Beyond Offsets; Why the Benefits to U.S. Farmers from Climate Legislation Outweigh Costs

This week, the Heritage Foundation once again used its highly inflated estimates of carbon allowance prices under the American Clean Energy and Security Act (ACES) to make this statement about costs to farmers:

"The Heritage Foundation's Center for Data Analysis estimates that the allowance price (in 2009 dollars) will be just under $140/ton in 2035...So if 'other ag' and 'animal waste' [the two ag offset categories for which EPA provides supply curves] add up to 15 million tons per year and the allowance price is $140, then the total offset revenue going to farmers is $2.1 billion-and that's assuming no cost of creating the offset. Compare $2.1 billion in offset revenue to $29 billion of lost farm income...Just this component of lost farm income is over ten times the offset revenue."

A price of $140/ton is wildly out of line with two of the most recent and credible analyses of ACES by the EPA (here), which reported allowance prices of $13/ton in 2015 and $16/ton in 2020, and the Congressional Budget Office (here), which estimates allowance prices would rise from about $15/ton in 2011 to about $26/ton in 2019. For a full critique of the Heritage Foundation's May 13, 2009 memo on ACES, see my colleague Laurie Johnson's blog entitled A Heritage of Shame: The Heritage Foundation's Economic Analysis of the Waxman-Markey Bill. 

What the Heritage Foundation gets right is that according to EPA and others, actual supply of agricultural offsets will likely be much smaller than previously believed. However, by focusing exclusively on offsets, it misses the larger story around climate legislation and the ag sector-that though the sale of offsets will create a new source of farm income, offsets are only a small fraction of the benefits that farmers stand to see from climate legislation. More important than the creation of an offsets market, a cap and trade program will speed the expansion of the renewable energy market, making energy sources like wind and biomass competitive with fossil fuels. As these technologies reach commercial scale, farmers are in a unique position to reap significant gains-gains that will greatly outweigh any increases in fossil energy costs.

Now a few more reality checks on prices. There is little question that energy prices have a direct impact on farmers' production costs, from fertilizer to transportation. However, we've already seen that although prices do rise, the effect is significantly smaller than the Heritage Foundation suggests, and especially benign compared to the price volatility in the markets for key farm inputs experienced just a year ago, when, for example, the year-over-year price of natural gas-used to produce ammonia, the main input in all nitrogen fertilizers-increased more than 65 percent. 

Moreover, the Heritage Foundation's claims about cost increases neglect three key factors: first, they assume no change in energy consumption from business-as-usual (BAU) levels; second, they assume no change in the composition of energy used on farms; and finally, they ignore the ability of farmers to pass through some portion of their increased costs on to consumers.

In reality, there is a range of energy efficiency options open to farmers, with over $1 billion in potential savings according to the American Council for an Energy Efficient Economy. Under ACES, farmers would be eligible for federal tax credits for energy efficient upgrades to help with upfront implementation costs.

Both livestock and crop farmers can also avoid increased electricity costs by harnessing energy readily available on their farms. For example, by installing solar panels on the roofs of their homes or barns, farmers can lock in today's electricity prices into the future. For livestock and dairy farmers, biogas recovery systems offer two key benefits under a cap: direct revenue from the sale of offsets for reductions in GHG emissions (with a total value of roughly $60 million according to the EPA) and a source of on-farm energy for heat and electricity, which could help mitigate any increases in electricity costs (EPA estimates that biogas recovery systems at swine and dairy farms have the potential to generate up to 6 million megawatt-hours of electricity per year or roughly 15% of ag sector consumption). Even if only half of this potential is realized, combined revenues and savings could be upwards of $200 million in 2020.

Finally, farmers will be able to pass through some portion of their increased costs to consumers. (It is important to note that ACES sets aside 15 percent of allowance value annually to protect low-income households from increases in the costs of energy and energy-intensive goods and services, including food. According to the Center on Budget and Policy Priorities, ACES will fully offset the average cost increase for low-income consumers. This low-income assistance is in addition to relief that would be provided to all consumers, regardless of income).

A carbon cap would also bring farmers significant indirect benefits in the form of avoided volatility in the energy markets. A well-regulated carbon market will reduce dramatic fluctuations in energy prices, thus removing much of the related risk and uncertainty farmers have experienced in recent years. In addition to providing meaningful guidelines for the carbon trading markets, the ACES bill would dramatically improve transparency and close many of the regulatory loopholes used by speculators to manipulate energy prices. For more on the market regulation provisions in ACES, see my colleague Andy Stevenson's blog entitled Climate Bill Puts Speculators on Notice.   

Finally, in a carbon-constrained world, farmers and other landowner will have access to increasing direct incentives to set aside marginal lands for their climate benefits and will see the value of their land increase as land becomes an ever scarcer resource. This in turn will raise land rents, decrease the amount of land used to produce crops and thereby raise the price of crops and other agricultural commodities, further benefitting farmers. For a global analysis of land use, see this recent report by the Pacific Northwest National Laboratory.