Potential Congressional Action on Greenhouse Gas Regulation

1. Patrick Westhoff (westhoffp@missouri.edu) FAPRI-MU (www.fapri.missouri.edu) University of Missouri PotentialCongressional Action on GreenhouseGasRegulation Breimyer Seminar, 2010 “Greenhouse Gas Regulation, Boom or Bust for Agriculture?” Columbia, Missouri, May 27, 2010

2. Agenda • Status of climate change legislation • What would climate change legislation mean for the farm sector? • Other Congressional action on greenhouse gas regulation

3. Climate change legislation: Quick summary of Congressional debate • House passed bill in 2009 • Formally the “America Clean Energy and Security Act of 2009,” or ACES • Often referred to as “Waxman-Markey” after sponsors • Passed House 219-212 on June 26, 2009 • Senate has not passed a bill • Environment and Public Works Committee approved a bill in Nov. 2009 • Senators Kerry and Lieberman have proposed the “American Power Act”

4. Climate change legislation overviewApplies both to House bill and Kerry-Lieberman • Would limit greenhouse gas emissions from main sources • Covered firms need allowances to emit • Can trade allowances or purchase offsets • Offsets earned by reducing emissions/ sequestering carbon in uncapped industries • Cap reduced over time • 83% of 2005 level in 2020 • 17% of 2005 level in 2050

5. House climate change legislation: What is capped and what isn’t? • Capped • Electric and natural gas utilities • Oil refiners • Most “heavy” industry • Not capped • Farms (although input industries are) • Various small emitters of greenhouse gases

6. House climate change legislation: Distribution of allowances • Some given away for free • Electric utilities, natural gas distributors • Energy-intensive, trade-exposed industries (including nitrogen fertilizer producers) • Free allowances generally phased down over time • Others auctioned • Revenues used to reduce net costs to consumers • Some set aside for deficit reduction

7. House climate change legislation: How are offsets generated? • Reduction in emissions or sequestration by uncapped industries • Agriculture examples • Shift to no till • Install methane digester • Convert crop or pasture land to forestry • Can be domestic or international

8. House climate change legislation: Big picture impacts • Most analysis shows biggest actual GHG reduction from electric utilities • Reduced use of coal • Expanded use of renewables and especially nuclear power • Relatively little change in transportation fuels • Carbon price increases over time

9. Estimated value of an allowanceBased on House-passed bill Source: Table 3 in USDA testimony before House Agriculture Committee, Dec. 18, 2009, p. 21.

10. Things to note • Estimates of allowance values of House bill • Are very different (and there are other competing estimates, even from EIA) • Increase over time • Imply significant incentives for sequestration • No-till and other practices that may have little effect on agricultural production and prices • Expansion of forestry or energy crops, which could have an important effect on crop production

11. How does Kerry-Lieberman compare to House bill? • Many provisions same or similar to those in House bill • Greenhouse gas reduction targets • Basic regulatory system (although not identical) • Some distinctive features • Additional incentives for nuclear power, offshore drilling • Distribution of free offsets different than in House bill • Allows fewer international offsets

12. Impacts on energy costs (House-passed bill, change from baseline) Source: EIA and EPA analysis of HR 2454, the House climate change bill. These costs include the value of allowances.

13. Uncertainties in estimating crop production cost impacts • How much will energy costs change? • How does a given change in energy costs affect prices for fertilizer, chemicals, etc.? • How will provisions to benefit energy-intensive, trade-exposed (EITE) industries work? • What changes will farmers make in production practices?

14. Estimated impacts on corn operating costs (change from baseline) *Free allowances are phased out between 2025 and 2035 under HR 2454. Source: FAPRI-MU estimates.

15. Cropland shifts to forestry or energy crops • FASOM model (Dr. McCarl, Texas A&M) results: much crop and pasture land will shift to forestry • Reduction in crop production results in higher crop prices • Tennessee analysis: at moderate carbon prices, energy crop area increases (less effect on forestry) • If grain and oilseed production is reduced, prices will increase • Depends on magnitude of production decline • And on how price responsive users and other producers are

16. Land use changes(From USDA testimony, based on FASOM results)

17. FAPRI-MU ongoing work • Estimating impacts on U.S. agriculture of multiple scenarios • Different increases in energy costs • Different assumptions about how biofuel sector is affected • Different assumptions about how many acres shift out of grain/oilseed/cotton/sugar production • Following results are all preliminary and may change if we get new information

18. Three scenarios(We will examine more)

19. Effects on production expenses(2030, change from baseline) Source: FAPRI-MU estimates. Measures changes in variable expenses (excluding land) for crops, feed and nonfeed expenses for livestock

20. Effects on prices(2030, change from baseline) Source: FAPRI-MU estimates. Farm prices for crops, Nebraska direct prices for steers, and 51-52% lean prices for hogs

21. Effects on planted acreage(2030, change from baseline) Source: FAPRI-MU estimates. 13 crops include listed crops, upland cotton, sorghum, barley, oats, rice, peanuts, sunflowers, canola, sugarcane and sugar beets.

22. Effects on farm income(2030, change from baseline) Source: FAPRI-MU estimates. These estimates do NOT include income from sale of offsets. If included, offset sales would increase net farm income.

23. Effects on food prices, expenditures(2030, change from baseline)

24. Things to note • Reported estimates are based on layers of assumptions and may be revised • But basic points should hold • Higher energy costs would reduce farm income, all else equal • But increased biofuel production, acreage shifts (and offset income) could change the picture • Landowners most likely to benefit; livestock producers least likely

25. Back to the Congressional process • Senate debate on Kerry-Lieberman in June/July/??? • Would require 60 votes to overcome filibuster • Both partisan and regional issues • Any Republican support? • Will coal-state Democrats support? • Bill could change before or during floor debate • And always possible no bill passes • Even if bill is approved, would have to be reconciled with House-passed bill (and recall close House vote last year)

26. Congress and greenhouse gases: EPA regulations • EPA has proposed to move forward on regulatory approach if no climate legislation • Sen. Murkowski (R-AK) proposes “disapproval resolution” • Vote now tentatively set for June 10 • Unlikely to stop regulation (even if passes both Houses, President can veto), but some see as key test vote • Sen. Rockefeller (D-WV) seeks 2-year delay in regulations • Appropriations bills could seek to delay or limit implementation • Outcome uncertain

27. Congress and greenhouse gases: Biofuel issues • Biofuel tax credits and tariffs • Biodiesel credit ($1 per gallon) expired at end of 2009 • Ethanol credit ($0.45 per gallon) and ethanol specific tariff ($0.54 per gallon) expire at end of 2010 if no legislation • Unfolding debate this week on large bill including biodiesel credits for 2010 • Many expect year-end tax legislation to address issue of provisions expiring this year • Much support, but budgetary cost is major concern • Renewable Fuel Standard requires minimum levels of biofuel use even if credits are not available

28. Congress and greenhouse gases: 2011 and beyond • Good chance no climate legislation will be approved in 2010 • Terms of debate could be very different in 2011 • New Congress could have different partisan make-up • This and other factors could lead to very different legislation (or none at all) being considered • Budget issues could transform debate • Attacking budget deficit likely to be a high priority in 2011 • Taxing carbon or selling greenhouse gas allowances could raise a lot of revenue • But would also face widespread opposition

29. THANKS! • To contact me: westhoffp@missouri.edu • FAPRI-Missouri website: www.fapri.missouri.edu