Government roles and Co-effects of Climate Change Mitigation policies

1. Government roles and Co-effects of Climate Change Mitigation policies Apr. 2 2004 En Zhu Department of Agricultural Economics Texas A&M University Spring 2004

2. Outline • Role of Agriculture • Role and Policy Design of Co-effects • Market failure • Government Intervention • Control GHG Emissions • Subsidize Agriculture • Tax Energy Sector • Case Study • Water Quality • Environmental benefits • Biodiversity

3. KEY FINDINGS for Global climate change • 1. Increased warming • rise 5-9ºF (3-5ºC) on average in the next 100 years. • 2. Vulnerable ecosystems • 4. Widespread water concerns • 5. Secure food supply • 6. Near-term increase in forest growth • 7. Increased damage in coastal and permafrost areas • 8. Adaptation determines health outcomes • 9. Other stresses magnified by climate change • 10. Uncertainties remain and surprises are expected • Precaution Principal: Stop Global Warming!

4. Carbon Emission Sources in US 6% 8% Power Plant 36% Transportation Industry 22% Agriculture Residential 28% Source: EPA - U.S. GHGE Inventory 2003 Role of Agriculture • Provides a set of potential “Carbon Sinks” • Sequestration from land use change and forestry in 1999: 15 % of total U.S. emissions. • Conservation tillage, crop residues, cover crops, water management, forestry, bio-fuels, manure management. • Alternative Fuel • Face different input and output prices due to mitigation (Mccarl and Schneider 2000)

5. Examples about potential ancillary benefits or costs • Particle pollution  fossil fuel use • Recreational sites  reforestation programs • Technological efficiency  new technologies and unit costs fall • Welfare  carbon taxation • Road-use related mortality  public transport • Congestion  public transport • Employment  GHG projects with excess supply of labor • Higher electricity prices reductions in electricity  reduce educational opportunities for children • Reduced electrification rates  increases in household air pollution • Costs associated with ghg projects  decreased economic activity  decline in employment

6. Negative the net Co-benefits (CB) • Some co-effects are beneficial and can help offset the costs of producing practices from a social perspective • eg: Improving water quality from low tillage • eg.: Enhancing producer incomes from conversion of cropland to grasslands • The co-benefits likely to be partially offset by co-costs • Expanded emissions in the energy sector vs. the offsets gained from CS • Co-effect are relevant in all sectors of the economy  accounting needs to be evenhanded Reference: McCarl.B.A , Tanveer A. B , Man,K. Kim

7. Co-effects from Agriculture and Forestry Sequestration • Watson 2000: co-benefits • soil productivity could be improved through increased capacity to retain water and nutrients • long-lived valuable products (wood) are produced • marginal lands could be improved and riparian ecosystems restored • Erosion reduction • Antle 2000 • Reduced erosion, improved land quality, water quality, recreation sites, bio-diversity, farmer income support .

8. Detail Report • Southern Carolina, Southern Wisconsin, and Maine will lose in bird populations from afforestation (Matthews et. al., 2002) • Soil erosion reduction -- $42 million per year under 25% conversion scenario, 32%-42% of sequestration costs. Erosion reduction and wildlife habitat --- $103 million annually (Plantenga, 2003) • Water quality, erosion, nitrogen, phosphorus. The damage values range from $ 0.57 per ton of erosion in Northern Plains to $7.06 in Northeast. • Defensive expenditures, production costs, consumer surplus

9. Co-effects of Emission Reductions by Energy Sector • Nuclear waste, risks of nuclear disasters, recreation sites, health effects. • $10 per ton carbon tax could result in $3 health benefit from associated NOx reductions (Burtraw, 1999) • Approximate by using marginal costs as social willingness to pay, 15$ per ton of CO2 (EIA, 1995).

10. How important is the Co-effect? • Speed up and spread the commitment to action and implementation • By knowing that the possibly high cost of climate change mitigation might be largely offset by ancillary benefits • Policy benefits of incorporating co-effects • Design policy on complete and inclusive set of effects • Support GHG initiatives with broader environmental co-effects (“no regrets”) • Justify policy interventions in favor of terrestrial activities • Safely ignored • On the other hand, if these effects are “small” relative to the other costs or the benefits of reducing GHGs • Debate over climate change mitigation policy — at least from the perspective of efficiency — simplifying an already too complex debate.

11. AM: Assessed in monetary terms AP: Assessed in physical terms, possibly partly in monetary terms. NA: Not assessed, they may be important. NE: No effect of significance is anticipated. 1. SO2 and NOx include acid deposition impacts. 2. Effects of PM10, NOx and SO2 on amenity arise with respect to visibility. In previous studies these have not been found to be significance in Europe, although they are important in the US. 3. Routine operations generate externalities through mining accidents, transport accidents, power generation accidents, construction and dismantling accidents and occupation health impacts. All these involve mortality and morbidity effects. 4. Water pollution effects include impacts of mining (including solid wastes) on ground and surface water, power plant emissions to water bodies, acid deposition and its impacts on lakes and rivers (partly quantified).

12. Externalities • Simple definition---Externalities may arise when economic activity has effects on third parties. • We are interested in cases when a policy yields a change in the productive use of resources, or in the welfare of individuals, and when these effects are not fully taken into account by the agents involved. • The magnitude of an externality can be measured by comparing the difference between the social opportunity cost of resources that are used in production, and the private market cost of those resources. • In economic vocabulary, this is referred to as market failure.

13. Market Failure • Market Failure • Inefficient allocation of scarce resources by market mechanism • Efficiency: PPO or PO • Co-effect are usually not reflected in private decision making. • Co-effects affect social welfare. • Co-effects affect social abatement costs. • Need to adjust private abatement activities to reflect co-effects.

14. Social vs. Private CN CGA CA CSA CN B D G

15. Solution for market failure • To solve the market failure problem, there are some remedies to this market failure of externality such as • Pigovian taxes • Voluntary negotiation (Coase Approach) • Compensatory tax/subsidy • Creating a missing markets with property rights • Direct intervention • Merges • Incentives mechanism design

16. Control GHG Emissions • Regulation, Command and Control • No incentive for innovation • Heterogeneity (Agriculture) • Taxes • Need MC to arrive optimal tax (Weitzman, 1974) • Concentrates on management decisions (Antle and Mooney, 2002) • Used to generate revenue (Stavins, 1998) • Tradable Pollution Permits • Clean Development Mechanism • Innovation (Burtraw, 2000) • Lower costs

17. Permit Trading CN CA qA qN B SN SA

18. Tax of conventional pollutants If the government has taken measures to internalize observable external effects such as damage from conventional air pollutants, then the ancillary effects of GHG reduction may not yield corresponding economic benefit equal to the change in the external cost. The reason is that pre-existing regulation has already incorporated into product prices some portion of external costs.

19. literature Regarding the costs and benefits of climate change mitigation: • Literature that primarily looks at climate change mitigation, but that recognizes there may be benefits in other areas; • Literature that primarily focuses on other areas, such as air pollution control, and recognizes there may be benefits in the area of climate mitigation; • Literature that looks at the combination of policy objectives (climate change and other areas) and looks at the costs and benefits from an integrated perspective.

20. literature on Co-effect • The literature uses a number of terms to depict the associated benefits and costs that arise in conjunction with GHG mitigation policies. • These include • co-benefits • ancillary benefits • side benefits • secondary benefits • collateral benefits • associated benefits.

21. Co-benefits Vs. Ancillary benefits: • Co-benefits: • The non-climate benefits of GHG mitigation policies that are explicitly incorporated into the initial creation of mitigation policies. • Reflects that most policies designed to address GHG mitigation also have other rationales involved at the inception of these policies (e.g., related to objectives of development, sustainability, and equity). • Ancillary benefits: • Those secondary or side effects of climate change mitigation policies on problems that arise subsequent to any proposed GHG mitigation policies • (eg: reductions in local and regional air pollution associated with the reduction of fossil fuels, and indirect effects on issues such as transportation, agriculture, land use practices, employment, and fuel security. ) • The benefits may be negative---cost. • From the perspective of policies to abate local air pollution, GHG mitigation may be an ancillary benefit.

22. Co-effects GHGE Mitigation Co-effects Agricultural Involvement Mitigation in Energy Sector Transportation Co-effects Co-effects Co-effects

23. Ancillary Benefits and Costs and Co-benefits and Costs • Mechanism for the Generation of Ancillary Impacts.

24. Case Studies of Co-Effects: Water Quality Ag Census NRI State Annual Crop Acreage Reference: Pattanayak et al. 2002 Carbon Prices Regional Crop Mix input use Env loads Water Quality Index NWPCAM County Crop Mix and percent loads ASMGHG Regionalizing Model EPIC Runoff Sim. • Run ASMGHG at GHG prices of $25, and $50/tonne CE • Link NWPCAM to ASMGHG outputs • Run NWPCAM at elevated loadings corresponding to 2 GHG prices ($25 and $50) • Estimate WQI at two levels • Compute

25. Co Benefits Analytical Framework 1. 2. 3. Convert changes in N, P, and TSS concentrations into a WQ Index

26. % Change GHG % Change WQI Co-Benefits Region $25/Ton CE $25/Ton CE Elasticity Northeast 75 0 0.0 Lake States 243 4 0.02 Corn Belt 165 4 0.03 North Plains 255 8 0.03 Appalachia 73 0 0.00 Southeast 112 1 0.01 Delta States 33 3 0.09 South Plains 140 5 0.04 Mountain 56 1 0.01 Pacific 47 0 0.01 Total U.S 133 2 0.02 Co-benefits elasticity: : $25/ton CE for representative year

27. Case Studies of Co-Effects: Water Quality Overall Results: • Economic • Agricultural production declines (2-4%) and prices increase (3-8%) • CS decreases, PS increases, Export earnings fall (3 – 5%). • GHG (not co-effects) • National GHG emissions decline (89 and 156 MMTCE/yr under $25 and $50 /ton CE, respectively). • Agriculture becomes a net sink at high GHG price. • Low C price=> Low/no till cropland management • High C price => Biofuel offsets and afforestation • Land use • Traditionally cropped lands decline(0.1 – 6%) • Irrigated lands decline(3 – 7 %) • Afforestation increases(5 – 12 million acres)

28. Case Studies of Co-Effects: Water Quality Overall Results: • Loadings • N and P decline at low price • All loadings decline at high price • Erosion reductions most dramatic • National WQ increased nearly 2% Future Extensions: • Co-effects • Monetized • Multiple co-effects – biodiversity • Omitted loadings in forestry and livestock

29. Case Studies of Co-Effects: Environmental benefits Reference: Plantinga and Wu 2003 Empirical Procedure Landik = fik (net return, population density, land quality ) fik = logistic function using SUR procedure Net return to forest=> + effect on the forest but – on the agriculture Net return to Ag => – effect on the forest but + on the agriculture Estimate Land Use Five values of subsidies are used to achieve conversion of 5%, 10%, 15%, 20%, and 25% of the baseline ag land. Average costs for afforestation rise from $200 (5% conversion) to $600 per acre (25% conversion). Get Acres of Afforested Land Using Birdsey forest carbon function to estimate additional C seq. through afforestation. Using the Natural Resource Inventory (NRI) and the Soil Interpretation Record System (SOILS5) to predict locations, agricultural land conversion, and environmental characteristics (e.g. soil type, permeability). Determine C Seq.& Environ. Characteristics Using estimation from previous studies to quantify environmental benefits. Under 25% conversion scenario => soil erosion benefits = 32-42% of cost of Cseq. program => wildlife habitat benefits = 25% of cost of Cseq. program => non-consumptive use benefits =25% of cost of Cseq. program Estimate Environ. Benefits

30. Case Studies of Co-Effects: Environmental benefits Remarks: (1). Co-Benefits appear to be substantial. Soil erosion + Wildlife habitat (Use Value) +Non-Use Value  Cseq Cost $42 M + $30 M + $31 M $101-132M (under 25% conversion scenario) (2). The number of potential co-benefits and co-costs are not included (e.g. water quality improvement, negative effects on wildlife habitat). (3). Unrealistic fixed prices assumption on timber and agricultural products

31. Case Studies of Co-Effects: Biodiversity Reference: Matthews, O’Connor, and Plantinga 2002 • Study of land use changes impacts on biodiversity in South Carolina, Maine, and Southern Wisconsin • Two types of land use => agricultural and Forestry lands • Two types of birds => farmland and forest birds (651 species) • Using an econometric model to estimate land use changes due to afforestation subsidies • Achieving a 10% reduction in agricultural land by giving afforestation subsidies as an incentive • Using an estimated land use change to estimate bird abundance

32. Discussion questions • Should we design policy to mitigate based on co-effect? How? What kind of policy? • Consider: • Co-effect legitimately vary under alternative climate change mitigation policies • Potential Welfare gain • Cost and scale of an effort • Information needed • Inherent Uncertainty • Safe Minimum Standard

33. Assignments: • Read these papers if interested: • Antle, J.M. and S. Mooney. 2002. Designing Efficient Policies for Agricultural Soil Carbon Sequestration. Chapter in Agriculture Practices and Policies for Carbon Sequestration in Soil, edited by J. Kimble, CRC Press LLC, Boca Raton, FL, pp. 323-336 • McCarl, B.A. and U.Schneider, (2000). “Agriculture's Role in a Greenhouse Gas Emission Mitigation World: An Economic Perspective”. Review of Agricultural Economics 22:134-159 • Plantinga A. J., and J. Wu, Co-Benefits from Carbon Sequestration in Forests: Evaluating Reductions in Agricultural Externalities from and Afforestation Policy in Wisconsin. Land Economics, 79(1), 74-85, 2003

34. Reference • Krupnick A., Dallas B. and Anil M. “The Ancillary Benefits And Costs Of Climate Change Mitigation: A Conceptual Framework” http://www.airimpacts.org/documents/local/M00007466.pdf • Antle J.M., “Economic Feasibility of Using Carbon Sequestration Policies and Markets to Alleviate Poverty and Enhance Sustainability of the World’s Poorest Farmers”, Presened at the Expert Workshop on “Carbon Sequestration, Sustainable Agriculture and Poverty Alleviation, World Meteorological Organization, Geneva Switzerland, August 31, 2000 • Antle, J.M. and S. Mooney. 2002. Designing Efficient Policies for Agricultural Soil Carbon Sequestration. Chapter in Agriculture Practices and Policies for Carbon Sequestration in Soil, edited by J. Kimble, CRC Press LLC, Boca Raton, FL, pp. 323-336 • Burtraw, D., “Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S Electricity Sector.” Resources for the Future Discussion Paper No. 00-38, 2000. • Burtraw, D. Krupnick, A., Palmer K.,Pul, A., Toman M., Bloyd, C., “Ancillary Benefits of Reduced Air Pollution in the U.S. from Moderate Greenhouse Gas Mitigation Policies in the Electricity Sector”. Resources for the Future. Discussion paper No. 99-51. 1999. • Energy Information Administration, Electricity Generation and Environmental Externalities: Case Studies, Office of coal nuclear and Alternative Fuels, Coal and Electric Analysis Branch, U.S. Department of Energy, Washington D.C. 20585, 1995. • International Panel on Climate Change, “Climate Change 2001: The Scientific Basis”. IPCC Third Assessment Report. 2001. http://www.ipcc.ch/ • Matthews, S., O’Connor, R., and A., J., Plantinga. Quantifying the Impacts on Biodiversity of Policies for Carbon Sequestration in Forests. Ecological Economics. 40(1): 71-87. 2002.

35. Reference • McCarl, B.A. and U.Schneider, (2000). “Agriculture's Role in a Greenhouse Gas Emission Mitigation World: An Economic Perspective”. Review of Agricultural Economics 22:134-159. • McCarl.B.A , Tanveer A. B , Man,K. Kim “How much would Carbon Cost a Buyer?” Working Paper 2004 • Meyer, J. L.,M. J. Sale, P. J. Mulholland,and N. L. Poff, “Impacts of climate change on aquatic ecosystem functioning and health” Journal of the American Water Resources Association, 35(6), pp.1373-1386,1999. • National Assessment Synthesis Team “Climate Change Impacts on the United States:The Potential Consequences of Climate Variability and Change” US Global Change Research Program,400 Virginia Avenue,SW Suite 750 Washington DC,20024 www.usgcrp.gov • Pattanayak, Subhrendu, Allan Sommer, Brian Murray, Tim Bondelid (RTI); Bruce McCarl, Dhazn Gillig (TAMU); Ben DeAngelo (USEPA), “Water Quality Co-Benefits of Greenhouse Gas Mitigation Incentives in U.S. Agriculture.” Presented at Forestry & Agriculture Greenhouse Gas Modeling Forum, Shepherdstown, WV, October 2002 Water Quality Co-effects of Greenhouse Gas Mitigation in US Agriculture. • Plantinga, A. J., “Modeling the Impacts of Forest Carbon Sequestration on Biodiversity.” Department of Agricultural and Resource Economics, Oregon State University. • Plantinga A. J., and J. Wu, Co-Benefits from Carbon Sequestration in Forests: Evaluating Reductions in Agricultural Externalities from and Afforestation Policy in Wisconsin. Land Economics, 79(1), 74-85, 2003 • Stavins, R.N., "Transaction Costs and Tradable Permits", Journal of Environmental Economics and Management, 29:133-148,1995. • Watson, R.T., “report to the Sixth Conference of the Parties of the United Nations Framework Convention on Climate Change”, IPCC, http://www.ipcc.ch/press/speech.htm Nov.13, 2000 • Watson, R.T. and the Core Writing Team (Eds.), IPCC Third Assessment Report: Climate Change 2001: Synthesis Report, IPCC, Geneva, Switzerland, September 2001. http://www.ipcc.ch/pub/un/syreng/spm.pdf • Wietzman, M., L., “Prices vs. Quantities” Review of Economic Studies. 41 (4): 447-91, 1974

36. AF Strategies for GHG Mitigation