Presentation to GHG Modeling Forum Shepherdstown, WV, October 8-11, 2002

1. Economic Assessment of GHG Mitigation Strategies for Canadian Agriculture: Role of market mechanisms for soil sinks Robert Flick & Bob MacGregor Agriculture and Agri-Food Canada, Presentation to GHG Modeling Forum Shepherdstown, WV, October 8-11, 2002

2. Outline of Presentation • Background & Goal • Modelling Objectives • The structure of CEEMA • Preliminary results • Limitations • Next steps

3. Background & Goal • Agriculture and Agri-Food Canada (AAFC) has a research program in place to assess alternative GHG mitigation strategies. • Canadian Economic and Emissions Model for Agriculture (CEEMA) is used to assess the economic and emission impacts. • Current efforts now include endogenizing adoption rates within CEEMA to respond to variable carbon prices. • The goal is to derive a supply curve for carbon removals.

4. Modelling Objectives • If we are going to use a market mechanism such as DET & offsets, need to estimate at what world prices for CO2 different mitigation actions would be adopted • In Phase I only looking at tillage practices and price for CO2 to test methodology in CEEMA

5. Schematic of the Components of CEEMA Land Base Non-land resources Uncultivated Land Cultivated Land Technology of Production Economic Optimization Model (Canadian Regional Agricultural Model) Product and Input Markets Farm Input Demand Level of Crop and Livestock Production Shipments and Trade Producer and Consumer Surplus Science of Greenhouse Gas Emissions: Estimation of coefficients Greenhouse Gas Emissions Model Greenhouse Gas Emissions from the Agriculture and Agri-Food Sector

6. Policy Model - CRAM • Static, non-linear optimization model • Maximizes producer + consumer surplus • Integrates all sectors of primary agriculture • Regional supply/demand • Inter-provincial and international trade • Government policies/subsidies • Transportation and handling • Land is the only resource constraint • Crop supply response determined by relative profitability of alternative crops

7. Greenhouse Gas Emissions Module • 100 year Global Warming Equivalent estimates of CO2, CH4 and N2O emissions • Emission coefficients based on latest scientific information • biophysical models (CENTURY) • expert opinion (AAFC Research Branch, IPCC and Environment Canada) • Disaggregate approach - emissions of each GHG are estimated for each region, crop and livestock production activities, and source of GHG emissions • Estimated emissions = emissions coefficient * production activity level • Flexibility in method of summation (e.g. total agriculture and agri-food sector vs. IPCC/Inventory methodology)

8. Features that Allow us to endogenize carbon • CRAM has crop production in the Prairies specified by rotation in terms of fallowing, crop type, tillage technology and region • The GHG module provides sequestration coefficients in a consistent manner, but by soil zone vs. region • The model is calibrated to represent the base year employing Positive Math Programming • Information is obtained from the Census (every 5 years) plus other sources

9. Testing Model for various carbon prices • Using a loop routine in GAMS, carbon prices in the objective function were increased incrementally • This has the impact of increasing returns to those cropping activities that sequester more carbon • This is interpreted as impacting the adoption rate for different tillage practices • Other GHG not initially account for, nor costs of adoption

10. Preliminary testing of Model

11. Economic Value to Sector

12. To complete Phase I we have some more work to do on the Model • Cost curves in model are only short run in nature, we need to replace with long run marginal factor cost curves to reflect true costs • Current cost information needs to be improved • Adoption cost must be incorporated • Need to incorporate any longer term economic and environmental benefits from practices • Transaction costs must be incorporated

13. Further Research Activities • Look at other offset possibilities • both sinks and emission reductions • Investigate Generalized Maximum Entropy to fill in data gap on cost of production • Incorporate other mitigation technologies or production options into the modelling system • Evaluate dynamic issues in terms of managing sinks over longer time horizon • Evaluate different design options to reduce transaction costs.