Carbon Sequestration and the Cap Carbon Sequestration and the Cap

and Trade Debateand Trade Debate

Joe L. OutlawProfessor & Extension Economist

Co-Director, Agricultural and Food Policy Center

2010 Ag Outlook ConferenceKeeping Louisiana Agriculture Competitive

Alexandria, Louisiana

January 21, 2010

Presentation OutlinePresentation Outline

• Background and Caveats• Assumptions….• Results• Conclusions

A Little Background… What We A Little Background… What We DoDo

• The Agricultural and Food Policy Center (AFPC) was created at Texas A&M in 1986 at the suggestion of Former Congressman Charlie Stenholm– With one mission – provide the agricultural

committees of Congress with unbiased and not politicized analysis of potential policy changes on the agricultural sector

– Do most of our work as member of FAPRI consortium

• My role in our Center is to position our analytical capabilities based on the issues I see coming– Ex. Renewable fuels and climate change

A Little Background… What We A Little Background… What We DoDo

• Most refer to us as the rep farm people– Currently have 98 “representative” farms across the

U.S.• Meet with about 600 farmers every other year

– Current rep farms in Louisiana:• 2,500-acre, large-sized northeast Louisiana (Madison

Parish) diversified farm. This farm harvests 500 acres of rice, 800 acres of soybeans, 250 acres of cotton, and 950 acres of corn.

• a 2,640-acre diversified farm located in northern Louisiana (Morehouse Parish). This farm plants 924 acres of cotton, 1,056 acres of corn, and 660 acres of soybeans each year.

• A 1,200-acre southwest Louisiana (Acadia, Jeff Davis, and Vermilion parishes) rice farm, is moderate-sized for the area. This farm harvests 660 acres of rice and 250 acres of soybeans.

– Analyze impacts of policy changes on them to indicate issues – at the farm level

– Learn more from panels than their costs of production

BackgroundBackground

• Had Been Trying to Figure Out How to Do– Rep farms perfect for this

• Request From Senator Chambliss• Very Difficult• Hadn’t Paid That Much Attention to

CCX

Representative Farms, Dairies, and Representative Farms, Dairies, and RanchesRanches

Assumptions….Assumptions….

• Had to Make a lot of Assumptions• EPA Had Their Own Baseline(s)• Sequestration Map {would work like

CCX}• Crop Farms Converted to No-Till

– Based on map some not able to participate

– No rice farms

• Dairies > 500 Head Add Methane Digester

• Cattle Ranches Assumed Not to Participate

Scenarios AnalyzedScenarios Analyzed

• Baseline – Projected prices, policy variables, and input inflation rates from the Food and Agricultural Policy Research Institute (FAPRI) January 2009 Baseline.

• C&T without Ag Carbon Credits – Assumes H.R. 2454 becomes effective in 2010. Imposes EPA commodity price forecasts along with estimated energy cost inflation on representative farm inputs.

Scenarios Analyzed Scenarios Analyzed (Continued)(Continued)

• C&T with Carbon Credits – Assumes H.R. 2454 becomes effective in 2010. Imposes EPA commodity price forecasts along with estimated energy cost inflation on farm inputs, converts crop farms to no-till production (if applicable) and/or installs a methane digester on dairies over 500 head and sells carbon credits at EPA estimated prices.

• C&T with Ag Carbon Credits and Saturation – Assumes the farmland reaches carbon saturation in 2014. This scenario represents the loss of revenues that will be experienced by farms at some point due to carbon saturation of the soil. This scenario is not relevant for analysis of methane digesters on the dairies since saturation is not an issue.

EPA study indicated 25 million acres of cropland and 24 million acres of pasture would be converted to trees

New University of Tennessee study completed for the 25x’25 Alliance indicated almost all would come from pasture??

Gross and Net-to-Farmer Carbon Gross and Net-to-Farmer Carbon Prices Utilized in Representative Prices Utilized in Representative

Farm Analysis, 2010 to 2016Farm Analysis, 2010 to 2016

Year 2010 2011 2012 2013 2014 2015 2016

Gross ($/ton)

8.97 9.704 10.438

11.172

11.906

12.64 13.374

Net-to-farmer ($/ton)

7.75 8.41 9.07 9.73 10.40 11.06 11.72

Representative Farms, Dairies, and Ranches Representative Farms, Dairies, and Ranches Analyzed Under the C&T with Ag Carbon Credits Analyzed Under the C&T with Ag Carbon Credits

Scenario Showing Higher and Lower Ending Cash in Scenario Showing Higher and Lower Ending Cash in 20162016

Representative Farms by Type That Representative Farms by Type That Have Higher or Lower Ending Cash Have Higher or Lower Ending Cash

Reserves For the C&T with Ag Carbon Reserves For the C&T with Ag Carbon Credits Scenario Relative to the Credits Scenario Relative to the

BaselineBaselineFarm Type Higher Lower Total

Feedgrain/Oilseed

17 8 25

Wheat 8 3 11

Cotton 1 13 14

Rice 0 14 14

Dairy 1 21 22

Cattle Ranches

0 12 12

Total 27 71 98

ConclusionsConclusions

• EPA’s Analysis Assumes– Energy prices go up but… assumes

some commodity prices offset those increases•Crop to crop and crop to forestry

– Carbon prices rise to ~$13/ton by 2016

• If EPA’s Analysis is right – not the end of the world – just not fun for everyone

• This isn’t the final answer…