This week, Kansas State University released its review of six recent economic studies that examine the cost-benefit impacts of the House-passed American Clean Energy and Security Act (H.R. 2454, a.k.a. ACES) on the domestic agricultural sector. The review provides a summary of each of the studies’ assumptions, analytical methods, and major findings and their implications. Though the studies vary according to analytic framework, economic performance metric, geographic and economic scope, degree of disaggregation across agricultural sub-sectors, and timeframe of analysis, the Kansas State reviewers are able to conclude:
Overall, the research suggests U.S. agriculture has more to gain than lose with the passage of H.R. 2454. The bill specifically exempts production agriculture from emissions caps, provides provisions to ease the transition to higher fertilizer prices and fosters the development of carbon offset markets which likely will enhance agricultural revenues.
The Kansas State assessment identifies direct and indirect cost impacts for the agricultural sector including increases in the price of fossil energy-intensive inputs such as diesel, natural gas, gasoline and electricity, as well as fertilizer and other farm chemicals. The report, however, correctly notes that farmers will be able to adapt to changing market conditions, as they have done for centuries, and mitigate some of these price impacts by substituting lower-cost inputs, shifting cropping patterns, and adopting new technologies. [Though not specifically addressed in the report, the American Council for an Energy-Efficient Economy (ACEEE) estimates that improvements in on-farm energy efficiency alone could generate savings upwards of $1 billion a year for farmers. This means $450 in direct savings for an average 418 acre U.S. farm].
The report seriously considers the need to consider both costs and benefits to agriculture from cap and trade legislation, stating:
Although changes in costs and revenues are important economic metrics, we believe that the change in net income from crop and livestock production is the best economic metric for assessing the impact of H.R. 2454 on agriculture. [emphasis in bold mine]
The need for comprehensive analysis seems obvious but is totally missing in the studies most frequently cited by ACES’s opponents, who continue to focus exclusively on increases to fossil energy costs, erroneously concluding that cap and trade will financially devastate farmers (see my previous blog on this here).
The review examines potential gains to agriculture from climate legislation, citing new sources of revenue from the sale of carbon offsets in a federal offsets market and increased demand for bioenergy driven in part by a Renewable Energy Standard (RES)--both new markets which ACES would establish. The report states that, in both cases, financial benefits would accrue to farmers since the agricultural sector will be a main source of domestic offsets—through changes to agricultural practices and land use that either directly reduce greenhouse gas emissions or enhance carbon sequestration—and feedstocks for bioenergy production. The Kansas State report also highlights the positive impacts ACES will have on land value, benefitting farmers and other landowners.
The analysis additionally touches on the impacts of ACES on the price of fertilizer—a major fossil energy-intensive input in farm production. Climate legislation opponents cite increases in fertilizer prices—driven by increases in natural gas prices as a result of a declining cap on greenhouse gas emissions—as a principle reason why ACES will hurt farmers, raise the costs of food production and thus, food prices. The report, however, correctly points out that while most of the indirect energy price increases will be felt immediately, fertilizer costs will be largely unaffected in the short and medium-term of the cap and trade program. This delay occurs because ACES includes provisions to ease the transition for energy- intensive, trade-exposed (EITI) entities covered by the cap, including nitrogen fertilizer manufacturers. This EITE assistance will be gradually phased out through 2025, giving farmers time to adapt their production practices. The report concludes that the “analyses that do not include the impact of EITE provisions may overstate the short-run cost impacts [of climate legislation]”, and based on USDA’s analysis, “the EITE provisions are very favorable to the agricultural sector in the short run”.
It is likely that most of the studies the Kansas State authors examined overstate ACES’s cost impacts on agriculture by not considering input substitution and technology adoption effects—i.e. assuming no change in on-farm practices in response to changing market condition. The studies also likely understate the legislation’s potential benefits by focusing exclusively on opportunities in the offsets and bioenergy markets without considering the full suite of new income opportunities farmers will see under ACES from expanded markets for renewable energy—for example, from leasing their land for wind turbines. The Kansas State review, however, does recognize that any analysis of the climate legislation’s impacts on the agricultural sector is incomplete if it fails to look at changes to net farm income, including costs and benefits. And the report concludes that U.S. farmers will see net gains from the passage of ACES.
For a more detailed analysis of opportunities for the agricultural sector under ACES, see NRDC’s Fact Sheet entitled Opportunities for Agriculture: How Energy and Climate Legislation Will Help Farmers Cut Energy Costs and Raise Farm Income.