Department of Economics Cap & Trade Legislation: What’s Proposed and What Does It Mean Iowa Meeting of ASFMRA and RLI Ames, Iowa March 23, 2010 Chad Hart Asst. Professor of Economics Iowa State University

Department of Economics Climate Change Source:

Department of Economics Climate Change Source: Congressional Budget Office

Department of Economics 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, –S. 1733, Clean Energy Jobs and American Power Act Introduced 9/30/09, In committee (actually, six committees)

Department of Economics U.S. GHG Emissions Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics CO 2 Emissions Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics CH 4 Emissions Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics N 2 O Emissions Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics GHG Emissions by Sector Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics Agricultural GHG Emissions Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics GHG Emission Statistics Source: EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:

Department of Economics 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 ). 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.

Department of Economics Climate Change Legislation Source: Craig Raysor, Gillon & Associates, PLLC Agriculture provisions in H.R 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

Department of Economics 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

Department of Economics 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 Source: ISU, Dermot Hayes presentation, Oct. 2009

Department of Economics Energy Sources Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics GHG Emissions & Abatements Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics 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 Source: ISU, Dermot Hayes presentation, Oct. 2009

Department of Economics Domestic Offsets Source: EPA Analysis of Waxman-Markey, April 20, 2009

Department of Economics Domestic Offsets Source: ISU, Dermot Hayes presentation, Oct. 2009

Department of Economics Land Use Changes Source: USDA, Office of Chief Economist Statement of Joseph Glauber, before House Ag Committee, 12/3/09 Allowance Prices

Department of Economics 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 Source: ISU, Dermot Hayes presentation, Oct. 2009

Department of Economics Allowances Source: Congressional Research Service, June

Department of Economics Carbon Prices Increase Over Time Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics Prices Are Sensitive to Offsets Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics Energy Price Paths Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics Impacts on an Average Household Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics Impacts on Tillage Practices Source: EPA Analysis of H.R. 2454, June 23, 2009

Department of Economics Comparison of Results Allowance Price Source: ISU, Dermot Hayes presentation, Oct. 2009

Department of Economics USDA Estimates Source: USDA, Office of Chief Economist Statement of Joseph Glauber, before House Ag Committee, 12/2/ Production Costs Changes

Department of Economics 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”

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

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

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

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

Department of Economics 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)

Department of Economics 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

Department of Economics Thank you for your time! Any questions?