USDA Finds ACES Benefits to Farmers "Easily Trump" Increased Energy Costs

Last week, the USDA's Office of the Chief Economist published its preliminary analysis of the effect of the American Clean Energy and Security Act (ACES) on the U.S. agricultural sector. The conclusion was clear: ACES will help, not hurt, American farmers.

Secretary of Agriculture Tom Vilsack delivered this conclusion on the same day in his testimony before the Senate Agricultural Committee:

"In the short term, the economic benefits to agriculture from cap and trade legislation will likely outweigh the costs. In the long term, the economic benefits from offsets markets easily trump increased input costs from cap and trade legislation."

Using EPA estimates of energy prices under ACES to assess the short and long-term impacts of the bill on energy costs to U.S. farmers, USDA found that farmers will at minimum break even in the short-term and stand to gain substantially from ACES in the medium- to long-term, once new revenues from the sale of offsets are included. In the short-term, EPA estimates the sale of agricultural offsets could generate $1-$2 billion annually in new revenues for farmers, (net of the costs associated with implementing offset projects), rising to about $20 billion per year in 2050 (in 2005 dollars). Adjusting for the fact that EPA includes revenue from forest management offsets while USDA does not (forest management offsets comprise approximately half of the total domestic offsets potential in the near-term and approximately one quarter in the long-term), net returns to farmers could total roughly $0.5-$1 billion per year in the near-term and roughly $15 billion per year by 2050. By comparison, USDA's preliminary analysis found that increased energy costs will reduce farm sector income by only $0.7 billion in the short-term and roughly 4.9 billion in the long-term (in 2005 dollars).

Importantly, as USDA indicates in its preliminary report, these cost estimates represent an upper bound because they assume no change in production practices — i.e. they do not account for the ability of farmers to successfully adapt to changes in market conditions — for example, through increased on-farm energy efficiency or a shift towards more renewable energy sources. (ACES includes strong standards and incentives to improve energy efficiency and increase renewable energy, which will help farmers reduce their dependence on foreign oil and other fossil fuels. The House-passed bill calls for 20 percent of electricity to come from renewable sources and efficiency improvements by 2020 and allocated $90 billion in incentives to energy efficiency and renewable energy technologies, including federal tax credits for farmer for energy efficiency upgrades). As a result, USDA's analysis of net benefits to farmers from clean energy and climate legislation are likely conservative, something that Secretary Vilsack appropriately highlighted:

"...we believe these figures are conservative because we aren't able to model the types of technological change that are very likely to help farmers produce more crops and livestock with fewer inputs. Second, the analysis doesn't take into account the higher commodity prices that farmers will very likely receive as a result of enhanced renewable energy markets and retirement of environmentally sensitive lands domestically and abroad. Of course, any economic analysis such as ours has limitations. But, again, we believe our analysis is conservative — it's quite possible farmers will actually do better."

Nevertheless, USDA's analysis has come under criticism from ranking Senate Agriculture Committee Member Saxby Chambliss. In response to the publication of USDA's preliminary analysis, Chambliss and other members of the Committee sent a letter to USDA's Chief Economist, criticizing the agency's use of EPA data and estimates, both of energy price impacts and domestic offsets supply potential in the agricultural sector.

EPA's estimates of energy price impacts under ACES are in line with non-partisan analyses of the bill, including that by the Congressional Budget Office. With respect to the potential supply of agricultural offsets — the amount of greenhouse gas (GHG) emissions EPA estimates the agricultural sector will be able to reduce or sequester, given their estimates of what the carbon price trajectory will be under the ACES cap, through practices like no-till farming, capturing and flaring methane gas from livestock operations, reducing nitrous oxide emissions from the application of nitrogen-based fertilizers, and planting trees on marginal farmlands — EPA's updated June, 2009 estimates, which are frequently criticized for being too pessimistic and therefore short-changing farmers, now seem to be coming under attack from Chambliss and others for being too high and optimistic for farmers!

EPA's analysis of domestic offsets potential is amongst the most credible estimates available and reflects recently updated assumptions about agricultural and forestry practices, policies affecting the agricultural and forestry sectors, as well as land, energy and other commodity prices. Though modeled estimates of offsets potential have obvious limitations, the larger point is that offsets are only part of the story. USDA's analysis does not account for the substantial revenues farmers stand to earn from biomass production for bioenergy or other markets for renewable energy like wind, solar and biogas recovery. Importantly, it also takes no account of the costs to farmers of inaction — the damages farmers will experience from increased droughts, changes in water supply and extreme weather events as a result of unmitigated global warming pollution.

Estimates of revenues from the sale of offsets also do not take into account the potential for innovation — the development of new project types that qualify as offsets over time. The House-passed version of ACES allocates 0.28 percent of emissions allowance value per year from 2012-2016 towards supplemental agriculture and renewable energy incentives programs, with at least half going specifically to agriculture, including investments in the development and demonstration of practices that reduce GHG emissions or sequester carbon in agricultural operations where these opportunities are currently limited. Over time, interest will likely grow in funding projects to explore additional ways to enhance emissions reductions and carbon sequestration on U.S. lands. Once a track record of success is established, these activities could also qualify as tradable offsets, expanding the potential for offset-based revenues to farmers.

The American agricultural community is well positioned to benefit from passage of clean energy and climate legislation. To maximize these benefits, agricultural representatives should now work together with business, environmental advocates, foresters and the American public to help ensure the carbon offsets market is governed by sound rules and that agricultural offsets represent a high-quality commodity that gains the confidence of investors and the public.