Cap And Trade: Controversy With Potential Revenue

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For all practical purposes, every Cornbelt farmer is in the middle of the great debate about energy. If you are growing corn and/or soybeans, your commodities are priced depending on ethanol and biodiesel demand. If you are using fertilizer, pesticides, and other chemicals made from petrochemicals, you are a consumer. If you are just fueling up to head to the field, the parts store, or sending your family to school, you are participating in the bioenergy market. You really can’t escape. And that is why familiarity with the biofuels market, cap and trade, and US energy policy is important to your economic welfare.

You probably are aware that the controversial Cap and Trade legislation passed the US House with a slim margin, but consideration was delayed in the Senate until after healthcare issues were resolved. Every economist and policy specialist will tell you that Cap and Trade will cause energy prices to rise, which includes your diesel fuel bill, but that farmers who want to participate will be able to financially benefit. That is the basis for a new report from 9 economists featured in the April Edition of Policy Issues published by the Agricultural and Applied Economics Association.

In a nutshell, Cap and Trade is an effort to reduce Greenhouse gases (GHG) by capping or taxing large energy users, but letting them trade or shift their penalty to farmers whose tillage practices would be financially rewarded by the greenhouse gas emitters. The offsets will result in financial benefits for agriculture, but everything must be considered within the entire policy change. Farmers will have higher fuel and fertilizer bills, there will be more demand for bio-energy feedstocks such as cornstalks and switchgrass, commodity prices may rise as their energy value increases, and payments may be made to farmers based on how much carbon they are returning to the soil through reduced tillage and other practices.

Regarding the numbers:
• Gasoline prices could rise 15% above a $4.50 baseline
• Electricity could rise 30% and natural gas could rise 35% above baselines of $0.10/kwh and $10/mm Btu, respectively.
• Agricultural production costs could rise 2% per acre in the short term and 4-10% long term, but those EPA calculations did not consider any changes in practices.

The economists, many of who are from Oregon State University, used their forestry expertise to evaluate Cap and Trade, should forest production be integrated into Cornbelt agriculture. Their evaluation used various values for sequestering carbon dioxide, ranging from $0 to $50 per ton, and a wide range of incentives for reducing GHG in agricultural production and forestry. They report their estimates slightly overstate cost increases and underestimate offsetting revenue. Payments to farmers would result from a variety of changes in farming practices: Agriculturally generated offsets include afforestation by planting trees on crop or pasture land, reduced CO2 emissions from energy/ other input use, soil carbon management, reductions in N2O emissions from crop and livestock production, and reductions in methane from rice cultivation and livestock. Forestry offsets include altered forest management practices to increase carbon sequestration potential—including changes in harvest timing, management intensity, and species mix—plus forest product sequestration and forest fossil fuel use emissions reduction.

Results of the study indicate that net producer income increases from $14.3 to $66.8 billion per year. Over 85% of that would go to crop producers and less than 15% would go to livestock producers. Net income depends on what changes are made by individual producers. Higher energy costs result in higher production costs per acre. Despite the higher costs, offset payments received from the Cap and Trade arrangements would result in added income of $6.8 to $41.4 billion and commodity prices would increase $7.2 to $25.5 billion. Forest production and on-farm energy production would both result in added revenue. The economists believe that commodity prices would not rise as much if CRP land enters some facet of production. Additionally, there would be fewer dollars resulting from timber planting, if an international cap and trade market develops and contributes cheaper land to timber production.

Summary:
A Cap and Trade program to reduce greenhouse gases would benefit agriculture with more revenue coming in than increases in production expenses. Those expenses for higher fuel and fertilizer prices would be more than offset by increased commodity prices and payments to farmers for reducing tillage and increasing forest production.

Source: Stu Ellis, University of Illinois



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