Department of Economics Cap & Trade Legislation: What’s Proposed and What Does It Mean Iowa...

Department of Economics

Cap & Trade Legislation:What’s Proposed and What Does It

Mean

Iowa Meeting of ASFMRA and RLIAmes, Iowa

March 23, 2010

Chad HartAsst. Professor of

EconomicsIowa State University


Climate Change

Source: www.conservationreport.com


Climate Change

Source: Congressional Budget Office


GHG Emission Rules

• Greenhouse gas rules are coming– Whether through legislation or regulation

• EPA has the authority to regulate GHGs– Via Clean Air Act

• However, Congress would like to set the rules– H.R. 2454, American Clean Energy and Security Act

of 2009, • Passed in U.S. House of Rep. on 6/26/09, 219-212

– S. 1733, Clean Energy Jobs and American Power Act

• Introduced 9/30/09, In committee (actually, six committees)


U.S. GHG Emissions

Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2007


CO2 Emissions



CH4 Emissions



N2O Emissions



GHG Emissions by Sector



Agricultural GHG Emissions



GHG Emission Statistics



Climate Change Legislation

Source: Congressional Research Service

American Clean Energy and Security Act of 2009 (H.R. 2454)• Requires utilities to supply an increasing percentage of their demand

from a combination of energy efficiency savings and renewable energy (6% in 2012, 9.5% in 2014, 13% in 2016, 16.5% in 2018, and 20% in 2021-2039).

• Provides for issuing, trading, banking, retiring, and verifying renewable electricity credits.

• Establishes targets to cap and reduce greenhouse gas (GHG) emissions, annually, so that GHG emissions from capped sources are reduced to 97% of 2005 levels by 2012, 83% by 2020, 58% by 2030, and 17% by 2050; and establish a federal GHG registry.

• Provides for trading, banking and borrowing, auctioning, selling, exchanging, transferring, holding, or retiring emission allowances.


Climate Change Legislation

Source: Craig Raysor, Gillon & Associates, PLLC

Agriculture provisions in H.R. 2454• Provides some exemptions from the GHG emission reduction

requirements for agriculture and forestry

• Provides incentive-based approach to GHG emission reduction/capture

• Allows USDA to help establish eligible GHG offset practices and review of those practices

• Shifts question on indirect-land-use to an independent panel for study with EPA and USDA to review in the future

• Allows for a specific exemption for livestock (enteric fermentation from ruminant animals) from uncapped emissions guidelines


Lots of Analysis

• The EPA has funded the development of several models that are capable of examining the impact of this bill and other similar bills

• The environmental economists who worked on these models are very well respected and the work is sound

• However, the only certainty in the bill is the limit on carbon, everything else is assumption driven

Source: ISU, Dermot Hayes presentation, Oct. 2009


Key Assumptions• The US economy was already on a slow growth

path for energy consumption, the analysis assumes that this continues

• Coal fired plants largely shut down and are replaced by nuclear

• Enormous reliance on international and domestic offsets

• If we cannot build the large number of nuclear plants or find the international offsets, then the price of carbon will increase at about twice the reported rate



Energy Sources

Source: EPA Analysis of H.R. 2454, June 23, 2009


GHG Emissions & Abatements



Domestic Offsets

• Implementing regulations not yet written

• Uncertainty about how the offsets would work in agriculture, particularly for conservation tillage, but the intention is clearly to use these offsets as a way to stimulate agricultural incomes

• Consideration of leakage is prohibited pending a study

• Heavy reliance on the growth of trees on pasture and crop land



Domestic Offsets

Source: EPA Analysis of Waxman-Markey, April 20, 2009


Domestic Offsets

Table 1. Rental values ($/acre) for U.S. cropland used to grow trees

Carbon Price ($/ton) Region 20.00 30.00 40.00 50.00 60.00 90.00 Corn Belt 81 121 161 202 242 363 Delta States 127 190 253 316 380 569 Lake States 98 147 195 244 293 440 Southeast 115 173 231 288 346 519



Land Use Changes

Source: USDA, Office of Chief Economist Statement of Joseph Glauber, before House Ag Committee, 12/3/09

Allowance Prices


International Offsets• Must be a developing country that is a member of a

unilateral or multilateral emissions reduction agreement with the United States

• Must have the technical capacity to monitor, measure, report and verify forest carbon fluxes resulting from deforestation

• Must have the capacity to reduce emissions from deforestation, including strong forest governance

• The international offset project itself must be shown to result in permanent verifiable reductions that are net of any leakage measures



Allowances

Source: Congressional Research Service, June 2009

2016

2030


Carbon Prices Increase Over Time



Prices Are Sensitive to Offsets



Energy Price Paths



Impacts on an Average Household



Impacts on Tillage Practices



Comparison of ResultsA

llo

wan

ce P

rice



USDA Estimates

Source: USDA, Office of Chief Economist Statement of Joseph Glauber, before House Ag Committee, 12/2/09

2012-2018 Production Costs Changes


Crop Production Changes

Source: USDA, Office of Chief Economist, “The Impacts of the American Clean Energy and Security Act of 2009 On U.S. Agriculture”


Crop Price Changes



Livestock Production Impacts



Livestock Price Impacts



Offsets and Revenues



Not The Only Game in Town• The House bill has not gained traction in the

Senate• Senate proposals have stalled in committee

– Very little committee action up to this point

• A bipartisan effort (Kerry D-Mass., Graham R-S. Car., and Lieberman I-Conn.) is underway

– No legislative language yet, but that may come soon– Expected to be more “business-friendly”– One trial balloon: carbon fee on transportation fuels

(suggestion from oil companies)


Concluding Thoughts• The potential for cropland conversion points

to higher crop prices and feed costs

• Crop prices will likely track carbon prices

• Cropland conversion will benefit landowners through higher rents

• Agriculture will experience the benefits and the costs of climate change legislation


Thank you for your time!

Any questions?

Department of Economics Cap & Trade Legislation: What’s Proposed and What Does It Mean Iowa...

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