The Role of Greenhouse Gas Offsets for Agriculture - Part II

AgMRC Renewable Energy Newsletter
March 2010

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

In last month’s article we discussed alternatives for controlling greenhouse gas emissions and their impact on the agriculture sector.  University of Tennessee research indicates that controlling greenhouse gases through regulation (similar to that expected under EPA) would reduce net farm income and impose additional permitting and regulatory requirements on the sector (2, 3).  However, the same study (3) indicated that properly designed cap-and-trade legislation that allows for the creation and sale of greenhouse gas offsets (similar to the legislation passed by the U.S. House of Representatives -- H.R. 2454 (1)) would increase net farm income.  This conclusion was supported by research at Texas A & M and Duke Universities (4).

In addition to net farm income impacts, the studies also focused on the role these emission control alternatives may have on land use changes.  Farmland diverted from agricultural production to greenhouse gas sequestration reduces the production capacity of the agricultural sector for food production.  In essence, it could expand the current “food versus fuel” debate to “food versus fuel versus carbon”.

Afforestation of cropland

Concerns have been expressed that an offset program may lead to widespread afforestation of cropland. If this occurred, it could undermine the production capacity of U.S. agriculture.  Here the two studies come to somewhat different conclusions.

In general, the Tennessee study (3) shows a modest reduction in corn, soybean and wheat acres along with a modest increase in crop prices by 2025.  The major land use shift is a 27 million acre increase in dedicated energy crops, a 15 million acre increase in hay acres and a 36 million acre decrease in pasture acreage under the cap-and-trade alternative.  The study uses EPA’s carbon dioxide equivalent price of $27 per metric ton that was assumed in its analysis of H.R. 2454.  At $27 per ton, both crop and herbaceous perennial grasses out-competed afforestation as carbon offsets. 

In their analysis the shift to afforestation of cropland begins to occur at a carbon price of $80 per metric ton. If the price rises to $160 per metric ton, significant land use changes are projected to occur.  About 40 million acres of cropland could convert to forests, 75 million acres of pasture could convert to forests, and 20 million acres of cropland could convert to grassland.

The Texas A & M study (4) shows larger conversions of cropland to trees.  Under their baseline analysis with no carbon price, 13.4 million cumulative acres of deforestation (the opposite of afforestation) occurs by 2030 due to the bioenergy mandates and other factors.  At $15 per metric ton of carbon, deforestation is absent and afforestation is profitable on approximately 11 million acres of cropland and 6.1 million acres of pasture by 2030.  At $30 per ton, 34 million acres of cropland are afforested by 2030 and 42 million acres are afforested at $50 per ton.

The inclusion of different carbon sequestration alternatives is a major reason for the variation in the results of the two studies.  The Texas A & M study includes only the carbon offset programs listed in the House Legislation.  Conversely, the Tennessee analysis includes the legislation offsets plus the carbon sequestration of dedicated energy crops.

EPA analysis also shows a significant amount of afforestation of cropland.  Their analysis indicates that a $30 per metric ton price of carbon would cause 50 million acres of afforestation of cropland and 100 million acres of total land by 2023 (EPA 2005,figure 4-2, pp. 4-6). 

Geographic shift in cropland acreage
Analysis at Iowa State University (5) focuses on where the cropland afforestation would occur under EPA’s afforestation projection.  In total, U.S. cropland area would be reduced by 12 percent by 2023 as shown in Table 1. 

Table 1.  Percentage Change in Planted Acres Compared to
Baseline by Region, 2023

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

Afforestation would not occur evenly across the agricultural sector.  It estimates that most of the afforestation would occur in the cornbelt and delta states.  Planted acres in the cornbelt would be reduced by 26 percent and 89 percent in the Delta States.  Because of climatic conditions, little afforestation would occur in the central and northern plains and these areas would actually expand cropland area slightly.

Shift in acreage by type of crop
Planted acreage of thirteen major crops would be reduced 14 percent and reduced by 12 percent when hay and double cropping are included, as shown in Table 2. 

Table 2.  Percentage Change in Acres Planted and Farm Price Compared to
Baseline by Crop, 2023

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

A very significant decline of 39 percent would occur in rice acres.  Soybean acres would decline by 25 percent.  Corn would only experience a five percent decline.  Due to the reduced acreage, farm prices for these crops would increase, with the largest price increases for corn and rice (28%) and the least for wheat (15%).

Limit competing offsets

Although reduced cropland acreage resulting from competitive offsets like afforestation will drive up crop prices in the short term and may result in an increase in farm income, the long-term production capacity of production agriculture will be undermined.  So, offsets that compete with agriculture by shifting farmland out of crop production should be discouraged.  

The indirect land use change (ILUC) concept has been hotly debated in its potential application to the corn ethanol industry.  However, it provides a bulwark against afforestation and other conversions of farmland out of food production.  When an acre of cropland is converted to non-food uses (e.g. planted to trees), the ILUC argument states that an acre of forestland is cleared somewhere in the world (e.g. Brazilian rainforest) to make up for the loss of the U.S. cropland acre.  So, the greenhouse gas emissions from foreign land use conversion are counted against the emissions benefit of converting U.S. farmland to forestland.  When the greenhouse gas emissions from ILUC are included, the carbon sequestration potential of afforestation of U.S. cropland is less attractive. 

H.R. 2454 prohibits the use of ILUC in determining the greenhouse gas emissions of domestic offsets (e.g. afforestation of cropland) for at least the first four years of the legislation.  However, the eventual inclusion of ILUC, along with further research to adequately measure the ILUC impact, will shift the emissions balance and the resulting economics of offset programs that convert cropland.

However, the easiest way to limit cropland conversion is to address the issue through legislation.  This will involve designing effective legislative regulations that prohibit cropland conversion.

Focus on complimentary offsets

While offsets that compete with agriculture should be discouraged, offsets that compliment or enhance agriculture should be encouraged.  Offsets that compliment the agriculture sector leave the sector intact and provide an additional income stream for farm operators and landowners.  An example of an offset program that is included in the research studies discussed earlier is methane capture from anaerobic digesters at livestock operations.  It provides the opportunity for an additional income steam while leaving the livestock sector intact.

However, there are additional offsets sources that are not included in the research studies discussed earlier that have the potential to compliment production agriculture.  For example, in addition to biochar’s potential to sequester large amounts of carbon (AgMRC Renewable Energy Newsletter, article Using Biochar Systems to Sequester Carbon), it also has the potential to improve agriculture’s production capacity (AgMRC Renewable Energy Newsletter article, Biochar – A Multitude of Benefits).  Improving the efficiency of nitrogen fertilizer usage holds the potential to reduce farmer production costs while reducing nitrous oxide emissions and creating offset income.  Cattle dietary improvements hold the potential to improve feed efficiency while reducing methane emissions from enteric fermentation (cattle emit methane through a digestive process that is unique to ruminant animals) and creating offset income.  Due to agriculture’s potential to reduce emissions and sequester carbon, it is likely that additional offset opportunities will emerge in the coming decades.  These sources, especially biochar, hold the potential to generate significant additional income for farmers and landowners from the sale of carbon offsets while maintaining or increasing the efficiency and production capacity of U.S. agriculture.

Conclusions

The revenue stream created from the sale of greenhouse gas offsets under a properly designed cap-and-trade system will compensate for some or all of the higher production costs from higher energy prices.  In addition, new revenue opportunities may exist for bioenergy feedstocks. 

This may not be true under a scenario of direct greenhouse gas regulation.  It appears as though agriculture’s net returns are decreased and additional regulations are imposed on farm businesses in this alternative. 

Any legislation that provides financial incentives for greenhouse gas offsets should not undercut the long-term production capacity of U.S. agriculture to meet the needs of an increasingly hungry world. So, climate change legislation should focus on developing offsets that are complimentary to the agricultural sector while discouraging or prohibiting those that are competitive.

However, controlling greenhouse gas emissions is critical for protecting U.S. agriculture’s production capacity from the ravages of uncontrolled climate change.  Inaction on effective climate change mitigation activities (both at the U.S. and world levels) leaves agriculture vulnerable to the vagaries of climate change not only in the U.S. (AgMRC Renewable Energy Newsletter article, Impact of Climate Change on Midwestern Agriculture) but in the world (AgMRC Renewable Energy Newsletter article, Impact of Climate Change on Global Agriculture).

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