This document discusses the potential impacts of cap-and-trade legislation on U.S. agriculture. It finds that the cost of cap-and-trade to the average wheat grower would be $4/acre by 2025 and $21/acre by 2035, but allowing offsets for fertilizers is critical to reducing these costs. No-till practices can generate carbon offset credits that offset some of the higher production costs from cap-and-trade. On average, U.S. wheat producers could benefit by approximately $35/acre from cap-and-trade by 2035 through no-till offsets, though benefits will vary between farmers and regions.
4. Cost Drivers for Agriculture
Basics
Carbon Cap declines
Carbon price increases (free today)
Energy prices increase
Fuel and fertilizer prices increase = Cost of
production increases
Freely distributed allowances to fertilizer industry help offset
fertilizer price increases until 2035
3
5. Cost Drivers
Three BIG Questions
1. What is the carbon price?
- Future energy demand
- Alternative energy supply
- Offset supply
2. What is the impact on energy prices?
Cap and Trade Energy Price Impact
(relative to reference case)
(nominal $) EIA Base
2020 2030 2035
Carbon Price 31.75 64.83 92.64
Diesel (cents/gallon) 32.57 78.31 122.20
3
Natural Gas ($/thous.ft. ) 1.47 3.81 6.81
3. How does that impact cost of production?...
4
6. U.S. Wheat Production Cost Impacts –
(Avg. Farm)
Production Cost Impacts (relative to reference)
25.0
Added Fertilizer Impact - (zero allowances)
Fertilizer
20.0 Transport (Farm-Elevator/Processor) $21.06 / 7.3%
Fuel,Lube, and Electricity
15.0
($/acre)
10.0
$9.52 / 4.1%
5.0
$3.64 / 1.9%
$2.67 / 1.6%
$1.67 / 1.3%
-
2015 2020 2025 2030 2035
$ per Acre / % of Reference Case Variable
*Does not include fuel or fertilizer efficiency increases beyond that assumed in the reference case.
Source: Informa Economics, EIA and ERS
The cost of cap-and-trade to the average wheat
grower = $4/ac by 2025 and $21/ac by 2035.
Key Policy Message: Fertilizer allowances are critical.
5
7. Example: Prairie Gateway Wheat Farm
Budget -2025
350
Revenue
300 Costs
Increase due to C&T
250 Net
Net Revenue Net Revenue Revenue Other
$112/acre $108/acre $105/acre
200
$/Acre
Seed
150
Repairs
100
Fuel, lube, and
electricity
50
Fertilizer
0
2025 Ref 2025 C&T 2025 C&T
(no fert.
allowances)
Nominal$
6
9. Conclusions
Impact on wheat production costs is less than corn
but more than soybeans.
Impacts are minimal in the short-term; up until 2025.
Fertilizer allowance assumptions are critical.
On a regional basis:
Short-term: impacts are higher in the Prairie Gateway due to
energy used for irrigation.
Long-term: regions (e.g., Prairie Gateway and Northern Great
Plains) and farmers with lower nitrogen based fertilizer usage will
be at a distinct advantage.
8
11. Carbon Offset Credits – What are
they?
C&T creates a tradable market for GHG emissions
Agriculture is not a capped sector under C&T
However, by reducing carbon, agriculture can sell a
carbon offset credit for every ton of GHG emissions
reduced.
Sell these credits at the market carbon price to
capped sectors.
Capped sectors use these credits just like
allowances.
10
12. How do I get carbon offset credits?
Carbon Sequestration Rates - Mt CO2e/ac
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Afforestation of cropland /1
CROPLAND:
Land-Use
Changes
Croplands shifted to perennial grasses
Conservation Buffers/2
Restoration of wetlands
Conservation to No-Till /3
Pasture Grazing Production Practice
Improved crop rotations and winter cover crops
Changes
Elimination of summer fallow Average High Maximun
Improved fertilizer manager
Use of organic manure and byproducts /4
Improved irrigation management
Afforestation of pasture
Management Land
Rangeland management
Improved use of fertilizers
Use of organic manure
Planting of improved species
Grazing management
Source: USDA, CCX, DOE, Informa Economics
Key Policy Message: Methodology used to calculate SRs can have large impact on
net farm revenues and potential cropland acreage shifts.
11
13. What is the Revenue Potential?
Practice Sequestration Rate 2012 2015 2020 2025 2030 2035
Mt CO2e/ac Carbon Credit - $/Acre *
Afforestation of cropland /1 1.90 25 38 62 100 160 255
Croplands shifted to perennial grasses 1.25 19 25 41 66 105 167
Conservation Buffers/2 0.70 11 14 23 37 59 93
Restoration of wetlands 0.37 6 7 12 19 31 49
Conservation to No-Till /3 0.66 10 13 22 35 56 89
Improved crop rotations and winter cover crops 0.29 4 6 10 15 25 39
Elimination of summer fallow 0.15 2 3 5 8 12 20
Improved fertilizer manager 0.15 2 3 5 8 12 20
Use of organic manure and byproducts /4 1.28 20 26 42 67 108 172
Improved irrigation management 0.15 2 3 5 8 12 20
Afforestation of pasture 1.48 23 30 48 78 125 198
Rangeland management 0.37 6 7 12 19 31 49
Improved use of fertilizers 0.55 8 11 18 29 46 74
Use of organic manure 1.28 20 26 42 67 108 172
Planting of improved species 0.73 11 15 24 39 62 98
Grazing management 1.10 17 22 36 58 92 147
Carbon Price (nominal$/CO2e) 19 25 41 66 105 167
* Sequestration rates are discounted by 20% to reflect potential reversals.
Source: USDA, CXX, DOE, IEA, Informa Economics.
Key Policy Messages: (1) Limitation on # of Re-enrollment periods will significantly
impact potential revenues in the out years (2) Ability to stack carbon credits
could add significantly to potential revenue opportunities
12
15. Distinction between Continuous and
Rotational No-Till
US
Rice
Northern Great Plains
Northern Crescent
Cotton
Heartland
Basin and Range
Wheat
Fruitful Rim
Eastern Uplands
Soybeans
Southern Seaboard
Prairie Gateway
Corn
Mississippi Portal
0% 10% 20% 30% 40% 50% 60% 70%
Key Policy Message: Addressing additionality - Distinction btw continuous
and rotational
14
16. Wheat
Net Impact: Benefits of no-till – Costs
60
Net Impact for Adopters (no adoption costs)
50
Net Impact for Non-Adopters
Net Revenue Impact ($/acre)
40
30
20
10
-
(10)
(20)
(30)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Cost for non-adopter (no offset revenue): $4/ac by 2025 and
$21/ac by 2035.
Net Gain for no-till adopter (no adoption costs): $25/ac by 2025
and $51/ac by 2035.
15
17. Wheat
Net Impact: Benefits of no-till – Costs
60
Net Impact for Adopters (no adoption costs)
50
Net Impact for Non-Adopters
Net Revenue Impact ($/acre)
40 Net Impact for Adopters (w/ est. no-till costs)
30
20
10
-
(10)
(20)
(30)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Adopting no-till does not come without a cost (e.g., yield drag,
equipment investment, risk).
Net Gain for no-till adopter (with/ est. adoption costs): $17/ac by
2025 and $47/ac by 2035.
16
18. Wheat
Net Impact: Benefits of no-till – Costs
60
Net Impact for Adopters (no adoption costs)
50
Net Impact for Non-Adopters
40 Net Impact for Adopters (w/ est. no-till costs)
Net Revenue Impact ($/acre)
Net Impact for All Wheat (w/ est. no-till costs)
30
20
10
-
(10)
(20)
(30)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Not every wheat farmer will be able to practice no-till.
Net Industry Gain (w/ no-till as only offset): $4/ac by 2025 and
$35/ac by 2035.
17
19. Example: Prairie Gateway Wheat Farm
Budget
350
Carbon Credit
300
Net
Net Revenue Revenue
250 $121/acre $118/acre Revenue
Net Revenue
$112/acre
Costs
200
$/Acre
No-till Costs
150
100 Increase due to C&T
50
Production Costs
0
2025 Ref 2025 C&T 2025 C&T
(no fert.
allowances)
Nominal$
18
20. Wheat
Net Impact: Benefits of no-till – Costs
Conclusions (no-till)
Wheat has a larger potential gain than corn but
smaller than soybeans.
On average, U.S. wheat producers could benefit by
approximately $35/acre from cap-and-trade by 2035.
Some farmers/regions will not benefit to the same
degree as others --- benefit will primarily be driven by
the carbon SR.
19
21. There are opportunities other than no-till
Practice Sequestration Rate 2012 2015 2020 2025 2030 2035
Mt CO2e/ac Carbon Credit - $/Acre *
Afforestation of cropland /1 1.90 25 38 62 100 160 255
Croplands shifted to perennial grasses 1.25 19 25 41 66 105 167
Conservation Buffers/2 0.70 11 14 23 37 59 93
Restoration of wetlands 0.37 6 7 12 19 31 49
Conservation to No-Till /3 0.66 10 13 22 35 56 89
Improved crop rotations and winter cover crops 0.29 4 6 10 15 25 39
Elimination of summer fallow 0.15 2 3 5 8 12 20
Improved fertilizer manager 0.15 2 3 5 8 12 20
Use of organic manure and byproducts /4 1.28 20 26 42 67 108 172
Improved irrigation management 0.15 2 3 5 8 12 20
Afforestation of pasture 1.48 23 30 48 78 125 198
Rangeland management 0.37 6 7 12 19 31 49
Improved use of fertilizers 0.55 8 11 18 29 46 74
Use of organic manure 1.28 20 26 42 67 108 172
Planting of improved species 0.73 11 15 24 39 62 98
Grazing management 1.10 17 22 36 58 92 147
Carbon Price (nominal$/CO2e) 19 25 41 66 105 167
* Sequestration rates are discounted by 20% to reflect potential reversals.
Source: USDA, CXX, DOE, IEA, Informa Economics.
Fertilizer Management = + $20/ac by 2035
Elimination of Summer Fallow = + 20/ac by 2035
20
22. Examples of Other Offset
Opportunities
Elimination of Summer Fallow/Cover Crop
Benefits
$20/acre carbon payment (2035).
Reduced erosion
If using a cover crop,
Reduction in weed, pest and disease pressures
If cover crop is a legume, can help fix nitrogen in the soil
$39/acre carbon payment if using a cover crop (2035)
Costs
Reduced moisture – summer fallow is often used to store water in
soil prior to seeding
Planting costs if using a cover crop
21
23. Examples of Other Offset
Opportunities
Improved Fertilizer Management
Benefits
$20/acre carbon payment (2035).
Costs
Improved fertilizer management could include:
Systems to better match supply and demand
Sub-surface applications
Use of ammonium nitrogen sources not mobile forms of nitrogen
such as nitrate and urea
Use of advanced fertilizers, examples:
Slow release fertilizers
Stabilized nitrogen fertilizers
A nitrification inhibitor
22
24. Conclusions – Carbon Offset
Opportunities
There are a number of potential revenue
opportunities available to farmers under C&T.
If structured properly, C&T could benefit a large
number of wheat farmers.
However, not everyone will benefit to the same level.
Legislation is not open or closed to additional
opportunities.
23
25. Top Policy Issues
Allowances to fertilizer industry are critical in keeping
production cost impacts down
Methodology used to calculate SRs can have large
impact on net farm revenues and potential cropland
acreage shifts.
Clearly establish minimum set of offset practices.
The Bill should establish the current list of offset practices
as a minimum set – not as examples.
Limiting the number of offset credit periods in which
a producer can re-enroll their offset practice will limit offset
credits available to farmers in later years when the cost
impact of cap-and-trade is greatest.
24
27. Renewable Electricity Standard (RES)
C&T creates a federal RES, which requires 20% of
electricity by 2020 to be from renewable sources.
Creates increased demand for wind, solar and
renewable energy crops.
Potential to increase revenues, in certain
scenarios.
Currently enacted state RESs mitigate demand
increase due to C&T.
26
28. Reference Scenario
(No Cap-and-Trade)
Reference Case Renewable Electricity Generation
900
Wind
800 Solar
Wood and Other Biomass
Municipal Solid Waste
700
Geothermal
Generation (billion kwh)
Conventional Hydropower
600
500
400
300
200
100
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Source: EIA
27
29. Biomass Contributes Largest Share of
Increase under C&T
Additional Renewable Energy Generation by Source (Basic - Reference)
250
Electricity Generation (billion kilowatthours)
Wind
Solar
Wood and Other Biomass
200 Municipal Solid Waste
Geothermal
Conventional Hydropower
150
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: EIA
Infrastructural issues limit further wind expansion.
Other gov’t programs, such as BCAP improve biomass
economics
28
30. RES Impact on Agriculture
2020 Total Renewable Electricity Increase
171 billion kwh
2020 Biomass
161 billion kwh = 32 million tons;
Electricity: $15.7 billion
Additional Energy Crop Acres
1.6-4.8 million
Scenario Assumptions:
Energy crops account for 50-75% of biomass increase
Energy crop yields of 5-10 dry tons/acre
29
31. Specific Case Study
Kansas Wheat – Switchgrass Example
2011 2012 Year 3-10
SWITCHGRASS CASH FLOW
Yield 1.50 4.59 6.70
FARMGATE COSTS (includes labor)
Establishment Costs ($/acre) 52.40 13.44 -
Establishment Costs 209.62 53.76 -
BCAP 157.21 40.32
Production Costs ($/acre) 65.34 164.40 283.80
Farmgate Costs ($/acre) 117.75 177.84 283.80
GROWER REVENUE
Grower Payment ($/acre) 39.40 110.27 250.68
Grower Payment ($/ton)* 26.27 24.02 37.22
BCAP Payments ($/acre) 39.40 110.27 36.26
BCAP Matching Funds 39.40 110.27
BCAP Annual Payment ** 36.26
Carbon Payment ($/acre) - 20.06 31.37
Grower Revenue ($/acre) 78.80 240.61 318.31
NET RETURNS
Net Return ($/acre) (38.95) 62.77 34.52
* Based on a delivered feedstock price of $50/ton
** Payments distributed through 2017
30
32. Specific Case Study
Kansas Wheat – Switchgrass Example
Average Annual
Return ($/acre) NPV 2011-2020
Prairie Gateway Wheat
@ Avg. Yields 56.89 409.17
@ Yields 20% below Avg. 11.94 87.70
Switchgrass
Base Scenario (Delivered Feedstock =$50/ton) 30.00 221.50
Delivered Feedstock =$60/ton 111.82 799.09
Delivered Feedstock =$40/ton (52.16) (359.27)
31
34. Acreage Shift Assessment
1. Early on, the majority of the acreage shifts due to
afforestation will likely come from pastureland.
2. Initially, the majority of cropland shifts will be to
perennial crops, with the exception of certain
regions where barriers to entry for forestry are
lower.
Increased demand for forage and energy crops (RES, RFS,
and pasture shift)
Less risk
Additional income stream
Lower start-up costs
Cultural reasons – “Farming as a way of life”
33
35. Acreage Shift Assessment
3. As the carbon price increases, particularly in the years
beyond 2035, more cropland can be expected to go into
forestry.
4. Yet, even at higher carbon prices (up to 2035), prime
cropland will not shift to forestry or perennial crop
production.
5. Regions and crops with larger net returns can expect to see
less acreage shifting to these alternative carbon crops than
regions with lower net returns.
Wheat acreage can be expected to decline the most
relative to corn and soybeans
34
37. Enteric Fermentation
Enteric fermentation emissions are twice as large a
market as GHGs from manure.
Ruminant animals are the source for over 95% of
enteric fermentation emissions = Greater potential to
gain carbon credits for emission reductions.
GHGs must be lowered through increased
efficiencies in production, changing feed rations, or
adding additives to the feed ration.
Potential to reduce enteric fermentation via an
additive is approx. 25% .
Feedlots that feed steers for 150 days would receive
$2.24 per head revenue by adding an additive.
Cost of additive?
36
38. 2007 CH4 Emissions from Enteric
Fermentation
Dairy Horses
23% 3%
Beef
72% Sheep
1%
Swine
1%
Goats
0%
Source: USDA “Inventory of U.S. Greenhouse Gas
Emissions and Sinks: 1990 –2007”
37
39. Manure Management
Dairy and swine have the greatest opportunity to
reduce the GHG emissions through manure mgmt.
Most feedlots and poultry operations are dry collection systems.
Limited opportunity from runoff of dry systems.
The two main methods to reduce GHG off of manure:
Methane digesters
Large investment costs currently limit its adoption to large
operations.
Future energy prices will influence economics of methane
digesters.
Burning/flaring off the methane
Less capital intensive
Doesn’t generate energy byproduct.
38
40. Industry Revenue Opportunities
Dairy has the greatest opportunity to capture carbon
revenues via C&T legislation.
Poultry operations have few opportunities
Swine operations will have some opportunities to
benefit via manure mgmt changes.
Feedlots will have some opportunities to benefit via
reductions in enteric fermentation emissions
Cow/Calf sector – landowners have more options –
reduces supply to feedlots
39
42. EPA Regulated Scenario Background
Under the Clean Air Act (CAA), any entity that has
the potential to emit more than 100 tons of a
regulated pollutant must obtain a permit to
operate.
In 2007, the Supreme Court, in Massachusetts v.
EPA, ordered the EPA to determine whether heat-
trapping gases harmed the environment and public
health.
On December 7, 2009, the EPA announced its
determination that GHGs "threaten the public
health and welfare of the American people,"
41
43. EPA Regulated vs. C&T Scenario
Cap-and-Trade is more efficient than direct
regulation = Higher production cost impacts.
Direct Regulation does not offer agricultural
producers additional revenue opportunities from
carbon offsets.
EPA regulations could result in the direct
regulation of agricultural producers’ GHG
emissions; whereas, current cap-and-trade
legislation excludes agriculture from GHG
emission regulations.
42
44. Wheat
Net Impact: Benefits of no-till – Costs
60
Net Impact for Adopters (no adoption costs)
50
Net Revenue Impact ($/acre)
Net Impact for Non-Adopters
40
30
20
10
-
(10)
(20)
(30)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
43
45. EPA Regulated Scenario Cost Impacts
2025 Example
At minimum – impacts presented for cap-and-trade
2025 = $3.64/acre increase
Plus …
No fertilizer allowances (adds $3.39/acre)
No offsets to mitigate carbon price or as a revenue opportunity
Inefficiency cost – direct reg. is less efficient than market based approach
Direct ag regulation adds a cost of compliance
Production cost impacts could potentially be multiple times more
than that of cap-and-trade, with no offset revenue opportunity.
44