Economic Potential for GHG Mitigation in the Agriculture Sector

transcript

Economic Potential for GHG Mitigation in the Agriculture

SectorCarol Jones, Jan Lewandrowski, Mark Peters and Robert House

Economic Research Service

with support from

Marlen Eve, Keith Paustian, and Mark Sperow, Agricultural Research Service and NREL/CSU

Forestry and Agriculture GHG Modeling Forum, Oct. 9-11, 2002

Outline

• Policy design questions and scope of the analysis

• ERS US agricultural sector modeling framework

• Modeling results

• Summary

Policy Issues

• Issues in design of payment structure – Permanence:

• “Full” payment during contract period or • Pay-as-you-store (“discount” payment)

– For gross or net sequestration?• Only positive payment for sequestration Positive

payment net of debit for land-based emissions

– Include cost-share?

Scope of Analysis

• Carbon sequestration in US ag sector• Activities:

– Land use change to forest from croplands, pasture

– Land use change to grasslands from croplands

– Cropland management• Conservation tillage• Changes in rotations, cover crops/ fallow

Modeling Framework

• USMP national agricultural sector model

• EPIC biophysical model

• Carbon accounting:– IPCC inventory procedures for carbon

accounting: cropland management, and conversion of grasslands

– Birdsey forestry accounting: afforestation

Endogenous Variables

• Domestic consumption, exports/imports• Production quantities and prices• Production technologies:

– Rotations– Tillage practices– Nitrogen fertilizer application rates

• Input use:– Land, labor, capital, purchased inputs

• Environmental outcomes

Capital

Purchasedinputs

USMP Summary SchematicProcessing DemandInputs Primary

Crop production

Livestockproduction

Cropprocessing

EnvironmentalIndicator

Domesticuse

Endingstocks

Exports

Imports

Beginning stocks

Animal productprocessing

Cropland C-Sequestration Rates: IPCC Inventory Method

• Simplified carbon inventory procedure• Features and assumptions:

– Top 30” of soil profile– 20-year inventory period: steady state

achieved in the 20-year period

• Sequestration parameters vary with:– Regional soil type and climate– Rotation types: fallow, organic

improvements, residue input factor– Tillage

Birdsey Carbon Sequestration Rates for Afforestation

• 8 regions

• Above and below ground carbon pools: soil, litter, trees, understory

• Average forest management intensity

Policy ScenariosAll policies have 15-year contract period• S1: “Discounted” carbon payments for storage

during contract period for net sequestration, no cost-share (Reference Policy)

• S2: “Full” carbon payments “Full” carbon payments up frontup front for net

sequestration, no cost-share

• S3: “Discounted” carbon payments for net

sequestration, with cost-share for LUC

• S4: “Discounted” carbon payments for gross

sequestration, no cost-share

$0.00 $25.00 $50.00 $75.00 $100.00 $125.00

C price ($/mt)

Net sequestration

Afforestation

Ag soil management

Grassland

Net Carbon Sequestration

S1 Reference Policy: Discounted payments on net seq.

Carbon $10 $25 $50 $75 $100 $125 Activity: Base Million acres

Cropland in prdctn Conservation tillage 85 1.6 4.1 8.1 12.1 15.6 17.8 Conventional tillage 241 -1.8 -3.6 -7.3 -11.3 -16.9 -23.1 Net cropland chg 326 -0.2 0.5 0.8 0.8 - 1.3 - 5.3 Afforestation Cropland 0 0.0 1.1 5.4 9.7 14.1 21.3 Pasture 0 0.0 3.4 13.9 22.5 33.3 48.0 Total afforestation 0 0.0 4.5 19.3 32.2 47.4 69.3

Land Changes:S1: Discounted payments on net sequestration

Changes in Net Farm Income During Contract Period:

S1: Discounted payments on net sequestration

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10 $25 $50 $75 $100 $125

C price ($/mt)

Payments

Net farmincome

Changes in Commodity Prices:S1: Discounted payments on net sequestration

$0 $25 $50 $75 $100 $125

C price ($/mt)

Fed beef

Soybeans

S2: “Full” Payment Upfront vs. S1: “Discount”(Pay-As-You-Store)

• PDV of payments are same, timing differs: – “Discount” (S1): receive .354 of full price in years 1-

15 [& receive full price over time - if permanent] – “Full” (S2): receive full payment up front during

contract period

• Different behavioral assumptions: – Pay-as-you-store assumes payment is necessary to

provide incentive to maintain practice– “Full” payment assumes farmer continues

sequestering practice after payments end

$0.00 $25.00 $50.00 $75.00 $100.00 $125.00

C price ($/mt)

Total seq- full

Total seq - discount

Ag soil seq - full

Ag soil seq - discount

Net Carbon SequestrationS2 Full vs. S2 Discounted sequestration payments

S2 “Full” Payment Upfront vs. S1 Pay-As-You-Store

• Two scenarios provide a range of estimates of response to carbon price– At $25, 1 MMT - 3 MMT cropland mgmt;

6 MMT - 37 MMT total net sequestration

– At $125, 8 MMT - 13 MMT cropland mgmt; 93 MMT - 362 MMT total net sequestration

How to Interpret the Range of Estimates?

• Reasonable behavioral assumptions?• Is consistency of outcomes to policy design

robust to alternative behavior? – “Full” payment not robust

• If sequestration ends with contract period, then have overpaid by factor of 1/.354 = 2.8

– Pay-as-you-store is robust• If sequestration is permanent, then - over duration of

permanent storage - pay PDV-equivalent to full payment during contract period

S2: “Full” Payment Upfront vs. S1: Pay-As-You-Store

• Alternatively, can interpret full payment in pay-as-you-store framework: – $125 discount price $353 “full” price

• Grassland not competitive at these prices– Even in regions where forestry is not viable

(Mountain, Plains states)• Threshold appears to be $125/$353: Southern

Plains states have 4000 acres afforested

$0 $50 $100 $150 $200 $250 $300 $350

C price ($/mt)

Total seq (S1)

Total seq (S2)

Ag soil seq (S1)

Ag soil seq (S2)

Net Carbon SequestrationS1 and S2 as discounted sequestration payments

S3 Cost-share for Establishing Grasslands, Forest

• Promotes more afforestation, but increase in seq. levels off at + 6 MMT by $25

• Share of subsidy/ton is high at low prices, but declines substantially with carbon price

• At higher carbon prices, there is partial offset due to reduction in cropland sequestration

• S3 may be more slightly cost-effective than S1, but distorts choice among activities

S4 Gross vs. S1 Net Sequestration Payments

• Focus on cropland leakage (no forest sector leakage in the model)

• Lower levels of net sequestration• Huge increase in program cost - ratios of

S4 costs to S1 costs are:– For 1 MMT sequestration, 75 x – For 3 MMT sequestration, 16 x – For 5 MMT sequestration, 9 x

A) Land in production1) Switches from conservation to conventional - yield

incentive w/no carbon debit increases emissions

2) Switches from conventional to conservation - carbon incentive increases sequestration

3) Omitted: tilling land now in conservation to establish future eligibility increases emissions

B) Idle land brought into crop productionIncreases emissions, whether practice:

1) conservation tillage (in program) or

2) conventional tillage (not in program)

• Relative to S1, S4 farm income starts out higher at low carbon prices but is equal at $125 – S4 incentive payments are 25% higher at $125– BUT: commodity price increases are much smaller

(so producer surplus does not increase as much)

Conclusions• “Full” payments upfront vs. pay-as-you-

store:– Important to distinguish which policy is employed in

reporting marginal cost analysis

– Pay-as-you-store is more robust across alternative behaviors

• Cost-share of establishment costs:– Small impact on sequestration across price levels

– May be slightly more cost-effective than without, but distorts choices if not applied to all activities

Conclusions

• Gross sequestration payments: – Substantially cut net sequestration– Substantially increase costs per ton of net

sequestration– Do not (substantially) increase farm income

Economic Potential for GHG Mitigation in the Agriculture Sector

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