The Impact of a Renewable Electricity Standard and a Carbon Payment Program
AgMRC Renewable Energy and Climate Change Newsletter
Iowa State University
U.S. energy policy has recently moved into the background due to concerns about the current economic downturn. However, the importance of the two major drivers of energy policy – the need to wean the U.S. from foreign energy and the need to limit the growth of atmospheric carbon – has not diminished.
Recent research from the Agricultural Policy Analysis Center at the University of Tennessee shows how the agriculture and forestry sectors would be impacted from policies designed to increase the use of renewable energy and decrease greenhouse gas emissions. The research also outlines how these policy options can create a significant amount of activity for the U.S. economy, while providing a large number of jobs.
The three policy scenarios analyzed in the study are outlined below:
- The EISA Scenario reflects the renewable fuels standard (RFS) that was included in the EISA (Energy Independence & Security Act of 2007). The RFS requires the usage of 36 billion gallons of renewable fuels by 2022. This includes 15 billion gallons of corn starch ethanol and 21 billion gallons of cellulosic ethanol and/or advanced biofuels. The EISA Scenario is the “baseline” against which the following two scenarios are measured. The baseline is formed by taking a USDA projection and extending it to 2025.
- The EISA + RES Scenario includes, in addition to the renewable fuels standard, a renewable electricity standard (RES), also known as a renewable portfolio standard. The RES requires electricity utilities, with some exceptions, to generate 25 percent of their electricity from renewable energy sources by 2025.
- The EISA + RES + CPAY Scenario includes, in addition to a renewable fuels standard and a renewable electricity standard, a carbon policy that will put a price on carbon of up to $27 per ton by 2030 and pay farmers for capturing and sequestering carbon. The carbon policies are designed around a cap-and-trade policy, but could also provide benefits to participating farmers through mechanisms such as tax credits or USDA run incentive programs similar to the Conservation Reserve Program.
The research focuses on how these policy options would impact the various agricultural, economic and environmental factors listed below.
- Farm Income
- Net carbon flux (the amount of carbon leaving the system)
- Biomass feedstock production and prices
- Carbon costs and carbon sequestration payments to farmers
- Livestock production and profitability
- Land use changes (shift in commodity cropland acreage)
- The U.S. economy
Renewable Electricity Standard (RES) Scenario
The renewable electricity standard (RES) portion of the EISA + RES scenario requires electric utilities to generate 25 percent of their electricity from renewable sources by 2025. After exemptions are made for a variety of purposes, the actual amount from renewables is 17 percent.
It is estimated that the U.S. annual electricity consumption by 2025 will be 4,577 billion kilowatt hours. So the U.S. would be required to produce 918 billion kilowatt hours of electricity annually under the renewable energy standard. The estimated sources of renewable electricity for the study are biomass (71%), wind (23%) and other (6%).
Estimated contributions of biomass from the agriculture and forestry sectors are listed below.
- Traditional crops – e.g. corn and soybeans
- Crop residues – e.g. corn stover and wheat straw
- Dedicated herbaceous energy crop – e.g. switchgrass
- Short rotation woody biomass – e.g. willow, poplar and pine
- Animal fats and oils
- Food processing wastes
- Forest residues
- Mill wastes
- Trees harvested for energy use.
The infrastructure requirements to move renewable electricity from where it is produced to population centers where it can be used is not incorporated in the study nor are the costs of investments in moving cellulose to meet the EISA and RES demands.
Carbon Payments (CPAY) Scenario
The carbon payment (CPAY) portion of the EISA + RES + CPAY Scenario provides payments for practices that capture and sequester carbon. Farmers receive payments from various carbon sequestering practices. Carbon capture and sequestration activities and the amount (%) the payment is discounted to reflect transportation costs, transaction fees, aggregator and verification costs and unintentional reversals are listed below.
- Conservation tillage – 40%
- Bioenergy crops – 20%
- Afforestation – 30%
- Grassland establishment – 20%
- Methane capture – 20%
Placing a price on carbon will increase energy prices which will subsequently increase the cost of production for crops and livestock. It is assumed that carbon price will increase to $27 per metric ton by 2030. As a result of this increase in carbon price, the price of electricity is projected to increase 14 percent and petroleum price 4.7 percent in 2025.
The impact of these policy scenarios on selected items are outlined in Table 1. Biomass feedstock prices increase only modestly with the addition of these programs. Renewable energy production increases, especially with the addition of the RES alternative.
The cumulative net returns for the agriculture and forestry sectors during the 15 year period are positive with the addition of both the RES and the RES + CPAY programs, as compared to just the EISA.
Table 1. Impacts of the various policy options, 2010 - 2025.
||Cumulative Economic Net Returns (billion $)
Cumulative Net Carbon Flux
|Feedstock Max. Price ($/dry ton)
||Renewable Energy Production (2025)
|EISA + RES
|EISA + RES + CPAY
* million metric tons of carbon equivalent
In addition, these impacts are spread relatively evenly across the nation. Figure 1 shows the distribution of the net returns with just the addition of the RES and Figure 2 shows the distribution with the addition of both the RES and the CPAY.
Farmer net revenue from the carbon policy is shown in Figure 3. Net revenue, while negative during the initial years, is over $1 billion dollars by 2025. Aggregated over the 15 years, net revenue is estimated at $5.7 billion. This is the result of $15 billion of carbon payments and $9.3 billion in increased energy costs. The analysis assumes that the energy used to produce fertilizer is exempt from carbon pricing. Also, crop residue removal is limited to levels where soil carbon is not reduced.
The impact of these programs on net carbon emissions from agricultural lands is shown in Figure 4. The carbon emissions with the addition of the RES alternative are about the same at just the EISA. This is because the study does not include the emission reductions from the RES and RES + CPAY due to the replacement of fossil fuel generated electricity with renewable electricity production.
The emissions from the RES scenario are slightly higher in the out years. This is due to the additional agricultural activity, including land use change, required for the RES program.
The addition of RES and CPAY will significantly increase the acreage of energy crops, as shown in Table 2. However, land use shifts are expected to be modest under these programs. The acreages of major crops, hay and pasture are reduced slightly under these programs due to the rise in energy crop acreage. This will result in a modest impact on food production.
Table 2. Estimated Land Use by Scenario, 2025
||Hay and Pasture
||------------ million acres ------------
|EISA + RES
|EISA + RES + CPAY
A portion of the cropland currently in pasture would be converted to the production of dedicated energy crops. This will lead to more intensive management of the remaining pastureland. In addition, crop residue removal in the RES is limited to levels that minimize soil erosion and in the CPAY is limited to a carbon neutral level and to minimize soil erosion.
Prices and production increase over time for beef, pork and poultry; thus increasing gross returns for all three sectors. Adding the carbon policy to increased energy feedstock demand is projected to decrease production of the livestock sectors by less than one percent each.
Table 3. Projected U.S. Economic Impacts from Changes in the Agricultural Sector, Compared to EISA, 2025
||Total Industrial Output
||Gross Domestic Product
||----- million 2010 $ -----
||----- number -----
||----- million 2010 $ -----
|EISA + RES
|EISA + RES + CPAY
The impact of these programs on the national economy would also be positive. As shown in Table 3, direct total industrial output is positive under both of these programs. The same is true for U.S. gross domestic product. As a result of this increase in economic activity, job creation under both scenarios is also positive. The increases are for both the direct impact on economic activity and job creation and the total impact when the economic multipliers are taken into account.
The Tennessee research concludes that there would be a net economic benefit to the agriculture and forestry sectors from the implementation of a national renewable electricity standard and a carbon payment policy. There would also be a positive impact on the national economy.
In addition to the benefits outlined in the study, a renewable electricity standard may have an additional benefit to the farm sector. With the emergence of electricity powered cars and light vehicles, some analysts believe that we may move rapidly to an electricity powered transportation fleet over the next decade or two. If this occurs, the U.S. consumption of gasoline may decline significantly, which may also result in a decline in ethanol consumption. However, the replacement of gasoline with electricity would replace the loss of agriculturally produced ethanol with agriculturally produced electricity. In essence, a renewable electricity standard would create a “hedge” for farm income.
Putting a price on carbon emissions and paying the agriculture and forestry sectors for sequestering carbon results is a net economic benefit to the agriculture and forestry sectors according to the research study. A conservative interpretation of the analysis may conclude that the cost to agriculture, increased energy prices, is a certainty, while the benefits to agriculture depend on the uncertainty of the proper development and implementation of the capture and sequestration programs outlined above. However, an innovative view would focus on agriculture’s ability to become more energy efficient due to higher energy prices and would highlight the potential implementation of additional carbon capture and sequestration programs, like biochar, that may emerge over the next 15 years.
For the complete research report go to Implications of Energy and Carbon Policies for the Agriculture and Forestry Sectors, Burton C. English, Daniel G. De La Torre Ugarte, Chad Hellwinckel, Kimberly L Jensen, R. Jamey Menard, Tristram O. West, and Christopher D. Clark, Agricultural Policy Analysis Center, University of Tennessee, November 2010.