AgMRC Blog - Some Thoughts on Climate Change
Blog entry written by Michael Boland, professor at Kansas State University and director of the Arthur Capper Cooperative Center.
There are a number of climate change studies which makes it difficult to sort through the information. Over the past year, a graduate student, Betty Canales, and I decided to look at this issue in a very small controlled setting in order to help me better understand how carbon emissions are calculated using the legislation passed by the House of Representatives last year. Our objective was to look at agricultural retail cooperatives in Kansas and calculate their carbon emissions. We chose this industry because many retailers are producer-owned and organized as cooperatives. Additionally, there is an exemption for individual locations with less than 25,000 metric tons of carbon emissions annually. Our goal was to learn if agricultural retailers would be impacted because of this exemption.
In order to estimate the carbon footprint, the carbon dioxide emissions associated with energy use from daily operations and services must be determined. Carbon dioxide emissions are estimated for each energy input and are found by multiplying the energy used by a carbon emission factor. Generally, sources of energy used by retail operations in Kansas are gasoline, diesel, natural gas, propane and electricity. Electricity-related emissions are released at the power station and are not attributed to the retail operation. For retailers in Kansas, diesel fuel represents the largest source of emissions. Retailers with a strong agronomic service component and higher diesel fuel use tend to have higher direct emissions as opposed to retailers with more locations specialized in grain marketing and retail sales due to lower gas use.
The proposed threshold for a covered entity under the cap and trade bill is 25,000 Mt CO2 (metric tons of carbon). The average quantity of CO2 produced by these retailers was 1,271 Mt CO2 with a minimum of 104 and a maximum of 3,103 Mt CO2. These results are good news for retailers, because their emissions are far less than the proposed emission threshold, demonstrating that they are not likely to be regulated.
Studies have projected carbon prices of $10 to $50 Mt CO2 under different scenarios as discussed by Golden, et al. The low prices for CO2 are due to the fact that the existing carbon allowances set forth in the European Union are much greater than the cost of compliance. Thus, the demand for CO2 has decreased steadily over time since firms have no need to buy any carbon credits. Increases in prices will be driven the increase in demand which is not likely to happen unless a regulation such as the proposed cap and trade legislation is passed by Congress creating a demand for carbon credits.
We chose three different Mt CO2 prices which represented the July 2010 price ($0.15), the average 2009 price ($0.94) and the projected 2012 price estimated by the Environmental Protection Agency study ($13). These prices were multiplied by the quantity data to show the potential value of the CO2 emissions. It is highly unlikely that Congress will require 100 percent of the CO2 emissions to have an offset credit. Rather a firm will be allowed some percentage of allowances for CO2 emissions. Using the best available data on the House legislation, we calculated the value of complying with a 10 percent requirement (i.e., a firm would require carbon credits for 10 percent of their CO2 emissions), a 25 percent requirement, and a 100 percent requirement (this would be a highly unlikely scenario requiring carbon neutrality).
These values are reported in the study for the three different price levels and three different compliance levels. But the value of complying with the 10 percent requirement ranged from $19 for a retailer that had the average amount of 1,271 Mt CO2 emissions at the current price of $0.15 (1,271 multiplied by $0.15 multiplied by the 10 percent compliance) to $1,652 (1,271 multiplied by $13 multiplied by the 10 percent compliance level). For the 100 percent compliance levels, these values were $191 and $16,523, respectively. For the largest retailer in our survey with 3,103 Mt CO2 emissions, the value at the 10 and 100 percent levels for the current $0.15 price was $46.5 and $4,034, respectively. For the $13 price, these values were $465 and $40,339, respectively.
What did we learn? Based on the cap and trade bill passed by the U.S. House of Representatives, energy end-users like agricultural retailers such as these cooperatives would not be required to reduce or offset their emissions. However, emissions from producers and providers of several of the energy inputs employed by these retailers would be regulated if this legislation were enacted. Thus, it is very likely that the cost imposed on energy generators and suppliers would be passed onto the energy consumers such as farmers and ranchers in the form of higher input prices for fertilizer and energy. These costs are likely to be greater than those incurred by the retailers since there are far more producers and ranchers.
Golden B., J. Bergtold, M. Boland, K. Dhuyvetter, T. Kastens, J. Peterson, and S. Staggenborg. “A Comparison of Select Cost-Benefit Studies on the Impacts of H.R. 2454 on the Agriculture Sector of the Economy.” AgManager.info. December, 2009. Department of Agriculture Economics, Kansas State University.