Thursday, May 7, 2009

New Perspective on Climate Costs & Ag

One of the greatest concerns about a climate change law is the potential increase in energy costs that could arise.  Just like virtually any other policy, a climate law can be done in a way that is very expensive to implement, and thus, very expensive for consumers -- OR, it can be done in a way that creates a modest increase in cost and yields a new market for conservation, renewable energy and leads to far greater energy diversity and security.

The devil really is in the details.

When federal agencies like EPA and DOE model various climate proposals, they usually look at multiple scenarios that could emerge off of a given proposal.  In this way, the modeling tries to account for the numerous variables that could affect a climate law's cost and/or implementation.  

Unfortunately, this modeling is often complex and very difficult to distill down to a level that the public would be interested in and could understand.  As a result, what often happens is interest groups on the right and the left pick and choose the scenarios and the data that they want to see and present that to the public as "the cost assessment" of a given policy.  

To get a more accurate view of climate policy, it is important to take full account of all the scenarios and variables involved.  In fact, a better way to look at modeling is as a means to detect which policy levers will cause an effect (raise or lower prices) based on how they are utilized in the law.

For example, recently, the American Farm Bureau and the Fertilizer Institute have made claims about the high cost of cap-and-trade climate proposals that may encourage some folks to see it as a net negative for agriculture.  However, closer scrutiny of the underlying analysis being used by these groups (a study conducted by the Doane Advisory Services, 2008) shows that this picture is not a complete one and may in fact present a misleading view of the potential economic opportunity that a cap-and-trade system represents.  Of course, it all depends on WHICH type of cap-trade system is put into place and of key importance, how many offsets are allowed and how well constructed is the agriculture offset market.

Its worth really understanding this important issue, because otherwise the agriculture industry could miss out on major economic opportunities by not participating in the debate.  Meanwhile, the absence of that participation has little chance of preventing a climate bill from passing -- it just means the TYPE of bill that passes is likely to be less positive for the agriculture sector

But don't take my word for it -- a new analysis out by Duke University's Nicholas Institute and Texas A&M professor Bruce McCarl goes through this issue in detail and points out some of the flaws that exist in the Doane analysis.

Below is a brief excerpt of the beginning of their white paper as well as a link to the full report.

Commentary on Impacts of Carbon Prices and Energy Costs on Returns to Agricultural Producers 


Brian C. Murray, Nicholas Institute for Environmental Policy Solutions, Duke University 

Bruce A. McCarl, Department of Agricultural Economics, Texas A&M University  

Justin Baker, Center on Global Change, Duke University 


A report issued by Doane Advisory Services in May 2008 titled An Analysis of the Relationship between 

Energy Prices and Crop Production Costs, has received recent attention as some interest groups have 

used it as evidence of how a U.S. federal cap-and-trade program – or any similar climate policy that 

creates a price on greenhouse gases (GHGs) would negatively affect U.S. farmers.   The study takes 

energy prices from EPA’s economic analysis of the Lieberman-Warner America Climate Security Act 

(S.2191) and combines this with USDA data on input costs from the eight largest crops (by value) in the 

United States to gauge how the higher energy costs expected under GHG controls translate into higher 

farm operating costs.  Higher farm operating costs provides the study’s lone measure of farmer well- 

being and the authors thereby imply that the economic harm to farmers equals their increased 

operating costs.  

The Doane report usefully addresses an important set of issues.  Yet there are a number of reasons why 

the results provide a misleading view of the impact on farmers of a carbon price including: 

-- Recent projections of cap-and-trade policy in EPA’s analysis of the Waxman-Markey bill shows 

smaller energy sector impacts than the estimates used in the Doane report 


-- The study uses a simple crop budget rather than a full structural economic model to capture the 

complex market linkages and substitution among inputs that determine net returns to 

agricultural producers.   

-- The study ignores the following factors that raise the returns to farmers 

o higher prices received by farmers reflecting the input higher costs 

o biofuels as an income source 

o offsets from agriculture as an income source 

-- Other recent independent studies of carbon price impacts on agriculture capture many of the 

missing features identified above and tell a different story 

To read the full report, click here.

1 comment:

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