One of President Obama’s goals as he entered the U.S. presidency in 2009 was to address global warming and concerns over world climate change. The U.S. House of Representatives passed a somewhat controversial climate change bill (HR-2454) by a narrow margin in late June. HR-2454 would cap carbon emissions at 17% below 2005 levels by 2020, 42% below by 2030 and 83% below by 2050. The bill also creates a so-called cap-and-trade system, through which a company or business could purchase carbon allowances (credits) from other businesses and industries that reduced carbon emissions through their normal operations. The legislation also calls for 15% of electrical energy in the U.S. to come from renewable sources by 2020, such as wind and solar.
The U.S. Senate has held committee hearings on the Senate version of legislation (S-1733), but has not reach consensus on a final climate change bill. Once a bill passes the Senate, the differences with the House version of the bill will have to be worked out in conference committee, before a final bill can be considered for passage. Proposed climate change legislation, and the carbon cap-and-trade aspects of the legislation, has become quite controversial in many areas of the country, related to some specific industries – including the agriculture industry. Not only has the proposed legislation divided members of congress, it has also divided farmers, economists and university experts.
USDA Economic Analysis
Several weeks ago, USDA provided a U.S. House Agriculture Subcommittee with an overview of the projected economic impact on the U.S. agriculture industry that would likely result from the proposed climate change legislation. Following are some of the highlights of the USDA economic analysis:
- Production Costs – USDA is projecting the price and income impact to be relatively small due to higher production costs from 2012-2025, as a result of potential rebates to fertilizer producers. On a longer-term basis, farm income is expected to decline by 7.2%, excluding the economic benefit of any potential carbon offsets.
- Carbon Offsets – The carbon offsets would be paid for practices that sequester carbon production. Under the proposed climate change legislation, most of the carbon offset benefits would be gained by converting current cropland and pastureland to tree plantings. Most of the projected carbon offset income would go to landowners who plant these trees. By 2050, USDA projects a total of approximately $30 billion for carbon offset income to agriculture, with about $24 billion going toward land conversions to tree plantings. Approximately only $3.8 billion in total carbon offsets are projected to be derived from crop production.
- Land Shift – The price of carbon credits will likely encourage landowners to convert cropland and pastureland to tree plantings. By 2015, USDA estimates that the price of carbon credits will be $13/ton and that 8 million acres will be converted to tree plantings. If the carbon credit price rises higher to $27/ton in the coming years, the land conversion would likely total 27 million acres in short run. By 2050, it is estimated that the price of carbon credits will increase to $70/ton and that as much as 59 million acres could be converted to tree plantings, with 35 million acres coming from crop production acres and 24 million from pasture land. Most of the shift in land-use from cropland and pastureland to tree plantings is expected to occur in the Corn Belt, Lakes states, Rocky Mountains and south-central U.S.
- Crop Production – USDA expects total corn production to decline by 3.5% in 2013, 7% in 2030 and 22% by 2050. Soybean production is expected to decline by 1.4% in 2013, 9% in 2030 and 29% in 2050. Increased crop yields have been factored into these crop production estimates.
- Livestock Production – Due to the land shifts and higher input costs, livestock production is also expected to decline sharply. USDA estimates total hog slaughter to drop by 7% in 2030 and by 23% in 2050. A 3% decline in beef slaughter is expected by 2030, and a 10% decline by 2050. Total U.S. milk production will likely decline 17% by 2050.
- Consumer Food Prices – USDA estimates that consumer food prices would increase only 0.1-0.2% in the short term – as a result of the carbon offsets – and 1-2% or more on a long-term basis. This is only due to agriculture offsets, and does not include other cost add-ons.
- Foreign Agriculture – USDA acknowledges that lower domestic production of crops and livestock, along with higher market prices, could encourage increases in agricultural production in foreign countries.
- Farm Income With Offsets – USDA estimates that total farm income would rise 12% by 2050, due to higher crop and livestock prices and the value of the carbon offsets.
Key Questions Regarding a Climate-Change Bill
Following are some key questions that need to be considered by congress, the administration, farm organizations, environmental groups, universities and the general public as we consider proposed climate change legislation and a potential carbon cap-and-trade system:
1. How sound is the science that is determining provisions the of the climate-change legislation?
There are a lot of discrepancies in both the science and the economics being used to develop policies, or to oppose policies, relative to climate change. It would seem that some sound, trustworthy, high-quality research is needed to assure sound policies for the future.
2. What will be the “true” costs of enacting the climate-change legislation, or not enacting it?
Again, there is wide variation in cost estimates for this legislation for agriculture, other industries and consumers. Most experts agree that the cost of energy and electricity will increase significantly, which will likely lead to increased expenses for most businesses and consumers. Some experts also point out the potential impact on long-term costs, if global warming issues are not addressed.
3. What new business opportunities will occur as a result of the climate-change legislation?
We are already seeing growth in green businesses and industries. There could likely be opportunities in renewable energy, but possibly not from traditional biofuels produced from corn and soybeans. There will likely be economic opportunities for farmers who employ conservation-tillage methods, improved fertilizer management and other conservation practices. However, there may also be farms and other businesses that are discontinued due to the added costs of production.
4. How will climate-change legislation in the U.S. affect the global economy?
Many experts feel that it is extremely important that any efforts to manage global warming be done universally by the major economic countries of the world. Otherwise, implementing strict climate-change regulations with increasing costs could put U.S. industries at an economic disadvantage.
5. Will the climate-change legislation greatly change future land-use patterns?
Some experts feel that the carbon cap-and-trade incentives will encourage farmers and landowners to take farmland out of row-crop and pasture production in order to sell or lease the land to large companies and industries that need to have carbon credits. There will be financial opportunities for landowners; however, that may not necessarily translate into economic benefits for farm producers or rural communities that depend on an agricultural economy. In addition, some people question the ethics of reducing food production at a time when large increases in world hunger are expected in the next few decades.
Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at [email protected]