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
Land
Labor
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
20
40
60
80
100
120
$0.00 $25.00 $50.00 $75.00 $100.00 $125.00
C price ($/mt)
C S
eq
ue
str
ati
on
(M
MT
)
Net sequestration
Afforestation
Ag soil management
Grassland
Net Carbon Sequestration
S1 Reference Policy: Discounted payments on net seq.
Price
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
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Mil
lio
n d
olla
rs
$10 $25 $50 $75 $100 $125
C price ($/mt)
Payments
Net farmincome
Changes in Commodity Prices:S1: Discounted payments on net sequestration
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
$0 $25 $50 $75 $100 $125
C price ($/mt)
Pe
rce
nt
ch
an
ge
Rice
Corn
Fed beef
Soybeans
Pork
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
25
50
75
100
125
150
175
200
225
250
275
300
325
350
375
$0.00 $25.00 $50.00 $75.00 $100.00 $125.00
C price ($/mt)
C s
equ
estr
atio
n (M
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
25
50
75
100
125
150
175
200
225
250
275
300
325
350
375
$0 $50 $100 $150 $200 $250 $300 $350
C price ($/mt)
C s
equ
estr
atio
n (M
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
S4 Gross vs. S1 Net Sequestration Payments
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)
S4 Gross vs. S1 Net Sequestration Payments
• 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
