1991).
This is because soil carbon in grasslands is mostly a function of root mortality and because the
roots of grasses are thin, compact, and often extend to a depth of a meter of more. Carbon in
forest soils, on the other hand is primarily a function of fine root turn-over near the surface and
tree litter. For areas that were once prairie or are otherwise poorly suited to forests, conversion of
cropland to grasses may be a more efficient carbon sink than conversion to trees.
Paustian et al. (1996) look at soil carbon accumulation on 25 million acres of CRP land in
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Great Plains. Over the 10 year contract period they estimate an aggregate increase in below
ground soil carbon (i.e. carbon in soil organic matter, roots, and soil litter) of 57.6 MM mt-or
5.76 MM mt per year. For CRP acres put into grasses at five locations in the Great Plains,
Gephart- et al. (1994) estimate carbon accumulation in the top 120 inches at 1,000 lbs. per acre per
year-implying a 25 million acre program would sequester a total of 11.36 MM mt of carbon per
year. For the most recent CRP enrollment period, average annual rental payments for land in the
Great Plains ranged between $32 and $40 per acre. At these rental rates, a land retirement
program that shifts 25 million acres of cropland to grasslands would cost between $0.8 to $1.0
billion.
Managing crop and pasture lands can also increase soil carbon levels. Management practices
include conservation tillage, use of winter cover crops, adding organic amendments to soils,
rotational grazing, and re-seeding pastures with improved varieties. 19 Economic analysis on the
potential costs and benefits of these practices to mitigate GHG emissions is limited although new
analysis is currently underway at USDA and at several universities. Kern and Johnson (1993)
estimate changes in soil carbon and energy use for various levels of adoption of minimum tillage
and no-till systems for the period 1990-2020. Their results suggest that in moving from 60
million acres in no-till to 80 million acres, soil carbon would increase between 206 MM mt
(million metric tons of carbon) and 339 MM mt over a 30 year period. (Table III.1, part B) This
suggests that shifting 20 million acres into no-till would result in between 6.9 MM mt and 11.3
MM mt of carbon being sequestered annually-or between 1.2 percent and 2.0 percent of the U.S.
19
Many of these practices are linked to a variety of environmental benefits such as improved
water quality and reductions in soils erosion. For example, the benefits of reduced erosion from
switching 22.4 million acres of highly erodible land now under conventional tillage to conservation
tillage at is estimated at between $30.5 million and $99.1 million U.S. Department of Agriculture,
Economic Research Service. 1998a.
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target for complying with the Kyoto Protocol in 2010. 20
If shifting lands from commodity production to forests or grasses, or moving from
conventional tillage to conservation tillage are to be considered carbon sinks in the context of the
Kyoto Protocol, the affected lands will have to stay in their new uses for extended periods of time
(perhaps a minimum of 20 years). That is, managing land to sequester carbon for a few years and
then returning it to production, or resuming conventional tillage in the case of land put into no-till,
would quickly release any carbon that had been added to soils or biomass by sequestration
activities (Paustian et al., 1996; U.S. Department of Agriculture, Economic Research Service,
1998). A key focus then of policies to promote agricultural carbon sinks will need to be ensuring
that conditions exist under which producers are willing to enter relatively long-run commitments
regarding the management of land resources.
To assess how government policies might facilitate and encourage such commitments, it is
helpful to view land ownership as a bundle of separate interests, each conveying the right to use a
parcel of land in a particular way (Weibe, 1996). The set of interests associated with any given
parcel may be held by one agent or may be distributed among multiple agents (public and
private). From this perspective, the market value of any subset of interests reflects expectations
about the present value of all current and future uses that subset allows the holder to legally
undertake. Hence, the effect of establishing agricultural GHG sinks within the framework of the
Kyoto Protocol would be create a new economic interest in farm land-namely the right to
20 To put this in perspective, conservation tillage increased from 2 percent of U.S. cropland
in 1968 to 36 percent in 1996, while acreage over the period 1992-1996 was almost
constant-although acres under no-till increased from 9.9 percent of all cropland to 14.5 percent
(USDA, ERS, 1998). Conservation tillage is used mostly on soybeans, corn, and small grains, which
indicates that conservation compliance has probably been a major factor affecting adoption rates
(USDA, ERS, 1997). This suggests that economic incentives would probably be a significant
component of any effort to mitigate GHG emissions via the expanded use of conservation tillage.
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manage it for increased carbon content. Giving sequestered carbon a positive market value would
mean farmers could treat it as another commodity. Profit maximizing producers would then
choose to sequestered carbon when the present value of its net returns exceeded similar streams
associated with other commodities over some relevant time horizon.
At present, the details of any future market for carbon sequestration are largely uncertain
since many of the factors that would define this market are still being debated by the Parties to the
Kyoto Protocol. Possibilities include: firms with high emissions reductions costs would mitigate
the environmental impacts of their emissions by contracting with farmers to engage in specific
sequestration activities. The government's role in this case could be limited to maintaining the
legal environment in which sinks are defined, measured, verified, and sequestration contracts
enforced.
Other mitigation opportunities. In addition to converting marginal agricultural lands to
forests and permanent grasses and adopting production practices that enhance soil carbon levels, a
number of other opportunities may exist for agriculture to help mitigate U.S. GHG emissions.
These include managing existing forests on U.S. farm lands for increased carbon storage, reducing
agricultural methane emissions (via changes in methods of handling animal wastes and changes in
livestock feeds), reducing agricultural emissions of nitrous oxide (via altering the use of nitrogen
fertilizers and other farm chemicals) and producing biomass crops for energy generation.. Little
formal economic analysis has addressed the potential of these opportunities to cost effectively
mitigate U.S. GHG emissions (see Bluhm, Conway, Ronigen, and Shapouri, 1995; Brown,
Rosenberg, Easterling, and Hays, 1998; and Ternary, Winnett, Shackleton, Hohenstein, 1995 for
discussions on the economics of biomass)
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Whether or not these alternative GHG mitigation options prove to be economically viable
will depend largely on the set of sinks and mitigation practices ultimately permitted in Kyoto
Protocol and the set of government policies implemented to achieve U.S. emissions reductions
obligations. For example, expanding production of biomass crops could help mitigate U.S. GHG
emissions in two ways. First, as discussed above, farmers could produce biomass utilizing
practices that increase soil carbon levels. Second, where the energy generated by burning biomass
replaces energy generated by fossil fuel combustion, it would represent a shift to recycling
atmospheric carbon and thus, over time, a reduction in net emissions. Additionally, because of
the substitutability between biofuels and fossil fuels in energy generation, any carbon-based
charge on fossil fuels would enhance the competitiveness of biofuels. The economic viability of
biofuels as a GHG mitigation option then will depend on whether or not agricultural soils are
allowed as a carbon sink in the Kyoto framework, whether or not shifting to practices that recycle
atmospheric carbon will be counted as a reduction in net emissions, and the magnitude of the
carbon charge needed to meet U.S. emissions reductions obligations.
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Table I.1: Greenhouse Emissions from the Agriculture Sector, million metric
tons of carbon equivalent (MMTCE), 1990-96
Gas/Source
1990
1991
1992
1993
1994
1995
1996
Total U.S. Emissions
1632.7
1620.2
1645.7
1678.0
1715.3
1731.1
1788.0
Methane (CH₄)
169.9
171.1
172.5
171.9
175.9
179.2
178.6
Nitrous Oxide (N₂O)
92.3
94.4
96.8
97.1
104.9
101.0
103.7
Carbon
1348.3
1333.2
1353.2
1385.6
1408.5
1419.2
1471.1
Total Ag. Emissions
105.7
107.5
109.3
110.9
114.8
114.4
114.0
CH,
50.3
50.9
52.2
52.5
54.4
54.8
53.7
Enteric Fermentation
32.7
32.8
33.2
33.6
34.5
34.9
34.5
Manure Management
14.9
15.4
16.0
16.1
16.7
16.9
16.6
Rice Cultivation
2.5
2.5
2.8
2.5
3.0
2.8
2.5
Agricultural Residue
0.2
0.2
0.2
0.2
0.2
0.2
0.2
N₂O, total
55.4
56.5
57.1
58.5
60.4
59.7
60.3
Manure Management
3.3
3.5
3.5
3.6
3.7
3.6
3.7
Ag. Soil
52.0
52.9
53.5
54.8
56.6
55.9
56.5
Management
Ag. Residue Burning
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Agricultural Emissions
6.5
6.6
6.6
6.6
6.7
6.6
6.4
as percent of Total U.S.
Source: U.S. Environmental Protection Agency. 1998. Inventory of U.S. Greenhouse Gas Emission and
Sink: 1990-1996. (USEPA 236-R-98-006, March 1998), Washington, DC.
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Table II.1: Assumptions, Features, and Results of Selected Farm-Level Studies on Reducing U.S. Carbon Emissions
Study
Emissions
Price of Carbon
Key Assumptions
Key Results
targets*
($ permit)
and Features
Francl (1997)
1990
Low scenario: $0.25
1. Estimates how fuel taxes would affect input
1. Total farm production expenses increase
results in
per gallon of fuel.
prices and production cost of selected
5.8% in the low scenario and 11.7% in the
1994 $'s
commodities.
high scenario.
2. Tax rates based on a literature review
2. See Table II.4 for impacts on agricultural
High scenario: $0.50
3. All price changes occur in year 1.
input prices
per gallon of fuel.
4. Effects relative to 1994
5. No producer supply response that would raise
commodity prices.
Sparks
See DRI
See DRI study.
1. Uses DRI model to define baseline and assess
1. Higher energy costs would:
(1999):
study (table
macroeconomic impacts of each scenario. No
a. increase farm production costs $16.2
results in
II.2)
phase-in period.
billion (8.8%) and food processing and
1995 $'s
2. Estimates how carbon tax would affect the
marketing costs $18 billion (2.6%).
prices energy intensive farm inputs.
b. reduce domestic food demand 0.8%
3. Input cost increase reflects producer response to
C. decrease farm income nearly 53% from
higher prices; domestic consumer response limited
1998
to income effect.
d. increase farm consolidation
4. Technology, commodity production patterns,
e. increase food imports and decrease food
and systems of food processing and marketing
exports.
assumed constant through 2010.
5. No producer supply response that would raise
commodity prices.
McCarl et al.
No specific
Considers taxes of 25,
1. taxes put in place all at once & all economic
1. U.S. agriculture is not very sensitive to
(1997)
target
$50, and $100 per short
adjustments occur immediately
carbon taxes.
ton of carbon
2. Changes in relative prices of diesel, natural gas,
2. Carbon taxes of $25, $50, and $100 / ton
fertilizer and electricity are estimated exogenously
would cost the farm sector, respectively,
and imposed on the model.
$450, $850, and $1,600 million annually.
3. Considers imposing carbon tax in 2000, 2005,
Annual tax revenues from the farm sector
2010, 2015, and 2020.
would be $450, $800, and $1,500 million.
3. Farmers would pass most of any input
price increases on to consumers.
Review Draft 4/12/99
44
Table II.2: Agricultural Input Cost Increases Estimated in Various Studies, by Carbon Tax
Scenario
Study
Input
Policy Scenario
Fuel Price Increase Scenario
Francl
Low
High
--percent--
Fuel and electricity
25
50
Pesticides/chemicals
20
40
Fertilizer
15 to 20
30 to 40
Custom operations/hauling
15
30
Other Expenses
5
10
Sparks, Inc.
Emissions Permit Price (1997 $'s per metric ton of Carbon)
$177-193
--percent--
Fuels and Oil
30
Electricity
100
Fertilizer and lime
100
Pesticides
50
McCarl et al.
Carbon Permit Price (1997 $'s per short ton of Carbon)
$25
$50
$100
--percent--
Gasoline
4.52
9.04
18.08
Diesel
8.26
16.53
33.06
Natural Gas
13.13
26.26
52.53
Electricity
8.26
16.53
33.06
Nitrogen
0.22
0.44
0.87
Phosphorous
0.08
0.16
0.33
Potassium
0.22
0.44
0.87
Chemicals
0.08
0.16
0.33
Review Draft 4/12/99
45
Table III.1: Summary of AEA (1998) Analysis of Implementing the Kyoto Protocol
Emissions Target:
U.S. greenhouse gas (GHG) emissions target is set 7% below 1990 levels between 2008 and 2012. Gases
covered are carbon dioxide (CO2), methane (CH₄), nitrous oxide (N₂O), hydroflurocarbons (HFCs),
perfluocarbons (PFCs), and sulfur hexafloride (SF₆).
Methodology :
1.
Construct regional "business as usual" (BAU) GHG emissions scenarios for 2010.
2.
Develop regional marginal abatement cost curves for reducing GHG emissions.
-
Use the Second Generation Model (SGM) to calculate the world GHG permit prices that equates marginal
abatement costs across regions for various trading scenarios. For each scenario, assess the impacts on U.S.
energy prices, energy consumption, GDP, investment, and consumption. (SGM is a 12 region - 9 sector
computable general equilibrium model designed to analyze energy markets).
Key Assumptions:
1.
Efficient trading of emissions allowances within regions and across specified trading blocs
2.
Carbon sinks not considered
3.
Autonomous gain in energy efficiency for the US economy set at 0.96% annually
4.
No banking of emissions allowances for later periods
5.
No emissions mitigation related to electricity sector restructuring, the Climate Change Technology
Initiative, the Energy Efficiency Initiative, or voluntary industry actions
6. GHG emissions target is, on average, 600 MMTCE below projected "business as usual" emissions levels
for 2008-2012.
7. Specified trade blocs:
Annex 1:
Unrestricted trade of emissions credits among Annex 1 countries.
Umbrella 1:
Unrestricted trade of emissions credits among Annex 1 countries minus Eastern Europe
and the European Union (EU).
Umbrella 2:
Unrestricted trade of emissions credits among Annex 1 countries minus the EU.
CDM:
Developing countries sell emissions credits via Clean Development Mechanism.
KDC:
Key developing countries adopt emissions targets equal to their 2010 baseline and
participate in normal trading:
Scenario results (% reductions relative to case where all countries reduce emissions domestically):
reduction in
reduction in U.S.
Permit Price
U.S: Economic
Scenario
permit price
economic cost
(1996 $s)
Cost (1996 $s)
Annex 1
72%
57%
Umbrellal
75%
61%
Umbrella2
85%
74%
Annex1+KDC
88%
80%
$23/metric ton
$12 billion/year
Umbrella1+KDC
91%
83%
Umbrella2+KDC
93%
87%
$14/metric ton
$ 7 billion/year
Annex1+CDM
79%
66%
Umbrella1+CDM
82%
71%
Umbrella2+CDM
88%
80%
Results for permit price = $14 per metric ton (relative to the BAU scenario in 2010)
a. raise household energy prices 3% and annual household energy costs $70,
b. raise both electricity and gasoline prices 3% (for gasoline this is about 4 cents per gallon);
Results for permit price = $23 per metric ton (relative to the BAU scenario in 2010)
a. raise household energy prices 5% and annual household energy costs $110,
b. raise electricity prices 5% and gasoline prices 4% (about 6 cents per gallon)
Source: AEA (1998)
Review Draft 4/12/99
46
Table III.2: Inputs under the Kyoto Protocol : embodied carbon and input prices
Item
Unit
Input Price
Carbon
Input Price Increase*
(2010)
Content
$ / unit
pounds / unit
$ / unit
percent
Fuels
1,2/
Diesel fuel
Gallon
1.21
6.026
0.063
5.2
Gasoline
Gallon
1.65
5.233
0.055
3.3
LP gas
Gallon
1.06
3.200
0.033
3.2
Natural gas
100 Cu.Ft.
0.45
3.300
0.034
7.7
Electricity
3/
Northeast
Kwh.
0.11
0.087
0.001
0.9
Lake States
Kwh.
0.06
0.150
0.002
2.6
Corn Belt
Kwh.
0.06
0.150
0.002
2.8
Northern Plains
Kwh.
0.06
0.150
0.002
2.8
Appalachian
Kwh.
0.08
0.105
0.001
1.4
Southeast
Kwh.
0.06
0.129
0.001
2.3
Delta
Kwh.
0.05
0.135
0.001
2.9
Southern Plains
Kwh.
0.05
0.127
0.001
2.5
Mountain
Kwh.
0.06
0.127
0.001
2.4
Pacific
Kwh.
0.07
0.042
0.000
0.6
Chemicals
4/
Nitrogen
Pound
0.38
1.420
0.015
3.9
Phosphate
Pound
0.29
0.296
0.003
1.1
Potash
Pound
0.17
0.236
0.002
1.4
Pesticides
Pound
3.49
5.633
0.059
1.7
* Input price change in USMP model run with carbon permit price of $23 per metric
ton.
Sources:
1/ USDOE/EIA. 1997. Annual Energy Outlook, p. 222. (Volume/Btu conversions)
2/ USDOE/EIA, 1997. Emissions of Greenhouse Gases in the United States -1996,
USDOE/EIA-0573(96), Oct. 1997. Table B1, p.100. Adjustments for incomplete
combustion per personal communication with Susan Holte, ELA emissions specialist.
(Btu/Carbon conversions)
3/ Wiese, AM. 1998. Impacts of Market-Based Greenhouse Gas Emission Reduction
Policies on U.S. Manufacturing Competitiveness, Research Study #090 American
Petroleum Institute. Citing USDOE, EIA. 1995. "Annual Electric Generator Report,"
in The Electric Power Annual, Vol.1, tables 6-8.
/Helsel, Z.R. 1992. "Energy and Alternatives for Fertilizer and Pesticide Use," Chapter
13 in Energy in Farm Production, ed. RC Fluck. Elsevier, 1992.
Review Draft 4/12/99
47
Table III.3: 2010 crop price, production, domestic use and exports under the Kyoto Protocol
Price
Production
Domestic use
Exports
Crop
Unit
Base
Base
Base
Base
2010
$23/mt
2010
$23/mt
2010
$23/mt
2010
$23/mt
--dollars per unit--
--million units--
Corn
Bushel
3.20
3.22
11,776.2
11756.5
1675.0
1674.3
3250.6
3240.0
Change
0.02
-19.7
-0.7
-10.6
% change
0.62
-0.2
0.0
-0.3
Sorghum
Bushel
3.00
3.02
770.0
766.1
35.0
34.8
335.0
331.9
Change
0.02
-4.0
-0.2
-3.1
% change
0.78
-0.5
-0.7
-0.9
Barley
Bushel
2.85
2.88
450.0
447.3
172.0
171.5
70.0
69.0
Change
0.03
-2.7
-0.5
-1.0
% change
1.13
-0.6
-0.3
-1.4
Oats
Bushel
1.90
1.91
293.7
292.8
102.0
101.9
2.0
2.0
Change
0.01
-1.0
-0.1
0.0
% change
0.65
-0.3
-0.1
-0.4
Wheat
Bushel
4.65
4.66
2,828.0
2821.6
1146.0
1145.8
1625.0
1619.3
Change
0.01
-6.4
-0.2
-5.8
% change
0.22
-0.2
0.0
-0.4
Rice
Hundred-
12.87
12.98
206.4
204.4
7.0
7.0
85.4
83.7
weight
Change
0.11
-2.0
0.0
-1.8
% change
0.85
-0.9
-0.3
-2.1
Soybeans
Bushel
7.55
7.56
3,144.2
3140.9
152.2
152.1
1149.7
1149.0
Change
0.01
-3.3
-0.1
-0.8
% change
0.09
-0.1
0.0
-0.1
Cotton
Bale
NA'
NA
21.3
21.2
13.2
13.2
8.0
8.0
Change
1.25
-0.1
-0.1
0.0
% change
0.34
-0.4
-0.3
-0.4
Silage
Ton
21.66
21.67
95.6
95.4
27.5
27.4
0.0
0.0
Change
0.01
-0.2
-0.1
0.0
% change
0.04
-0.3
-0.3
0.0
Hay
Ton
60.53
60.61
155.6
154.9
79.2
78.7
0.0
0.0
Change
0.08
-0.7
-0.6
0.0
% change
0.13
-0.4
-0.7
0.0
1
USDA is prohibited from publishing cotton price projections.
Review Draft 4/12/99
48
Table III.4: 2010 acreage planted and acreage change under the Kyoto Protocol
Base/
North
Lake
Corn
North
Appa-
South
Delta
South
Moun-
Pacific
US
Change
East
States
Belt
Plains
lachia
East
States
Plains
tain
Total
Selected crops
-- million acres -
Feed-
2010 base
3.97
15.49
43.59
24.55
4.78
2.18
1.00
6:39
4.36
1.42
107.72
grains
Change
-0.02
-0.02
-0.02
-0.13
-0.01
-0.01
0.00
-0.10
-0.05
-0.02
-0.38
% change
-0.40
-0.10
0.00
-0.50
-0.20
-0.20
-0.40
-1.60
-1.20
-1.30
-0.30
Wheat
2010 base
0.73
3.89
6.46
28.97
1.45
0.38
0.71
21.42
10.69
2.83
77.50
Change
0.00
-0.01
-0.01
-0.09
0.00
0.00
0.00
-0.18
-0.03
0.00
-0.31
% change
-0.20
-0.10
-0.10
-0.30
-0.30
-0.20
-0.10
-0.80
-0.20
0.20
-0.40
Soybeans
2010 base
1.08
8.38
36.11
8.36
4.99
2.87
8.19
0.30
0.00
0.00
70.27
Change
0.00
-0.01
-0.02
-0.02
-0.01
-0.01
-0.03
0.00
0.00
0.00
-0.09
% change
-0.10
-0.10
0.00
-0.20
-0.20
-0.30
-0.30
-0.80
0.00
0.00
-0.10
Hay
2010 base
7.81
10.53
11.38
10.94
6.33
1.05
0.76
1.19
9.31
3.20
62.50
Change
-0.01
-0.02
-0.01
-0.07
0.00
0.00
0.00
-0.02
-0.14
0.00
-0.26
% change
-0.20
-0.20
-0.10
-0.60
0.00
0.00
0.00
-1.30
-1.50
0.10
-0.40
10 major
2010 base
15.04
40.04
98.61
74.29
19.00
7.61
17.01
36.40
25.14
9.00
342.15
Change
-0.04
-0.07
-0.05
-0.31
-0.03
-0.02
-0.04
-0.44
-0.22
-0.05
crops
-1.26
% change
-0.20
-0.20
-0.10
-0.40
-0.20
-0.20
-0.20
-1.20
-0.90
-0.50
-0.40
Tillage Types
Conven-
2010 base
3.28
16.01
45.20
37.24
7.66
6.56
15.55
27.97
13.51
5.39
178.37
Tional
Change
-0.03
-0.05
-0.02
-0.34
-0.01
-0.02
-0.04
-0.43
-0.24
-0.05
-1.23
% change
-0.90
-0.30
0.00
-0.90
-0.10
-0.20
-0.20
-1.50
-1.80
-0.90
-0.70
Mold-
2010 base
8.31
13.34
12.22
15.03
6.17
1.05
0.80
6.41
8.78
3.37
75.47
board
Change
0.01
-0.01
0.00
0.10
0.00
0.00
0.00
-0.07
0.03
0.00
0.06
% change
0.10
-0.10
0.00
0.60
0.10
0.00
-0.10
-1.10
0.30
0.00
0.10
Mulch
2010 base
1.33
7.57
20.71
15.68
1.71
0.00
0.00
2.02
2.86
0.24
52.12
Change
-0.01
-0.02
-0.03
-0.02
-0.01
0.00
0.00
0.06
-0.01
0.00
-0.03
% change
-0.50
-0.20
-0.10
-0.20
-0.70
0.00
0.00
3.00
-0.30
0.70
-0.10
No-Till
2010 base
2.12
3.02
20.48
4.99
3.46
0.00
0.66
0.00
0.00
0.00
34.73
Change
-0.01
0.01
-0.01
-0.05
-0.01
0.00
0.00
0.00
0.00
0.00
-0.07
% change
-0.40
0.30
0.00
-0.90
-0.30
0.00
0.10
0.00
0.00
0.00
-0.20
Ridge-Till
2010 base
0.00
0.11
0.00
1.35
0.00
0.00
0.00
0.00
0.00
0.00
1.46
Change
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
% change
0.00
0.10
0.00
0.10
0.00
0.00
0.00
0.00
0.00
0.00
0.10
All
2010 base
15.04
40.04
98.61
74.29
19.00
7.61
17.01
36.40
25.14
9.00
342.15
Tillage
Change
-0.04
-0.07
-0.05
-0.31
-0.03
-0.02
-0.04
-0.44
-0.22
-0.05
-1.26
Types
% change
-0.20
-0.20
-0.10
-0.40
-0.20
-0.20
-0.20
-1.20
-0.90
-0.50
-0.40
Conventional Tillage : use of disc in planting preparation. Moldboard Tillage: conventional plus use of moldboard plow. No-till
(slot planting): Soil is left undisturbed prior to planting; weed control is usually accomplished with a combination of herbicides and
cultivation. Ridge-till: soil is left undisturbed prior to planting; about one third of the soil surface is tilled with sweeps or row cleaners
at planting time; planting is completed on ridges; weed control with herbicides and cultivation. Mulch-till: -total surface is tilled,
using tools such as chisels, field cultivators, disks, sweeps, or blades; weed control with herbicides and cultivation.
Review Draft 4/12/99
49
Table III.5: Selected 2010 livestock price and production under the Kyoto Protocol
Price
Production
Item
Unit
Base
Base
2010
$23/mt
2010
$23/mt
--dollars per unit--
--million units--
Milk
Hundred-
15.25
15.29
1,705.0
1,703.2
weight
Change
0.03
-1.8
% change
0.23
-0.1
Hog
Hundred-
49.8
49.94
255.2
255.1
slaughter
weight*
Change
0.14
0.0
% change
0.27
0.0
Beef
Hundred-
90.64
91.17
185.9
185.7
yearlings
weight*
Change
0.53
-0.2
% change
0.58
-0.1
Fed beef
Hundred-
80.61
81.08
329.5
329.0
weight*
Change
0.47
-0.5
% change
0.58
-0.2
Broilers
Pounds
0.39
0.39
37,863.5
37,853.2
Change
0
-10.3
% change
0.22
0.0
* live weight.
Review Draft 4/12/99
50
Table III.6: 2010 Income and expenses: base level, change and percent change under Kyoto Protocol
Base/
North
Lake
Corn
North
Appa-
South
Delta
South
Moun-
Pacific
US
Change
East
States
Belt
Plains
lachia
East
States
Plains
tain
Total
Crops
-- million dollars --
Value
2010 base
3,503
11,034
38,477
16,835
5,595
2,496
7,577
6,299
5,218
3,497
100,530
Of
Change
3
30
127
0
9
4
18
-29
-19
-9
135
Production
% change
0.10
0.30
0.30
0.00
0.20
0.20
0.20
-0.50
-0.40
-0.30
0.10
Conserva-
2010 base
5
104
268
214
29
30
20
118
108
38
933
Tion
Change
0
0
0
0
0
0
0
0
0
0
0
Reserve
% change
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Payments
Production
2010 base
92
357
1,029
857
152
83
411
642
227
160
4,010
Flexibility
Change
0
0
0
0
0
0
0
0
0
0
0
Payments
% change
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Total
2010 base
2,485
5,868
16,580
10,141
3,498
1,516
4,272
5,409
3,049
2,220
55,038
Variable
Change
13
60
208
86
31
15
48
2
-9
-6
448
Costs
% change
0.50
1.00
1.30
0.90
0.90
1.00
1.10
0.00
-0.30
-0.30
0.80
Net
2010 base
1,115
5,627
23,195
7,764
2,278
1,093
3,736
1,649
2,505
1,474
50,435
cash
Change
-10
-30
-81
-86
-23
-10
-30
-31
-10
-3
-314
Returns
% change
-0.90
-0.50
-0.30
-1.10
-1.00
-0.90
-0.80
-1.90
-0.40
-0.20
-0.60
Livestock
Value
2010 base
8,816
11,676
17,889
18,416
8,488
8,156
5,741
19,701
8,901
9,545
117,329
Of
Change
6
10
157
87
4
2
2
-183
139
92
315
Production
% change
0.10
0.10
0.90
0.50
0.00
0.00
0.00
-0.90
1.60
1.00
0.30
Total
2010 base
5,163
7,882
15,398
18,306
6,293
5,082
3,558
17,370
8,035
6,464
93,550
Variable
Change
18
27
155
87
10
8
6
-122
112
71
373
Costs
% change
0.30
0.30
1.00
0.50
0.20
0.20
0.20
-0.70
1.40
1.10
0.40
Net
2010 base
3,653
3,794
2,491
109
2,195
3,074
2,184
2,331
866
3,081
23,780
cash
Change
-12
-17
2
0
-6
-7
-5
-60
26
21
-58
Returns
% change
-0.30
-0.40
0.10
-0.30
-0.30
-0.20
-0.20
-2.60
3.00
0.70
-0.20
Crops and Livestock
Value
2010 base
12,319
22,710
56,366
35,250
14,083
10,652
13,318
26,000
14,120
13,042
217,859
Of
Change
9
40
285
87
12
6
20
-211
120
83
450
Production
% change
0.10
0.20
0.50
0.20
0.10
0.10
0.10
-0.80
0.80
0.60
0.20
Total
2010 base
7,648
13,750
31,977
28,447
9,790
6,598
7,830
22,778
11,084
8,685
148,587
Variable
Change
31
86
363
173
42
23
54
-120
103
65
821
Costs
% change
0.40
0.60
1.10
0.60
0.40
0.30
0.70
-0.50
0.90
0.70
0.60
Net
2010 base
4,768
9,422
25,686
7,874
4,474
4,167
5,919
3,981
3,371
4,555
74,215
cash
Change
-22
-47
-79
-87
-29
-17
-35
-91
17
18
-371
Returns
% change
-0.50
-0.50
-0.30
-1.10
-0.70
-0.40
-0.60
-2.30
0.50
0.40
-0.50
Review Draft 4/12/99
51
Table III.7: Carbon embedded and energy expenses under the Kyoto Protocol
I
Carbon embodied in
Energy expenses in
Item
production
production
Base2010
$23/mt
Base2010
$23/mt
-- Crops --
-- million mt --
-- million dollars --
Fuel
11
10.8
5,210.9
5,404.0
Change
-0.2
193.1
% Change
-1.4
3.7
Electricity
0.5
0.5
446.3
453.8
Change
0
7.5
% Change
-0.7
1.7
Custom
1.4
1.3
655.5
657.9
Change
-0.1
2.4
% Change
-4.4
0.4
Fertilizer
13
12.9
12,275.3
12,528.1
Change
-0.1
252.8
% Change
-0.4
2.1
Chemicals
5.9
5.8
8,007.9
8,102.5
Change
0
94.6
% Change
-0.5
1.2
Crops all energy
31.7
31.4
26,595.8
27,146.2
Change
-0.3
550.4
% Change
-1
2.1
-- Livestock --
Fuel
8.4
8.3
4,075.4
4,216.9
Change
-0.1
141.4
% Change
-1.4
3.5
Electricity
0.4
0.4
483.6
499.8
Change
0
16.2
% Change
1.1
3.4
Livestock all energy
8.8
8.7
4,559.0
4,716.7
Change
-0.1
157.7
% Change
-1.3
3.5
--Crops and livestock-
Fuel
19.4
19.1
9,286.3
9,620.9
Change
-0.3
334.6
% Change
-1.4
3.6
Electricity
0.9
0.9
929.8
953.6
Change
0
23.7
% Change
0.2
2.6
Custom
1.4
1.3
655.5
657.9
Change
-0.1
2.4
% Change
-4.4
0.4
Fertilizer
13
12.9
12,275.3
12,528.1
Change
-0.1
252.8
% Change
-0.4
2.1
Chemicals
5.9
5.8
8,007.9
8,102.5
Change
0
94.6
% Change
-0.5
1.2
40.5
40
31,154.8
31,862.9
All energy
Change
-0.4
708.1
% Change
-1
2.3
1
These estimates pertain to the 10 major field crops and major livestock enterprises included in the USMP model and cover
most significant carbon use in agriculture. USMP does not model fruit, vegetable and other horticultural production which
are energy intensive and use relatively more electricity than field crops. Horticultural electricity uses include irrigation,
refrigeration and greenhouse operation.
Review Draft 4/12/99
52
Table III.8: Social benefit measures under Kyoto Protocol
Measure
U.S. Total
million dollars
Producer Surplus
Base
1,096,957
$23/mt
Change
-417
% change
-0.04
Net farm cash
Base
74,215
Returns
$23/mt
Change
-371
% change
-0.5
Consumer surplus
Base
822,239
$23/mt
Change
-374
% change
-0.05
Consumer and
Base
1,919,196
producer surplus
$23/mt
Change
-791
% change
-0.04
Revenue transfers out of agriculture sector²
N/A
$23/mt
Change
724
Net social benefit
Base
1,919,196
$23/mt
Change
-67
% change
-0.00
Net foreign surplus
Base
54,409
$23/mt
Change
-127
% change
-0.46
1 Crop and live animal producers. Processing (food, feed and meat) not included.
2
Revenues transferred out of agriculture sector based on carbon tax rate implied by carbon permit price.
Equal to tax revenues from imposition of a carbon tax.
A Net social benefit
= A Consumer surplus + A Producer surplus + Tax revenue
Д Net foreign surplus = A Export surplus + A Import surplus
Review Draft 4/12/99
53
Table III.9: Changes in erosion and water related nitrogen losses'
North
Lake
Corn
North
Appa-
South
Delta
South
Moun-
Pacif
U.S.
Indicator
East
States
Belt
Plains
Lachia
East
States
Plains
tain
ic
Total
million tons---
Soil
Base
48.9
224.3
471.7
307.1
102.2
47.0
85.3
285.2
326.4
89.5
1987.7
Erosion
$23/mt
change
-0.073
-0.538
-0.200
-1.322
-0.174
-0.091
-0.157
-0.556
0.207
-0.027
-2.928
% change
-0.149
-0.240
-0.042
-0.430
-0.170
-0.193
-0.184
-0.195
0.064
-0.031
-0.147
Nitrogen-
Base
0.23
0.36
1.96
1.10
0.46
0.17
0.47
0.63
0.17
0.09
5.63
Loss to
$23/mt
change
0.000
0.000
-0.001
-0.005
0.000
0.000
-0.001
-0.005
0.000
-.001
-0.016
Water
% change
-0.311
-0.249
-0.055
-0.428
-0.164
-0.199
-0.221
-0.842
-0.107
-1.376
-0.288
Nitrogen-
Base
0.019
0.075
0.664
0.229
0.046
0.021
0.037
0.273
0.049
0.041
1.453
Loss to
$23/mt
change
0.000
0.000
0.000
-0.001
0.000
0.000
0.000
-0.003
0.000
0.000
-0.006
Air 2
% change
-0.242
-0.114
-0.067
-0.467
-0.232
-0.160
-0.196
-1.276
-0.126
-0.779
-0.393
million dollars---
Offsite
Base
228.8
377.4
579.3
152.4
346.9
108.2
265.8
175.1
170.0
208.1
2612.0
Damages
$23/mt
change
-0.339
-0.713
-0.199
-0.486
-0.590
-0.209
-0.489
-0.777
-0.025
-0.198
-4.024
From
% change
-0.148
-0.189
-0.034
-0.319
-0.170
-0.193
-0.184
-0.444
-0.015
-0.095
-0.154
Erosion
1 The environmental indicators reported in this table do not measure environmental quality, but rather changes in factors
which influence environmental quality.
2 Nitrogen loss to air includes nitrogen losses from denitrification and volitization.
Review Draft 4/12/99
54
Table IV.1: Potential Carbon Sequestration on U.S. Agricultural Lands
A.
Selected Features of a Land Retirement Program to Sequester Carbon on Marginal Cropland and Pasture
Lands Targeted:
Cropland and Pasture
Cropland
Objective:
Minimize
Minimize
Minimize
Minimize
Cost per Acre
Cost per Ton C
Cost per Acre
Cost per Ton C
Total land enrolled
(million acres)
23.1
22.2
10.3
9.4
Annual Carbon Sequestered
(million metric tons)
40.9
44.2
15.3
19.6
Annual cost ($/acre)
19.75
20.54
44.29
48.53
Annual cost ($/metric ton)
11.15
10.33
29.88
23.23
Length of Program:
10 years (assumes forests would then be highest value use)
Total Program Cost:
$3.7 billion total
Annual Program Cost:
$456.2 million
Source: Parks and Hardie (1995)
Estimated Changes in SOC and Fossil Fuel Use to the year 2020 for Select Changes in the Use of Minimum Tillage and No-Till
systems in the United States
Tillage
Scenario 1
Scenario 2
Scenario 3
System
Mean
Min.
Max.
Fuel
Mean
Min.
Max.
Fuel
Mean
Min.
Max.
Fuel
MMT C
a. Conventional
-41
-31
-52
-121
-24
-18
-30
-87
-13
-9
-16
-67
b. Minimum
0
0
0
-30
0
0
0
-52
0
0
0
-66
C. No-till
0
0
0
-6
105
80
129
-10
377
286
468
-13
d. Totals
-41
-31
-52
-157
80
62
99
-149
364
277
452
-146
Net gain/loss
-198
-188
-209
-69
-87
-50
218
131
306
Scenarios:
1. 27% of current cropland is in conservation tillage 27% (20% in minimum till and 7% in no-till)
2. Conservation tillage increases to 57% of all cropland (=> 60 million acres in conserv- tillage).
3. Conservation tillage increases to 76% of all cropland (=> 80 million acres in conserv- tillage).
Source: Kern and Johnson (1993)
Review Draft 4/12/99
55
Table IV.2: Relative Carbon Gain and Potential Policy Actions for Selected Management Practices
Relative Carbon Possible
Gain
Policy
Management Practice
(per unit area)*
Actions**
Cultivated Land
Adoption of reduced- or no-till
M
CS, E&TA, CC
Use of winter cover crops
L
CS, E&TA
Elimination of summer fallow
M
CS, E&TA
Use of forages in rotations
M
CS, E&TA
Use of improved varieties
M
CS, E&TA
Use of organic amendments
M
CS, E&TA
Irrigation
H
CS
Set-Aside Lands
Establish perenial grasses
H
CS, LR,
Soil/water conservation measures
H
CS, E&TA, CC
Establish forest
H
CS, LR
Restore wetlands
H
CS
Pastureland
Improved grazing methods
M
CS, E&TA
Fertilizer applications
M
CS, E&TA
Use of improved species/varieties
M
CS, E&TA
Irrigation
M
CS
Source: Except for restoring wetlands, assessments of relative carbon gain are from Bruce et al. (1998)
*
H = high, M = medium, L = low
CS = cost share (paying all or part of the costs of implementing the practice - cost could be defined to include lost income).
CC= conservation compliance (requires land owner to participate in a market transition, commodity support, or other government program with
economic benefits). E&TA = education and technical support (requires that the practice be profitable). LR = land retirement (providing
payments, usually annual, for land to be put into specific uses).
Review Draft 4/12/99
56
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Sparks Companies, Incorporated. 1997. Carbon Emissions Constraints: Potential Impacts on US
Agriculture. McLean, VA.
Spinelli, F., W.T. Disney, J. Blackwell, and H. Metcalf. "U.S. Economic Impact of Uncooked Beef
Imports from Argentina," Selected paper presented at the American Agricultural Economics Association
annual meetings (July 1996), San Antonio, TX.
Stavins, R.N. 1998. "The Costs of Carbon Sequestration: A Revealed-Preference Approach."
Forthcoming in American Economic Review.
Turnure, J., Winnett, S., Shackleton, R., and W. Hohenstein. 1995. Biomass Electricity: Long-Run
Economic Prospects and Climate Policy Implications. In: Proceecdings of the Second Biomass
Conference of the Americas, Portland, OR. NREL, Golden, CO. August
U.S. Department of Agriculture, Economic Research Service. 1999. Agricultural Outlook.
(April1999), Washington, DC.
.
1998a. Economic and Environmental Benefits and Costs of Conservation Tillage. Report
to Congress by the Economic Research Service, in collaboration with the Natural Resources
Conservation Service, Washington, DC. (we will need a 1998a, 1998b, and 1998c here)
.
1998b. Agricultural Outlook. (March, July, and September 1998), Washington, DC.
.
1998c. Webpage http://www.econ.ag.gov/briefing/fbe/car/car.htm. Washington, DC.
.
1997d. Agricultural Resources and Environmental Indicators, 1996-97. Agricultural
Handbook Number 712, Washington, DC.
-
Farm Costs and Returns (FCRS) and Agricultural Resource Management Study
(ARMS) Data.
.
1992. Cropping Practice Survey Data.
U.S. Department of Agriculture, National Agricultural Statistics Service. Crops County Data.
U.S. Department of Agriculture, Natural Resources Conservation Service. 1987 and 1992 National
Resources Inventory Data.
U.S. Department of Agriculture, World Agricultural Outlook Board. 1997. Agricultural Baseline
Projections to 2005, Reflecting the 1996 Farm Act. (Staff Report WAOB-97-1). Washington, DC
U.S. Department of Energy, Energy Information Agency. 1997. Annual Energy Review. Washington,
Review Draft 4/12/99
61
DC. (we will need a 1997a, 1997b, 1997c, and 1997d here)
.
1997. Annual Energy Outlook 1998 with projections to 2020. (DOE/EIA--0383(98),
December 1997). Washington, DC.
-
1997. Emissions of Greenhouse Gases in the United States -1996, (DOE/EIA-0573(96),
October 1997). Washington, DC.
.
1997. Service Report: Analysis of Carbon Stabilization Cases. Department of Energy,
Office of Policy Analysis and Forecasting, Washington, DC.
.
1995. "Annual Electric Generator Report," in The Electric Power Annual, Vol. 1, tables
6-8. Washington, DC.
U.S. Environmental Protection Agency. 1998. Inventory of U.S. Greenhouse Gas Emission and Sink:
1990-1996. (USEPA 236-R-98-006, March 1998), Washington, DC.
Uri, Noel D. and M. Gill. The Agricultural Demand for Electricity in the United States,
International Journal of Energy Research, Vol. 19, 145-157 (1995).
WEFA Inc. 1998. Global Warming: The High Cost of the Kyoto Protocol-National and State Impacts.
WEFA Inc., Burlington, MA.
Wiebe, K., A. Tegene, and B. Kuhn. 1996. Partial Interest in Land: Policy Tools for Resource Use and
Conservation. (Agricultural Economic Report No. 744). U.S. Department of Agriculture, Economic
Research Service, Washington, DC. [wrong spelling of Wiebe in text]
Wiese, A.M. 1998. Impacts of Market-Based Greenhouse Gas Emission Reduction Policies on U.S.
Manufacturing Competitiveness, Research Study #090 American Petroleum Institute. Washington, DC.
Williams, J.R., P.T. Dyke, W.W. Fuchs, V.W. Benson, O.W. Rice, and E.D. Taylor; and
Sharpley, A.N. and J.R. Williams , eds. 1990. EPIC- Erosion/Productivity Impact Calculator,
Vols. 1 and 2. USDA, Agricultural Research Service. (Technical Bulletin Number 1768).
Temple, TX.
Review Draft 4/12/99
62
Appendix 1: Impacts under Alternative Carbon Prices
Several studies reported in Chapter 2 conclude carbon prices will be greater than those
predicted in the Administration's Economic Analysis (AEA, 1998). While these analyses are not
consistent with the provisions of the protocol, these higher carbon prices have been used in the
several analysis of the agricultural sector. For comparison, we provide multipliers for interested
readers to compute the agricultural sector impacts for a range of carbon prices. Appendix tables
A1.1 to A1.4 report multipliers which can be used to calculate the economic impacts for selected
variables for every $50.00 increase in the price of carbon.
Using the multipliers. For example, in table A1.3, Net Cash Returns for Crops and
Livestock projected to be $74,214.9 million in 2010. Using the multiplier, Net Cash Returns
with a $50 carbon permit price would be $73,450.9 million (which is the base level $74,214.9
million plus the multiplier, -$763.3 million). Or, assuming a $10 carbon permit price we can
estimate that Net Cash Returns would decline by $152.66 million to $74,062.24 million
($74,214.9 - ($10/$50) * $763.3 million). Multipliers are presented for crop prices and
production, crop domestic use and exports, income, total expenses, and welfare measures.
While the impacts on the sector increase as carbon prices increase, even with higher
carbon prices, the impacts on the agricultural sector remain far below those predicted in recent
studies such as Sparks (1999). This is because our analysis more accurately reflects the carbon
content in farm production inputs and takes into consideration market adjustments.
Stavins estimates a marginal cost function for carbon sequestration through forestry that extends
to 342 million acres of land sequestering 518 million tons (470 million metric tons) of carbon per
year. Stavins' results at lower levels are similar to those of Parks and Hardie. But upon reaching
342 million acres of land, annual average costs are $106 per acre and $70 per ton ($77 per metric
63
ton) of carbon, and marginal costs are $200 per acre and $136 per ton ($150 per metric ton) of
carbon. Stavins estimates that marginal costs are roughly linear until reaching about $66 per ton
($73 per metric ton) or $100 per acre, after which marginal costs increase rapidly. Thus, Stavins
provides demonstrates the need for caution in extrapolating costs from relative low levels of land
conversions to higher levels.
64
Appendix 1, Table 1: 2010 key variables under Kyoto Protocol and multipliers for alternate carbon permit price
Item
Unit
2010 base level
$23/ton
change per $50
permit price
permit price
change¹
Supply and Use Indicators
Commodity Price
-dollars/unit--
Corn
Bushel
3.20
3.22
0.04137
Sorghum
Bushel
3.00
3.02
0.04985
Barley
Bushel
2.85
2.88
0.04955
Oats
Bushel
1.90
1.91
0.02900
Wheat
Bushel
4.65
4.66
0.02717
Rice
Hundred-
12.87
12.98
0.23135
weight
Soybeans
Bushel
7.55
7.56
0.01361
Cotton
Bale
NA²
NA
3.00029
Silage
Ton
21.66
21.67
0.01776
Hay
Ton
60.53
60.61
0.08300
Production
-million units--
Corn
Bushel
11776.2
11756.5
-43.64565
Sorghum
Bushel
770
766.1
-8.46810
Barley
Bushel
450
447.3
-4.16688
Oats
Bushel
293.7
292.8
-2.28620
Wheat
Bushel
2828
2821.6
-17.17149
Rice
Hundred-
206.4
204.4
-4.14855
weight
Soybeans
Bushel
3144.2
3140.9
-7.24297
Cotton
Bale
21.3
21.2
-0.20408
Silage
Ton
95.6
95.4
-0.52743
Hay
Ton
155.6
154.9
-0.83345
Domestic Use
-million units--
Corn
Bushel
1675.04
1674.32
-1.5148
Sorghum
Bushel
35.00
34.77
-0.4892
Barley
Bushel
172.00
171.50
-0.7778
Oats
Bushel
102.00
101.93
-0.1559
Wheat
Bushel
1146.00
1145.77
-0.6035
Rice
Hundred-
7.00
6.98
-0.0420
weight
Soybeans
Bushel
152.17
152.12
-0.10410
65
Item
Unit
2010 base level
$23/ton
change per $50
permit price
permit price
change¹
Cotton
Bale
13.20
13.16
-0.1090
Silage
Ton
27.52
27.43
-0.2079
Hay
Ton
79.22
78.66
-0.59850
Exports
Corn
Bushel
3250.56
3239.95
-22.2636
Sorghum
Bushel
335.01
331.94
-6.5183
Barley
Bushel
70.00
69.00
-1.5433
Oats
Bushel
2.00
1.99
-0.0240
Wheat
Bushel
1625.04
1619.25
-15.32570
Rice
Hundred-
85.40
83.65
-3.73210
weight
Soybeans
Bushel
1149.74
1148.99
-1.5206
Cotton
Bale
8.00
7.97
-0.0749
Silage
Ton
0.00
0.00
0.0000
Hay
Ton
0.00
0.00
0.0000
Income/expense Indicators
-million dollars --
Crops --
Value of Production
100,530.10
134.90
276.93
Conservation Reserve
933.10
0.00
0.00
Payments
Production Flexibility
4,009.70
0.00
0.00
Payments
Total variable costs
55,037.70
448.40
940.42
Net cash returns
50,435.20
-313.50
-663.49
-- Livestock --
Value of Production
117,329.30
314.70
657.34
Total variable costs
93,549.60
372.50
757.15
Net cash returns
23,779.70
-57.80
-99.81
-- Crops and Livestock --
Value of Production
217,859.40
449.60
934.28
Total variable costs
148,587.30
820.90
1,697.57
Net cash returns
74,214.90
-371.40
-763.29
Welfare Measures
Producer Surplus
1,096,957
1,096,540
-888.81
Net farm cash returns
74,215
73,844
-764.24
Consumer surplus
822,239
821,865
-798.90
66
Item
Unit
2010 base level
$23/ton
change per $50
permit price
permit price
change¹
Consumer and producer
1,919,196
1,918,405
-1690.10
surplus
Revenue transfers out of
442
3,082
1511.33
agriculture
Net social benefit
1,919,196
1,919,129
-189.18
Net foreign surplus
54,409
54,281
-277.03
1 Amount by which the selected variable changes for each $50 change in carbon permit price.
2 USDA is prohibited from publishing cotton price projections.
67
Appendix 2. Energy Use in Agriculture
Agricultural energy uses comprise on-farm direct uses of fuels and electricity to operate
vehicles, machinery, irrigation, and drying systems; indirect uses of energy in manufactured
fertilizers and pesticides; and uses of energy in hired or purchased services. Energy is included
in smaller proportion in other expenses including commodity transportation, hired custom and
machine work, and purchased feed. Agricultural fossil fuel use peaked in 1978, declining in
response to the oil price shocks of the 1970s and early 1980s (TableA.1). By 1993, fossil energy
use declined by 25 percent, but electricity use increased by about 17 percent (ERS, 1997).
Major factors in agricultural use of refined petroleum products and electricity use are
planted acreage and irrigated acreage (ERS, 1997; and Uri and Gill; ). Irrigated land in farms
increased from 46.4 to 53.3 million acres between 1987 and 1996 (TableA.2). Planted acres in
1990-96 averaged 337 million acres with a low of 330 million acres in 1993 and a high of 346
million acres in 1996. More energy efficient diesel machinery and reduced tillage systems have
allowed diesel use to be maintained at about 1978 levels while reducing gasoline use by over
half. Estimated electricity use increases are consistent with increased irrigated acres. Uses of
nitrogen fertilizer, the most energy intensive nutrient, increased by about 10 percent,
phosphorous declined by a similar amount. Potash and pesticide use levels show little change
until 1994, with pesticides increasing by 14 percent in one year.
U.S. Farm Sector Income and Energy Expenses. U.S. agriculture commodity cash
receipts are about $203 billion (1996 through the 1998¹), about 53 percent from crops and 47
¹Values for 1998 are USDA-ERS forecasts.
68
from livestock (Table A.3). The crop proportion is slightly higher than the 51 percent share from
1989 through 1998. Energy related expenses are about $40-41 billion per year (1996 through
1998). The energy-related share of the U.S. farm sector cash expenses averaged about 24 percent
from 1989 through 1998, showing a slight increase since 1994. This increase is consistent with
the increases in planted and irrigated crop land.
Manufactured inputs include fuels, oils, and fertilizers and other agricultural chemicals.
Annual manufactured input expenses are around $29 billion (1996 through 1998). Manufactured
inputs accounted for about 17 percent of U.S. farm cash expenses from 1989 through 1998, and
with a slight increase since 1994. This increase is driven by rising expenditures for fertilizer and
pesticides. The direct energy share of cash expenses has declined slightly since 1994 to about
5.5 percent. Expenditures for other energy intensive inputs have averaged about $12 billion per
year since 1994. This category includes "machine hire and custom operations" and "marketing,
storage, and transportation."
Adjustments can be expected in input usage with long-run shifts in relative prices and
changes in technology. Machine hire and custom work can substitute for farm owned and
operated machinery and its attendant direct energy expenditures. Past and future shifts in custom
expenditures could be associated with greater efficiency in the use of machinery, labor, and
energy. The shift to reduced tillage has reduced direct energy expenditures and increased
pesticide expenditures. The extent of irrigated acres and quantity of irrigation water applied is
related to costs of pumping and the returns to irrigation, and over time efficiency gains have
occurred with irrigation (ERS, 1997).
Crop Enterprises. Expenditures for direct energy, chemicals, and on other energy
intensive inputs range between about 30 and 75 percent of total crop cash expenses (TableA.4).
69
As a share of total cash expenditures, this sum is quite stable across each crop's reporting
regions. Of three input groups, chemical expenditures show the least variation in expenditure
shares, followed by direct energy. Corn and wheat are cases in point, with significant variation
in direct energy and chemical expenditures, but with little variation in the energy-intensive share
of total expenditures.
Irrigation accounts for higher magnitude expenses and revenues for Plains States corn and
Pacific wheat, but the energy share of total cash expenses is similar to other regions. Revenues
can be affected by both yields and regional price variation. The regional variation in direct
energy and chemical expenditures and shares of total cash expenses reflect the differences in
production techniques and possibilities across the country. Further, the data presented are
regional averages--considerable variation would be expected within regions, driven by land
quality, farm type, land tenure and other factors. The regional stability of the share of direct,
chemical, and other energy including expenses of total cash expenses for each crop, is
hypothesized to reflect competitive profit maximizing relationships among commodity and input
prices and land productivity.
The complexity and the difficulty in using cost of production budgets and returns alone to
predict the effects of energy price increases on regional crop production is illustrated by corn,
wheat, and soybean production in the Southeast. The high Southeastern expenditures on
fertilizer and pesticides are offset by yields or prices, to generate average or higher ratios of
expenses to revenues for wheat and corn. While the ratio is higher than average for soybeans (at
least for 1996), Southeast soybeans are often double cropped with wheat in rotation with corn.
Further, the livestock industry in the Southeast and the eastern ports contribute to higher grain
prices than in the Midwest markets. Thus it is not at all clear from budgets alone what the effects
70
of higher energy costs will be on regional production patterns.
Livestock Enterprises. Energy related expenses as a share of total cash expenses range
between about 6 and 33 percent for livestock and poultry (Tables A.5). Energy related expenses
include expenditures on fuel, lubrication, and electricity; marketing and hauling; and custom
services and supplies. Feed expenditures, broken out separately in ERS cost of production
tables, range from 50 to 75 percent of total cash expenses. Broiler farms stand out with energy
expenses ranging from 28 to 33 percent of total cash expenses, attributed to heating and cooling
requirements for broiler houses. The energy share of hog expenses is 6 percent, but the animal
feed expenses are 73 percent of cash expenses. Hog feed is primarily composed of feed grains
and soybeans, among the highest in energy expenses.
Dairy, with cooling and milking equipment power requirements, follows with energy
shares averaging about 15 percent of total cash expenses. Northeast and Southeast energy shares
stand out at 19 percent, resulting from higher marketing and hauling expenses. Feed expenses as
a percent total cash expenses increase with reliance on feeding grains and concentrates as
opposed to forage, with the upper Midwest and Pacific regions below average. The Pacific
region stands out as well with lower direct energy expenditures, consistent with its lower feed
expenditures.
Cow-calf regional feed expenditure differences are mainly due to harvested forage and
pasture expenses, which in turn are related to direct energy, chemical and irrigation expenses.
Somewhat offsetting the South's lower feed expenditures is a higher marketing and hauling
expenditure. Similarly, lower direct energy expenses in the West are more than offset by higher
feed expenses. Noting the losses per bred cow in 1996 and the cyclical nature of the cattle
industry, the beef industry faces longer term competitive problems with respect to pork and
71
broilers as background for any potential energy increases (ERS, 1998).
72
Appendix 3, Table 1: Use of Energy Inputs in U.S. Agriculture; 1978 and 1990-94.
Year
Gasoline
Diesel
LP gas
Electricity
Nitrogen
Phosphate
Potash
Pesticide
billion gallons
billion
million pounds
kWh
1978*
3.6
3.2
1.3
47.6
10
5.1
5.5
0.29
1990
1.5
2.7
0.6
48.9
11.1
4.3
5.2
0.27
1991
1.4
2.8
0.6
47.9
11.3
4.2
5
0.27
1992
1.6
3.1
0.9
54.6
11.5
4.2
5
0.29
1993
1.4
3.3
0.7
55.6
11.4
4.4
5.1
0.28
1994
1.4
3.5
0.9
56.2
12.6
4.5
5.3
0.32
* 1976 pesticide value; 1980 electricity value.
Sources:
Electricity: estimated from farm expenditures data in USDA, ERS (1997; table 3.3.3, p.138) and
electricity price data for industrial users in USDOE, EIA (1996; table 8.11, p. 247).
All other inputs see USDA, ERS (1997, table 3.1.1, p. 100; table 3.2.2, p.119; and table 3.3.1, p. 136).
73
Appendix 3, Table 2: Factors in U.S. farm demand for refined fuel, electricity, fertilizer, and pesticides
Item
1978
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Cropland
million acres
Cropland used for crops \1
na
331
327
341
341
337
337
330
339
332
346
Irrigated cropland \2
50.3
46.4
na
na
na
na
49.4
49.8
51.8
52
53.3
Farm Fuel Prices, U.S. Ave. \3
dollars per gallon
Gasoline
0.6
0.92
0.93
1.05
1.17
1.19
1.15
1.14
1.08
1.11
1.26
Diesel
0.46
0.71
0.73
0.76
0.95
0.87
0.82
0.82
0.77
0.77
0.92
LP gas
0.4
0.59
0.59
0.58
0.83
0.75
0.72
0.78
0.72
0.73
0.8
cents per Kwh.
Electricity (Retail industrial rate) \4
2.8
4.8
4.7
4.7
4.7
4.8
4.8
4.8
4.8
4.7
4.6
Fertilizer 15
dollars per ton
Anhydrous ammonia (82%)
177
187
208
224
199
210
208
213
243
330
303
N solutions (30%)
118
109
137
142
132
138
141
137
137
169
182
Urea (45-46%)
169
161
183
212
184
212
198
202
207
266
278
Ammonium Nitrate (33%)
140
157
166
189
180
184
178
186
196
223
233
Ammonium Sulfate (21%)
109
144
140
154
154
151
151
157
170
182
184
Superphosphate (44-46%)
151
194
222
229
201
217
206
190
212
234
258
Potassium chloride (60% pot.)
96
115
157
163
155
156
150
146
146
155
153
Chemicals \6
index (1990-92 = 100)
Chemicals price indices
101
103
107
112
115
Herbicides
101
102
106
110
113
Insecticides
101
104
110
117
120
Fungicides and others
101
105
111
109
117
\1 USDA-ERS Ag. Resources and Environmental Indicators, 1996-97, Ag. HB 712 - Table 1.1.5 Major uses of cropland, U.S. 1986-96 p6.;
and Cropland Use in 1997, AREI update No. 5 Aug. 1997, Table 1.
\2 USDA-ERS Ag. Resources and Environmental Indicators, 1996-97, Ag. HB 712 - Table 2.1.3 Irrigated land in farms, by region and crop, selected years
1969-96, p.74.
\3 USDA-ERS Ag. Resources and Environmental Indicators, 1996-97, Ag. HB 712 - p. 137, Table 3.3.2 - Avg. U.S. farm fuel prices, 1974-95.
\4 Energy Info. Admn. Annual Energy Review - Table 8.11 Retail prices of Electricity Sold by Electricity Utilities, 1960-1996, p. 247.
\5 USDA-ERS Ag. Resources and Environmental Indicators, 1996-97, Ag. HB 712 - p.109, Table 3.1.8 - Average U.S. farm prices of selected fertilizers,
1960-96.
\6 USDA-ERS Ag. Resources and Environmental Indicators, 1996-97, Ag. HB 712 - p. 127, Table 3.2.6 Selected April pesticide prices, 1991-
1995.
74
Appendix 3, Table 3: Income statement and energy-related expenses for U.S. farm sector 1989-1998
Item
Unit
1989
1990
1991
1992
1993
1994
1995
1996
1997P
1998F
Ave.
St. Dev.
Cash income statement:
1. Cash receipts
$ Bil.
160.8
169.5
167.9
171.3
177.7
181.2
188.1
199.6
208.3
200.6
182.5
16.1
Crops 1/
$ Bil.
76.9
80.3
82.1
85.7
87.5
93.1
101.0
106.6
111.7
105.8
93.1
12.4
Livestock
$ Bil.
83.9
89.2
85.8
85.6
90.2
88.2
87.0
93.0
96.6
94.8
89.4
4.2
Livestock share
Pct.
52.2
52.6
51.1
50.0
50.8
48.6
46.3
46.6
46.4
47.3
49.2
2.5
2. Direct Government payments
$ Bil.
10.9
9.3
8.2
9.2
13.4
7.9
7.3
7.3
7.5
7.4
8.8
2.0
3. Farm-related income 2/
$ Bil.
8.6
8.2
8.2
8.2
9.0
9.2
10.1
10.9
11.8
11.5
9.6
1.4
4. Gross cash income (1+2+3)
$ Bil.
180.3
187.0
184.3
188.7
200.1
198.3
205.4
217.8
227.6
219.5
200.9
16.4
Cash expenses 3/
$ Bil.
127.5
134.2
134.0
133.6
141.2
147.6
153.6
161.4
166.9
166.2
146.6
14.7
Net cash income
$ Bil.
52.8
52.8
50.3
55.1
58.9
50.7
51.8
56.4
60.7
53.4
54.3
3.5
Farm income statement:
Total gross income 4/
$ Bil.
192.0
198.2
191.9
200.5
203.7
215.8
210.1
235.8
237.9
230.0
211.6
17.6
Total expenses
$ Bil.
146.7
153.4
153.3
152.9
160.5
167.4
174.0
182.3
188.0
187.4
166.6
15.5
Net farm income
$ Bil.
45.3
44.8
38.6
47.6
43.2
48.3
36.1
53.5
49.9
42.5
45.0
5.2
Energy-related Expenses
Manufactured inputs
Fuels and oils
$ Bil.
4.8
5.8
5.6
5.3
5.4
5.3
5.4
6.0
6.2
6.2
5.6
0.4
Electricity
$ Bil.
2.6
2.6
2.6
2.6
2.7
2.7
3.0
3.2
3.0
2.9
2.8
0.2
Direct Energy Expenses
$ Bil.
7.4
8.4
8.2
7.9
8.1
8.0
8.4
9.2
9.2
9.1
8.4
0.6
Share of Cash Expenses
Pct.
5.8
6.3
6.1
5.9
5.7
5.4
5.5
5.7
5.5
5.5
5.7
0.3
Share of Total Expenses
Pct.
5.0
5.5
5.3
5.2
5.0
4.8
4.8
5.0
4.9
4.9
5.0
0.2
Fertilizer & lime
$ Bil.
8.2
8.2
8.7
8.3
8.4
9.2
10.0
10.9
10.9
11.0
9.4
1.2
Pesticides
$ Bil.
5.0
5.4
6.3
6.5
6.7
7.2
7.7
8.5
8.8
8.8
7.1
1.4
Chemical Expenses
$ Bil.
13.2
13.6
15.0
14.8
15.1
16.4
17.7
19.4
19.7
19.8
16.5
2.5
Share of Cash Expenses
Pct.
10.4
10.1
11.2
11.1
10.7
11.1
11.5
12.0
11.8
11.9
11.2
0.6
Share of Total Expenses
Pct.
9.0
8.9
9.8
9.7
9.4
9.8
10.2
10.6
10.5
10.6
9.8
0.6
Total Manufactured Inputs
$ Bil.
20.6
22.0
23.2
22.7
23.1
24.4
26.2
28.7
29.0
28.9
24.9
3.1
Share of Cash Expenses
Pct.
16.2
16.4
17.3
17.0
16.4
16.5
17.1
17.8
17.4
17.4
16.9
0.5
Share of Total Expenses
Pct.
14.0
14.3
15.1
14.8
14.4
14.6
15.1
15.7
15.4
15.4
14.9
0.6
Other expenses
Machine hire & custom work
$ Bil.
3.4
3.6
3.5
3.8
4.4
4.8
4.8
4.7
4.9
4.9
4.3
0.6
Marketing ,storage, & transport.
$ Bil.
4.2
4.2
4.7
4.5
5.6
6.8
7.2
6.8
7.0
7.1
5.8
1.3
Total Other expenses
$ Bil.
7.6
7.8
8.2
8.3
10.0
11.6
12.0
11.5
11.9
12.0
10.1
1.9
Share of Cash Expenses
Pct.
6.0
5.8
6.1
6.2
7.1
7.9
7.8
7.1
7.1
7.2
6.8
0.8
Share of Total Expenses
Pct.
5.2
5.1
5.3
5.4
6.2
6.9
6.9
6.3
6.3
6.4
6.0
0.7
Total Energy Related Expenses
28.2
29.8
31.4
31.0
33.2
36.0
38.1
40.1
40.8
40.9
35.0
4.8
Share of Cash Expenses
Pct.
22.1
22.2
23.4
23.2
23.5
24.4
24.8
24.9
24.5
24.6
23.8
1.0
Share of Total Expenses
Pct.
19.2
19.4
20.5
20.3
20.7
21.5
21.9
22.0
21.7
21.8
20.9
1.0
P = preliminary. F = forecast.
1/ Includes commodities placed under CCC loans and profits made on loans redeemed.
2/ Income from custom work, machine hire, recreational activities, forest product sales, and other farm sources
3/ Cash expenses exclude capital consumption, perquisites to hired labor, and farm household expenses from total expenses.
4/ Total gross income includes gross cash income, nonmoney income, and value of inventory change.
Source: Adapted from Tables 29 and 34 Agricultural Outlook USDA-ERS March 1998 for 1989-1993, and ERS website July 1998 update for 1994-1998.
Appendix 3, Table 4: Cash Expenses that Include Energy for U.S. Field and Horticultural Crops, 1996
Commodity
Region
Direct Energy
Chemicals
Other Inputs \2
Dir., Chem., Oth.
T. Cash
Revenue
Expense
Percent
Percent
Percent
Percent
Expns.\1
/Revenue
$/plt.ac.
of total
$/plt.ac.
of total
$/plt.ac.
of total
$/plt.ac.
of total
$/plt.ac.
$/plt.ac.
Percent
Com
United States
21.14
12.9
82.95
50.7
9.76
6.0
113.85
69.5
163.77
388.73
42.1
Northeast
13.07
8.9
75.34
51.2
9.03
6.1
97.44
66.2
147.27
252.73
58.3
Southeast
15.38
8.7
97.86
55.6
4.23
2.4
117.47
66.7
176.07
385.29
45.7
North Central
13.98
9.2
83.15
54.4
9.1
6.0
106.23
69.5
152.74
370.55
41.2
Plains States
42.67
22.1
80.53
41.6
12.67
6.6
135.87
70.3
193.4
453.78
42.6
Wheat
United States
9.71
13.9
27.34
39.1
5.35
7.6
42.40
60.6
70.01
146.94
47.6
North Central
5.77
6.8
46.26
54.5
4.04
4.8
56.07
66.0
84.95
141.90
59.9
Southeast
6.51
6.9
45.63
48.6
7.35
7.8
59.49
63.3
93.97
219.66
42.8
Northern Plains
7.12
12.0
23.9
40.4
2.72
4.6
33.74
57.0
59.18
143.56
41.2
Cen.& So. Plains
10.95
17.5
19.78
31.6
7.79
12.4
38.52
61.5
62.59
105.09
59.6
Pacific
22.34
17.0
50.74
38.7
7.9
6.0
80.98
61.7
131.25
332.18
39.5
Soybeans
United States
9.45
11.8
35.4
44.3
3.65
4.6
48.50
60.6
80
256.36
31.2
North Central
8.22
10.5
35.88
45.7
4.04
5.1
48.14
61.3
78.54
265.55
29.6
Northern Plains
12.51
18.2
23.61
34.3
2.41
3.5
38.53
55.9
68.87
254.69
27.0
Southeast
10.55
10.7
50.35
50.9
2.38
2.4
63.28
64.0
98.88
214.76
46.0
Delta
14.06
16.3
30.49
35.3
3.88
4.5
48.43
56.1
86.37
232.47
37.2
Cotton
United States
35.67
11.9
97.51
32.6
71.76
24.0
204.94
68.6
298.78
383.84
77.8
Southeast
24.76
8.0
138.97
45.1
74.86
24.3
238.59
77.4
308.16
536.61
57.4
Delta
30.17
8.2
145.47
39.6
88.15
24.0
263.79
71.8
367.16
566.19
64.8
Southern Plains
39.33
18.4
50.1
23.4
41.12
19.2
130.55
61.0
214.04
189.19
113.1
Southwest
48.98
8.3
139.38
23.5
168.42
28.4
356.78
60.1
593.2
634.70
935
Rice
United States
73.03
19.7
123.96
33.4
75.71
20.4
272.70
73.4
371.61
592.70
62.7
Ark. Non-Delta
77.04
22.8
116.83
34.6
61.72
18.3
255.59
75.7
337.58
630.01
53.6
Miss. River Delta
77.36
24.3
116.44
36.6
46.97
14.8
240.77
75.7
318.2
588.32
54.1
Gulf Coast
69.03
18.7
120.87
32.7
70.39
19.0
260.29
70.4
369.79
543.08
68.1
California
65.96
13.1
150.81
30.0
144.81
28.8
361.58
71.8
503.27
744.96
67.6
Sorghum
United States
17.95
21.9
30.27
37.0
5.26
6.4
53.48
65.3
81.85
170.91
47.9
Central Plains
12.31
16.3
32.72
43.2
4.69
6.2
49.72
65.7
75.72
193.37
39.2
Southern Plains
25.24
28.1
27.11
30.2
5.99
6.7
58.34
65.0
89.76
141.80
63.3
Oats
United States
7.41
14.2
18.87
36.2
4.33
8.3
30.61
58.7
52.17
128.26
40.7
Northeast
12.38
15.1
33.26
40.7
4.91
6.0
50.55
61.8
81.77
125.37
65.2
North Central
4.19
8.2
21.38
42.0
5.75
11.3
31.32
61.6
50.85
119.06
42.7
Northern Plains
9.78
22.2
12.55
28.5
2.42
5.5
24.75
56.2
44.06
115.37
38.2
Peanuts
United States
40.31
11.6
143.83
41.6
25.73
7.4
209.87
60.6
346.1
635.14
54.5
VA NC
40.05
9.8
195.14
47.8
10
2.4
245.19
60.0
408.38
832:06
49.1
Southeast
29.7
8.2
170.14
47.0
27.13
7.5
226.97
62.6
362.3
680.56
53.2
Southern Plains
61.09
21.7
64.93
23.1
31.5
11.2
157.52
56.1
280.97
481.58
58.2
Sugar Beets
United States
41.64
9.6
144.8
33.3
42.15
9.7
228.59
52.5
435.18
746.61
58.:
Great Lakes
22.77
7.7
131.49
44.2
28.35
9.5
182.61
61.4
297.2
439.68
67.0
Red River Valley
21.87
6.7
112.8
34.7
24.88
7.6
159.55
49.0
325.43
698.52
46.(
Great Plains
53.53
11.1
167.75
34.8
38.86
8.1
260.14
54.0
481.49
692.29
69.
Northwest
95.71
14.0
208.57
30.4
49.18
7.2
353.46
51.6
685.53
1017.37
67.
Southwest
65.27
8.1
197.3
24.4
195.95
24.3
458.52
56.8
807.69
1246.62
64.1
Sugarcane
United States
29.80
4.3
135.26
19.6
70.30
10.2
235.36
34.1
690.16
979.40
70.
Florida
23.79
3.1
119.15
15.7
104.81
13.8
247.74
32.6
760.95
1040.40
73.
Hawaii
93.51
3.7
450.15
17.8
62.57
2.5
606.23
24.0
2526.63
2645.37
95.:
La/Texas
29.73
7.2
119.48
29.1
31.89
7.8
181.09
44.1
410.67
727.00
56.
$ mil.
percent
$ mil.
percent
$ mil.
percent
percent
$ mil.
$ mil.
percen
Horticultural
United States
2386
9.8
2275
9.4
2874
11.8
7535.31
31.0
24308
38497
63.
\I Total cash expenses for commodities include cash expenses as reported in ERS Cost of Production tables.
\2 Other expenses that embody energy include custom costs for all commodities, cotton ginning, rice and peanut drying,
and marketing, storage, and transport costs for horticultural products.
13 Expenses including energy as a proportion of cash expenses.
\4 Revenue per acre is yield times price. Revenue for horticultural farms is gross cash income, of which $38540.9 mil. (95 percent)
is generated by vegetable, fruit, greenhouse, and nursery sales.
Sources: USDA-ERS webpage, http://www.econ.ag.gov/briefing/fbe/car/car.htm), and USDA-ERS-RED-FSP.
76
Appendix 3, Table 5: Cash Expenses that Include Energy for U.S. Livestock Enterprises (1996) and Broiler Farms (1995)
Enterprise
Region
Fuel, Lub., & Elec.
Marketing
&
Hauling
Custom
Serv.
&Sup.
Energy\2
Animal Feed
Total Cash
Revenue
Expense
Share of
Expense
Share of
Expense
Share of
Share of
Expense
Share of
Expenses
Total
Total
Total
Total
Total
$ per
$ per
$ per
$ per
$ per
$ per
cwt. milk
percent
cwt. milk
percent
cwt. milk
percent
percent
cwt. milk
percent
cwt. milk
cwt. milk
Dairy
United States
0.53
4.6
0.80
7.0
0.42
3.7
15.2
7.53
65.5
11.49
14.78
Northeast
0.7
5.6
1.13
9.0
0.54
4.3
18.9
7.46
59.6
12.51
15.19
Southeast
0.34
2.6
1.49
11.2
0.65
4.9
18.7
8.12
61.2
13.27
17.41
Upper Midwest
0.62
5.5
0.50
4.5
0.34
3.0
13.0
7.17
64.1
11.19
14.74
Com Belt
0.58
4.7
0.74
5.9
0.38
3.0
13.6
8.35
67.0
12.47
14.88
Southern Plains
0.49
4.0
0.85
6.9
0.31
2.5
13.4
9.09
74.1
12.27
15.10
Pacific
0.28
2.8
0.83
8.2
0.40
4.0
15.0
7.25
71.9
10.08
13.89
$ per
$ per
$ per
$ per
$ per
$ per
bred cow
percent
bred cow
percent
bred cow
percent
percent
bred cow
percent
bred cow
bred cow
Cow-calf
United States
23
6.7
8.34
2.4
0.00
0.0
9.2
212.17
62.2
341.28
287.42
North Central
28.2
10.0
5.28
1.9
0.00
0.0
11.9
157.99
56.1
281.41
281.43
South
22.76
8.2
10.97
4.0
0.00
0.0
12.2
140.66
50.9
276.23
216.17
Great Plains
24.95
6.8
7.45
2.0
0.00
0.0
8.9
232.23
63.6
365.30
319.70
West
17.54
4.5
8.93
2.3
0.00
0.0
6.9
266.69
69.1
386.12
298.98
$ per
$ per
$ per
$ per
$ per
$ per
cwt. gain
percent
cwt. gain
percent
cwt. gain
percent
percent
cwt. gain
percent
cwt. gain
cwt. gain
Hogs
United States
1.83
3.8
0.59
1.2
0.51
1.1
6.1
35.48
74.1
47.86
60.16
North
1.84
3.8
0.56
1.2
0.47
1.0
6.0
35.62
74.3
47.97
59.58
South
1.78
3.7
0.70
1.5
0.64
1.3
6.6
34.98
73.6
47.50
62.12
$ per
percent
$ per
percent
$ per
percent
percent
$ per
percent
$ per farm
$ per farm
farm \4
farm 5
farm
farm 16
Broiler
Appalachia
9871
22.3
na
na
1450
3.3
25.6
na
na
44225
78543
Farms 13
Southeast
17731
28.1
na
na
3213
5.1
33.2
na
na
63055
93076
Delta
11024
26.0
na
na
2694
6.4
32.4
na
na
42325
77041
Other regions
8515
13.5
na
na
917
1.5
15.0
na
na
63027
95165
United States,
12529
23.4
na
na
2713
5.1
28.5
na
na
53446
84048
with gross cash
income ≥ $50,000
\I Total cash expenses for enterprises include cash expenses as reported in ERS Cost of Production tables for 1996.
12 Energy-related expenses as a proportion of cash expenses.
13 Broiler farm revenues are 1995 gross cash income, including other livestock and crop-related income.
Broilers comprise 74 percent of Appalachia gross cash income, 76 percent of Southeast, 89 percent of Delta, and 77 percent of U.S. farms with income over
$50,000.
\4 Broiler farm fuel, lub, and electricity includes telephone expenses.
15 Marketing and hauling is included as "Other variable expenses", defined as "Supply, transportation, storage, and geneeral business expenses, and registration
fees."
For the U.S. farms, "Other variable cost" is $2483 about 20 percent of fuel, lube. and electricity.
\6 Sufficient detail not available for feed cost presentation.
Sources: USDA-ERS webpage, http://www.econ.ag.gov/briefing/fbe/car/car.htm, and Perry, Janet, David Banker, Robert Green, Broiler Farms': Organization,
Management, and Performance, AIB 748, USDA, ERS, March, 1999, Table 10.
77
Appendix 3. USMP Regional Agricultural Model
The U.S. Regional Agricultural Sector Model (USMP) is designed for general purpose
economic, environmental, and policy analysis of the U.S. agriculture sector². USMP is linked
with regularly-updated USDA production practices surveys, the USDA multi-year baseline
(USDA, WAOB, 1997), and geographic information system (GIS) databases such as the National
Resources Inventory (USDA,NRCS). USMP predicts how changes in farm, resource,
environmental, or trade policy, commodity demand or technology will affect regional supply of
crops and livestock, commodity prices and demand, use of production inputs, farm income,
government expenditures, participation in farm programs, and environmental indicators (such as
erosion, nutrient and pesticide loadings, greenhouse gases and others). An agriculture sector
spatial equilibrium model (as described in McCarl and Spreen), USMP incorporates agricultural
commodity supply, use, and policy measures (House), as well as natural resource and
environmental impacts derived through biophysical models (Faeth).
Baseline validation; demand and supply response. USMP does not make dated forecasts
or projections. Instead, acreage, supply/use, prices, production practices, environmental loadings
and so forth are validated exactly to any USDA baseline year or recent historical year (e.g.
between 1988 and 2005) and corresponding geographic information. For example, for scenario
analysis with a 2001 base year, USMP's base U.S. corn acreage planted equals the USDA
2
USMP is designed and maintained by Robert House, Mark Peters, and Howard McDowell of the
USDA/Economic Research Service/Resource Economics Division. USMP is modeled in the General
Algebraic Modeling Language (GAMS) as a nonlinear programming problem with solutions obtained
using the MINOS nonlinear optimizer solver. USMP consists of some 2000 equations (of which 550 are
nonlinear) and 5400 variables (900 nonlinear). Links with geographic information system (GIS)
databases on the input data and output results sides of USMP further disaggregate the economic and
environmental impact analyses supported by USMP.
78
baseline's 2001 projection (80.5 million acres), and corn acreage in each model region/practice
strata is determined by share information from NRI and USDA Cropping Practices Survey (CPS)
regional data. From there, comparative static adjustments to the scenario "shock" (e.g. a policy
change) explain how the sector changes (through both aggregate indicators such as U.S. farm
income and detailed indicators such as acreage in corn-bean rotation using mulch tillage in the
central Corn Belt) between the base period and several years later when the change has worked
itself out and the sector returns to equilibrium. USMP acreage planted/commodity supply
response uses a positive mathematical programming (PMP) formulation (Howitt) with U.S.
aggregate commodity supply response calibrated to supply response elasticities from the
FAPSIM econometric simulation model (Green and Price)³. Responses in individual region,
tillage practice, rotation and other strata follow nested adjustment functions which are part of the
PMP calibration, and sum up to aggregate response. No bounds or flexibility constraints are
used.
Commodity coverage. USMP models production of 10 crops: corn, sorghum, oats, barley,
wheat, rice, cotton, soybeans, hay and silage. Fruits and vegetables are not modeled in USMP.
Some 16 primary livestock production enterprises are included, the principal being dairy, swine,
beef cattle, and poultry. USMP commodity coverage comprises about 75 percent of the value of
U.S. agricultural production, about 55 percent of the value of crop production, and about 95
percent of the value of livestock and poultry production (USDA, ERS, 1999). Several dozen
processed and retail products are included in the model structure, the principal being dairy
³The Food and Agricultural Policy Simulator (FAPSIM) is an annual econometric model
of the U.S. farm sector, designed and maintained by J. Michael Price of the USDA's Economic
Research Service.
79
products, pork, fed and nonfed beef, poultry, soy meal and oil, livestock feeds, and corn milling
products. Additionally, the model incorporates domestic use, imports, exports, and
inventory/stock product markets. USMP includes government conservation, acreage, price, and
income programs. Production, consumption (demand), trade, and price levels for crop and
livestock commodities and most processed or retail products are endogenously determined within
the model structure with domestic consumption, commercial stock, export and other demand
elasticities from the FAPSIM model.
Integrated economic and resource/environmental analysis. USMP's crop production
enterprises include both economic items (e.g. yield, nitrogen cost, etc.) and environmental
indicator coefficients corresponding to the specific rotation and tillage practices (e.g. soil
erosion, nitrogen leaching, etc.). Economic coefficients in the enterprise budgets were developed
from USDA data including the National Resources Inventory, Cropping Practices Survey
(USDA, ERS, 1992), the Farm Costs and Returns Survey (FCRS) and the Agricultural Resources
Management Survey (ARMS) (USDA, ERS), and calculations (of e.g. machinery costs) standard
to crop budget generators. Most environmental measures were estimated using the USDA
Erosion/Productivity Impact Calculator (EPIC) model (Williams et al.) For each "baseline"
solution or alternative scenario, the model tallies associated levels of selected agricultural
environmental indicators and acreage under various rotation/tillage practices. Impacts are
determined within USMP for the national level, 10 farm production regions, and 45 land resource
regions. Environmental impacts, using Geographic Information System databases such as the
National Resources Inventory, are further disaggregated depending on the analysis.
USMP has been applied to project the effects on U.S. national and regional agriculture of
changes in export levels and variability (Miller et al.), trade agreements (Burfisher et al.),
80
imports (Spinelli et al.), input taxes (Peters et al.), irrigation policy (Horner et al. ), ethanol
production (House et al. ), wetlands policy (Heimlich et al. 1997a), and various other policy and
program scenarios.
Crop System Biophysical Calibration. Crop system calibration is performed to ensure that
the EPIC simulations of each crop system in the model correctly represent yield and other
characteristics. Representative soil type and weather conditions are inputs to the biophysical
model, as are the crop(s) grown, multi-year rotation of crops, and cultural practices of
production. A representative soil was selected for each region from the NRI and Soils5
databases using a multidimensional similarity measure to regional average Universal Soil Loss
Equation variables capturing slope, hydrological, and erodability characteristics. Representative
weather conditions are specified as distributional information on temperature, rainfall, and other
variables (NOAA). County yield data for the 10 crops are aggregated into the 45 regions to
estimate average crop yields (USDA, NASS).
Each crop system is specified as a sequence of crops with dated field operations including
cultivation, planting, harvesting, and application of specific fertilizer formulas and pesticides.
Biological parameters in the biophysical are validated in each production region to ensure
calibration of the model's simulated yield to regional yield statistics and to ensure the yield-
nitrogen response is consistent with observed nitrogen application rates and rational use of
nitrogen. The 60-year average results of the calibrated EPIC simulations are entered as
environmental coefficients for the crop system in the USMP system budget.
81
eiaanal4.924
Page 1
Talking Points on EIA's Analysis of Implementation of the Kyoto
Protocol
September 1998
The EIA Analysis Fails to Model the Kyoto Protocol's Flexibility
The EIA analysis fails to model international trading. EIA's model is not
capable of modeling international emissions trading, even though this is a
critical feature in reducing the cost of compliance for the United States and
other countries. By contrast, the Administration explicitly modeled
international trading, as has every modeling team participating in the exercise
assessing Kyoto conducted under Stanford's Energy Modeling Forum --
which includes virtually all of the leading energy economic modelers in the
world. These models have demonstrated that international trading among
industrialized countries could lower costs of emissions reductions by as much
as half.
EIA does attempt to include scenarios which assume an amount of domestic
reductions intended to mirror the level of domestic reductions implied in the
model used by the Administration. However, these EIA scenarios still
overstate the cost of permits because they fail to take into account the way
that an international market, bidding to a single international permit price,
lowers cost.
The EIA analysis fails to account for all six types of greenhouse gases. The
EIA study assumes that the United States would achieve its target only
through carbon dioxide reductions. In fact, the Kyoto Protocol covers all six
major greenhouse gases, and permits countries to achieve their targets
through reductions made in any of these gases. This flexibility allows
countries and companies to make reductions in the most cost-effective
manner possible, reducing the cost of compliance.
EIA Assumes Firms Take Little or No Action to Address Climate Change before
2005
EIA assumes most firms do not anticipate climate change policies. In EIA's
study, most businesses do not take action to address climate change until
2005, and therefore only have a short time until the 2008-2012 budget
window to reduce emissions. Studies have demonstrated that the amount of
lead time a company takes has dramatic economic implications. For example
with EIA's model, a 5-year "ramp-up" (starting in 2005) would result in
economic costs 65% greater than that associated with a 10-year "ramp-up"
(starting in 2000). Thus, EIA's assumption that many businesses would fail
to plan for the future results in higher projected costs.
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Already businesses are taking action to address climate change. For
example, on September 18, British Petroleum announced its plan to reduce
emissions of greenhouse gases worldwide by 10% below 1990 levels by the
year 2010. In July, United Technologies announced their plan to reduce its
worldwide energy consumption by 25% by the year 2007.
The EIA Analysis Does Not Include Policy Elements That Will Lower Costs
In the Administration's analysis, additional elements of policy were
recognized as having the potential to significantly decrease the costs of
compliance and increase the amount of reductions that might be
accomplished at home. These policies were not factored into the illustrative
model the Administration cited, but were qualitatively taken into account in
reaching the conclusion that the United States could meet its Kyoto target
for a relatively modest cost. The EIA analysis, however, ignores elements
such as forestry activities (covered under the Kyoto Protocol) and the
Administration's electricity restructuring proposal, which could significantly
lower compliance costs.
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
CHIEF OF STAFF
September 15, 1998
Dear Senator Hagel:
I am writing to provide information that is responsive to a question in your September 9
letter to Under Secretary of State Eizenstat regarding the economic assumptions the
Administration used during the Kyoto Protocol negotiations. Because you have asked specific
and technical questions about economic analysis conducted by Council of Economic Advisers
(CEA) staff, the State Department forwarded your request to CEA to provide answers.
In your September 9 letter, you asked for the model or analysis used during the
negotiations in Kyoto. During the Kyoto Conference, CEA staff worked with Treasury staff in
providing economic analysis used by the U.S. delegation.
In conducting this analysis, CEA drew from modeling results derived from the Second
Generation Model (SGM). CEA developed cost curves for Annex I countries and five
developing country regions from SGM model outputs for carbon dioxide and assessed the
marginal cost of compliance based on required emissions targets necessary to comply with
various targets under consideration. (The approach used is comparable to the methodology used
for the illustrative modeling analysis in the Administration Economic Analysis.)
Most analyses focused on the economic effects of various trading regimes. For example,
we assessed the permit prices and efficiency losses associated with constraints on purchasing
permits as well as with constraints on selling permits. These analyses provided results for the
United States, and in most cases, results for all other Annex I countries (or regions) represented
in SGM. Further, we assessed the economic implications of an umbrella trading group, with and
without developing country participation through "joint implementation" (as CEA termed it
during Kyoto). We considered permutations that included both trading constraints and variations
of umbrella trading that provided more information on the economic effects of these proposals.
Finally, there were some analyses that considered various trading arrangements with different
emissions targets.
CEA staff have compiled the memoranda, tables, and modeling data produced by CEA
staff for use by the U.S. delegation during the Kyoto negotiations. Given your specific interest in
the economic assumptions used at the Kyoto negotiations and your important role as a member
of the Senate Observor Group on climate change, we are willing to make these materials
available to you or your staff. In the event that these materials reflect internal policy
deliberations or ongoing international negotiations, we are willing to make appropriate
accommodations for you to review the materials while protecting the Executive Branch's interest
in maintaining confidentiality in the policymaking process.
If you or your staff are interested in reviewing these materials, please ask your staff to
contact me at (202)395-5084.
Sincerely,
Micale Jan Jen
Michele Jolin
The Honorable Chuck Hagel
Chairman
Subcommittee on International Economic
Policy, Export and Trade Promotion
Committee on Foreign Relations
United States Senate
Room 450, Dirksen Senate Office Building
Washington, D.C. 20510-6225