The Role of Greenhouse Gas Offsets for Agriculture - Part 1

AgMRC Renewable Energy Newsletter
February 2010

Don Hofstrand
Co-director
Agricultural Marketing Resource Center
dhof@iastate.edu

 

Concerns about climate change and the impact it may have on the world’s economy and society have led to efforts to mitigate its impact by controlling greenhouse gas emissions.  Several gases have been identified as drivers of the warming of the earth. These greenhouse gases are:

• Carbon Dioxide (CO2) – The major greenhouse gas.  Although it occurs in large quantities in nature, its concentration in the atmosphere increases primarily through the burning of fossil fuels.  It stays in the atmosphere for a very long period of time.  So, reducing emissions does not result in lower levels of atmospheric carbon dioxide.  It simply reduces the rate of increase.

• Methane (CH4) – Greenhouse gas 21 times more powerful than carbon dioxide.

• Nitrous Oxide (N20) – Greenhouse gas 310 times more powerful than carbon dioxide.

• Hydrofluorocarbons – A variety of manmade gases that are very powerful greenhouse gases but exist in the atmosphere at very low concentrations.

Agriculture currently emits significant quantities of carbon dioxide, methane and nitrous oxide.  

Controlling the build-up of greenhouse gases in the environment can be accomplished by one of three methods:

• Regulation – Regulating industries that emit greenhouse gases.

• Cap and Trade – Capping the emissions of emitting industries and allowing these industries to meet their cap requirements by purchasing greenhouse gas offsets.

• Tax – Taxing greenhouse gas emissions.

In 2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency (EPA) is responsible for regulating greenhouse gas emissions through the Clear Air Act (CAA).  With EPA regulations, it appears as though many agricultural production businesses would come under EPA’s regulatory authority.  Also, agriculture would not be allowed to create greenhouse gas offsets that could be sold to other regulated industries.  There are currently efforts by some congressional members to remove EPA’s authority to regulate greenhouse gas emissions.

Controlling greenhouse gases emissions through climate change legislation is an alternative to EPA regulation. The U.S. House of Representatives has passed legislation titled the American Clean Energy Security Act (H.R. 2454) that focuses on reducing greenhouse gas emissions through a cap and trade system.  Although the U.S. Senate has worked on similar legislation, as of the date of this article it has not been voted on.

The House legislation (1) sets greenhouse gas emission target reductions of 42 percent (below 2005 levels) by 2030 and 83 percent by 2050.  To meet these targets, emitting industries like oil refineries, electric utilities and others would be required to reduce their emissions of greenhouse gases, mainly carbon dioxide, over time.  Companies in these industries have the choice of either reducing their own emissions or paying someone else to reduce their emissions.  The cap and trade system establishes the mechanics of this process. 

Production agriculture is not included as one of the “capped” industries in this legislation.  So there is no penalty for agriculture’s greenhouse gas emissions.  Moreover, agriculture has the opportunity to provide greenhouse gas “offsets” that can be sold to company’s in capped industries like electric utilities and oil refineries. 

Greenhouse gas offset mechanics

Offsets are verifiable greenhouse gas reductions created by a business (e.g. the agriculture sector) that can be sold to a business in a capped industry and used by that business as a greenhouse gas reduction in meeting its emissions cap.  These offsets act as a “credit” to be used in meeting the regulated entity’s emissions reduction threshold.  

The mechanics of how an offset program would work are uncertain.  However, if offset policies and procedures were enacted similar to those outlined in H.R. 2454 (1), they would look something like the following.  In general, the procedures would allow the issuance of “offset credits” to qualifying offset projects for the reduction or avoidance of greenhouse gas emissions or the sequestration of greenhouse gas emissions.  However, these emission reductions must be in addition to the level of current activities and must be verifiable.  An Advisory Board is established and composed of individuals adept at evaluating scientific and technical information to provide advice to the governmental decision makers.  

To ensure that the reductions actually occur, a methodology would be established that addresses the following issues:

1. The government, along with input from the advisory board, creates a list of eligible types of projects that can receive offsets.  This list is revised periodically.

2. Baselines levels of current emissions from the eligible activities are established.  The amount of emission reductions from this baseline level represents the reductions that qualify as offsets.

3. Specific metrics and monitoring protocols are established for the various types of activities.  These metrics and protocols including accounting for the uncertainty of any “leakage” that may occur from this activity.

4. In addition, procedures will be established to account for any “reversals” of emission reductions, avoidance or sequestration.  To accomplish this, a portion of the offsets may be held in reserve in case a reversal occurs.

5. One offset credit will be issued for each ton of carbon dioxide that is reduced, avoided or sequestered.  Other greenhouse gases offsets will be computed on a carbon dioxide equivalency based on their potency as a greenhouse gas relative to carbon dioxide.  For example, methane is 21 times more powerful greenhouse gas as carbon dioxide, so one ton of methane will receive 21 offset credits. Likewise, nitrous oxide is 310 times more powerful, so one ton of nitrous oxide will receive 310 offset credits.

6. The offset credits must be fungible, meaning that each credit is identical so that credits can be aggregated and/or separated in a manner similar to fungible commodities like corn and soybeans.

Energy prices

Under any of the above methods of controlling greenhouse gas emissions described above, U.S. energy prices will increase due to the increased cost imposed on the energy industries that use fossil fuels.  Agriculture is an energy intensive industry using a variety of fossil fuel based energy sources.  Examples are gasoline and diesel fuel to propel machinery and equipment, natural gas to make nitrogen fertilizer, propane to dry grain and electricity used for a variety of farmstead activities.

Due to agriculture’s energy intensive nature, controlling greenhouse gas emissions by either of the means above will result in increases in the cost of producing crops and livestock as discussed in AgMRC Renewable Energy Newsletter article Impact of Cap and Trade Legislation on U.S. Agriculture.  Although studies differ as to the size of the energy price increases, they all indicate that the increase will be modest in the early years but increase in subsequent years.  Much of this increase will eventually be passed on to consumers. 

Regulation

Production agriculture, under a system of controlling emissions through EPA regulation, may suffer from increased regulatory responsibility and decreased net returns.  Regulation imposed through the CAA involves permitting and control requirements.

Permitting – USDA (2) estimates that many farming operations that are not currently subject to permitting requirements would come under this requirement.  It further states that the CAA’s 100-tons-per-year emissions permitting threshold may even include smaller agricultural operations.  Imposing costly and time consuming requirements on these operations would be burdensome.  In addition, it would be an inefficient method of controlling emissions.  

Control – Imposing requirements to control all of the various sources of greenhouse gas emissions of production agriculture would be difficult.  Although some sources could be controlled, other emissions sources, many of them from natural interactions, would be difficult to calculate and control with current technology.  Examples include methane emissions from the digestive process of cattle and nitrous oxide emissions from tilling the soil.   

Economic impact – In addition to the regulatory impact, production agriculture would suffer from higher production costs due to higher energy prices, as described above.  However, agriculture would not be eligible for income from the sale of emission offsets.

Results from research conducted the University of Tennessee (3) are shown in Table 1. The baseline net return is a projection of the cumulative returns from 2010 to 2025, assuming the Renewable Fuel Standard under EISA continues in place.  The regulation and cap and trade scenario results show how the baseline results would change with the implementation of these alternatives.

Greenhouse gas regulation through EPA would lower net returns for production agriculture (about four percent) during the 2010 to 2025 period as shown in Table 1.  Average returns for six of nine crops analyzed would be reduced from the baseline level. Net carbon emissions from agriculture would be reduced by about 24 percent.
 

Table 1. Comparison of EPA Regulation and Cap and Trade Legislation with Offsets to Baseline (accumulated values for 2010 - 2025)
Scenario	Net Returns (billion $)	Net Carbon Flux * (mil. metric tons)
Baseline	$4,067	1,820
EPA Regulation	3,912	1,388
Cap and Trade with Offsets	4,276	1,357
* Net carbon flux is the net amount of carbon leaving the system.
Source: Analysis of the Implications of Climate Change and Energy Legislation to the Agricultural Sector, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November 2009.

Cap and trade with offsets

Production agriculture, under a system similar to the U.S. House Legislation, would be eligible for the sale of agricultural generated greenhouse gas offsets to capped industries.  A variety of studies of the value of the offsets to the agriculture sector have been conducted.  Some of them are discussed here.  Additional studies will be forthcoming in the future.

An example analysis is The University of Tennessee research (3) that analyzed the economic impact on production agriculture of a variety of combinations of agriculturally based greenhouse gas offsets.  The scenario presented here includes the following offset sources. The price of carbon dioxide was assumed to be $27 per ton before discounts.  

A key variable in determining the impact of an offset program is the number and types of offsets available.  Any legislation should be flexible enough to include a variety of offset programs as long as they are verifiable and meet the offset requirements. The assumed discount for each source is also shown. 

• Methane capture – An example, is the anaerobic digestion of livestock manure – 20% discount due to the initial cost of verification, low ability for aggregation and high monitoring and documentation cost.

• Afforestation – Planting trees to sequester carbon on land where trees have not existed before – 30% discount due to the cost of quantification and verification and the danger of leakage and reversals.

• Conservation tillage – Tilling the soil in a manner that reduces the release of organic matter carbon – 40% discount due to uncertainty of duration and permanence.  The carbon sequestration value of conservation tillage is being challenged as discussed in AgMRC Renewable Energy Newsletter article Crop Residue – A Valuable Resource.

• Bioenergy crop production – Due to their deep root structure and low input requirements, herbaceous dedicated perennial energy crops contribute significantly to sequestering carbon and reducing GHG emissions from agriculture – 20% discount due to quantification and verification costs.

• Grassland sequestration

Biomass sources for offsets included corn grain, soybeans, crop residues, switchgrass, hybrid poplar, willow, wood resides and manure.  Crop residue removal was limited to an amount that would not reduce soil organic matter.  This is an important factor in crop residue management as discussed in AgMRC Renewable Energy Newsletter article Crop Residue – A Valuable Resource.

As shown in Table 1, cumulative net farm returns increased (5 percent) and net carbon emissions decreased (25 percent) under the cap and trade scenario. Improvements under cap and trade occur for all crops studied except rice.  As shown in Table 2, the greatest increase in net crop returns and net offset returns is from energy crops. 

Table 2. Average Change in Net Returns from Cap and Trade with Offsets, by Crop (million dollars) (2010 - 2025)
Crop	Baseline Net Returns *	Average Change in Crop Returns	Net Offset Returns
Corn	$31,713	$1,937	$131
Wheat	7,726	210	91
Soybeans	21,736	680	196
Energy Crops	737	4,764	819
* Includes the renewable fuels standard of the Energy Independence and Security Act of 2007.
Source: Analysis of the Implications of Climate Change and Energy Legislation to the Agricultural Sector, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November 2009.

In addition to the crop returns listed above, net carbon payments to livestock producers from methane capture was estimated at $120 million for hogs production and $208 million for dairy production by 2025.

The beef industry is impacted by reduced pasture acreage.  Regardless of whether the shortfall is made up by increased forage productivity on the reduced acres or reduced beef cattle numbers, the impact does not cause major disruptions in the industry.

Research conducted at Texas A&M University and Duke University (4) came to a similar conclusion that a properly constructed cap and trade system with a carbon offset program would result in a net economic gain for agricultural producers.  However, their research showed that the majority of the offset payments would come from afforestation and forest management.  Afforestation is the red portion of the bar shown in Figure 1.  It would be responsible for at least half of the offset payments.

Figure 1.  Annualized GHG offset payments across mitigation schemes to forestry and agricultural sectors.
 
Source:  The Effects of Low-Carbon Policies on Net Farm Income – Working Paper, Agrilife Research and Extension, Texas A & M University; and the Nicholas Institute for Environmental Policy Solutions, Duke University, NI WP 09-04, September, 2009.  

Afforestation (growing trees on land that previously did not have trees) is a way of sequestering carbon due to the carbon stored in the tree.  Much of the tree plantings could occur on cropland and pastureland. So, it has the potential to undermine the production capacity of the agriculture sector.  Also, there is the potential of other land use changes.  These will be addressed in “Part 2” of this article that will appear in next month’s newsletter.

References

1. American Clean Energy Security Act of 2009 (ACES), H. R. 2454.  

2. EPA --Advance Notice of Proposed Rulemaking: Regulating Greenhouse Gas Emissions under the Clean Air Act

3. Analysis of the Implications of Climate Change and Energy Legislation to the Agriculture Sector, Bio-Based Energy Analysis Group, Agricultural Policy Analysis Center, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November, 2009

4. The Effects of Low-Carbon Policies on Net Farm Income – Working Paper, Agrilife Research and Extension, Texas A & M University; and the Nicholas Institute for Environmental Policy Solutions, Duke University, NI WP 09-04, September, 2009. 

5. Market Impact of Domestic Offset Programs, Working Paper 10-WP 502, Center for Agriculture and Rural Development, January 2010