Q. How can agriculture be a part of the solution to climate change?

With the adoption of a cap-and-trade market that includes agricultural offsets, it has been estimated that 30% of greenhouse gas (GHG) offsets could be met with agricultural offsets annually over the next 50 years.(i) Currently, agriculture emits about 6% of the annual total of US greenhouse gases.(ii) Reductions could come from the use of methane capture, precision fertilizer application, and other agricultural practices such as carbon sequestration.

Q. What are offset markets and how do they work?

Since greenhouse gases accumulate in the atmosphere from emissions worldwide, greenhouse gas reductions can come from anywhere with equal impact on climate change. Offset markets are a way for companies to meet their GHG reduction obligations through reductions outside their facilities and operations. A company might do this for a period of time to avoid replacing equipment before the end of its useful life or because it is the most cost effective way to meet their reduction obligations.

For example, if a utility is required to reduce their emissions by 100 tons over the next year, an offset market allows them maximum flexibility to meet that goal while keep prices stable for consumers. The utility could reduce its direct emissions to reach part of the goal, increase its efficiency to meet part, and it could choose to purchase GHG reductions from farmers for part – or its entire target depending on which choices make the most economic sense. In this way, offset markets make it possible to take action to reduce greenhouse gases without significantly affecting the economy.

In order to create these markets Congress must adopt a policy that caps greenhouse gas emissions and allows agricultural offsets to be purchased in place of allowances (cap and trade). So far, the American Clean Energy and Security Act of 2009 (ACES) has passed the House of Representatives, which contains multiple opportunities for American agriculture to partake in a robust offset market. The Senate is involved in ongoing discussion of climate legislation, but Senator Stabenow and six key co-sponsors have introduced the Clean Energy Partnerships Act of 2009 (CEPA) which makes America’s agriculture and manufacturing part of the solution in the debate over climate and clean energy. CEPA includes a domestic emission-reductions program to earn carbon credits and a list of initial eligible projects.

Q. Will agriculture be regulated by the “cap”?

No, under the most climate legislation being discussed in Congress manufacturing, transportation and utilities are “capped” entities, not agriculture. Agriculture, however, has the potential to be involved in the “trade” portion of the market.

Q. How much are these markets worth?

Analysis from EPA and indicates ACES could create a domestic offset market valued at $2.7 billion to $3.4 billion or more annually within five years of the legislation’s implementation.(iii) Recent USDA analysis indicates domestic agricultural and forestry offset revenues of $2 billion per year in the near-term rising to $28 billion per year in the long-term.(iv) USDA analysis found that under ACES, “the agricultural sector will have modest costs in the short term and net benefits – perhaps significant net benefits – over the longterm.”(v)

Q. How can agricultural practices reduce or offset greenhouse gases and climate change?

Plants naturally take up carbon dioxide (a primary greenhouse gas) and give off oxygen. In this process, they also store or “sequester” carbon in the soil through their roots; however, most of that carbon is released when farmers plow up the field to plant a crop. If farmers were to use direct seeding or no-till practices to plant crops, they would keep all that stored carbon in the soil. Practices like this, which have the ability to literally take CO2 out of the atmosphere and sink it into soils –also create better soil fertility, water quality, water retention and greater wildlife habitat. Other farming practices could also qualify for GHG emission reduction credits under the bill now before Congress. ACES allows for 2 billion annual offset credits to be traded on the market. Currently, the bill allows for emissions to be offset by:(vi)

Soil Carbon Sequestration
Animal Waste Methane Capture
Nitrous Oxide Reductions from Fertilizer Application
Afforestation Carbon Sequestration
Forest Management Carbon Sequestration

USDA forecasts the amount of carbon sequestered by US agriculture will nearly double from current levels in the next five years.(vii) This additional uptake is expected through improved soil management (~60%), improved manure and nutrient management (~30%), and additional land-retirement (~10%).(viii)

Q. How do offsets impact the cost of emissions reductions for the US economy?

Agricultural carbon offsets are a lowest cost option and they can significantly reduce the overall cost of a cap-and-trade system while still achieving the desired level of emissions reductions. Additionally, offsets may act as a price “safety valve” for cap-and-trade if an unlimited number of offsets are allowed. As the price of a carbon allowance or credit rises, because the cost of abatement is often lower for agriculture than for other sectors, new entrants will arrive at an earlier price-point than other participants.

Q. What will happen to farming income?

Projections on increased costs from cap-and-trade to agriculture vary widely. Analysis by Iowa State University economist Bruce Babcock indicates “relatively small” production costs of roughly $4.52 per acre for corn and soy farmers in Iowa, on the order of 1-2%. To put this potential cost increase into perspective, the variable cost of producing corn and soybeans in Iowa in 2009 is somewhere around $300 per acre. Babcock also cites that the amount of soil carbon that can be increased from adoption of no-till farming is typically on the order of one ton of CO2 per hectare, or about 0.4 tons per acre annually. At a $20-per-ton carbon price, this amounts to $8.00 per acre.

USDA analysis of ACES also indicates only marginal production cost increases. In fact, USDA found the near-term impact of ACES on net farm income is less than a 1% decrease. While USDA predicts the cost of fertilizer and production will increase over the medium and longer term, these increases are still predicted to be less than 10%.

Depending on the carbon pricing scheme, farmers could increase their net profits under a cap and trade system (after taking costs into account). Recent USDA analysis “strongly suggests that revenue from agricultural offsets (afforestation, soil carbon, methane reduction, nitrous oxide reductions) rise faster than costs to agriculture from cap and trade legislation.”