How Will Cap-and-Trade
Affect Beef Producers?
Never mind that scientists can't agree whether global warming is a legitimate worry, or whether the burning of fossil fuels is to blame. A sufficient number of U.S. politicians are convinced that a problem exists and government must fix it.
They succeeded in advancing climate change legislation in the House of Representatives, and the Senate is debating similar legislation to curb greenhouse gas (GHG) emissions by U.S. industry. The goal is to impose a declining ceiling on emissions (particularly carbon dioxide) during the next 40 years.
This is a controversial issue, to say the least, because of the potential effect on manufacturers, including electric power companies. Proponents and opponents agree that the cost of producing energy will increase. Increased prices for agricultural inputs will follow. However, proponents claim agriculture actually should realize long-term benefit from climate change legislation. Skeptics say the beef industry and other livestock sectors are likely to come to more harm than good.
The House's Waxman-Markey measure and Senate proposals are referred to as cap-and-trade legislation. The "cap" is the maximum level of emissions a specific manufacturer or other entity is allowed, as established by a government authority. If the entity can keep its emissions below the maximum allowed, it receives credit for the difference between the actual emissions level and the cap. If a manufacturer cannot reduce emissions below its cap, it must purchase credits from another that has. That's the "trade."
The buyer is required to purchase credits to offset the amount by which it exceeds its emissions cap. Thus, the buyer is penalized for failing to keep emissions below its cap, and the seller is rewarded for reducing its emissions by more than was mandated. While the proposed legislation does not impose emission regulations upon agriculture, proponents say ag producers have opportunities to sequester carbon through various conservation programs, or capture methane from manure ponds to earn credits that can be sold to other industries needing to offset excessive emissions levels. This, say advocates of cap-and-trade, is the way agriculture can more than make up for increased production costs.
In testimony prepared for the Senate agricultural committee, U.S. Department of Agriculture (USDA) Secretary Tom Vilsack said, "Our analysis demonstrates that the economic opportunities for farmers and ranchers can potentially outpace — perhaps significantly — the costs from climate legislation."
Analysis of the Waxman-Markey bill's potential effect on agriculture, according to USDA's Economic Research Service (ERS), indicates higher production costs might result in a 0.9% loss in net farm and ranch income for the near term. Long-term, net income could be reduced by 7.2%. USDA's report suggests that revenue from agricultural offsets (credits earned through establishing forest, no-till farming, range and pasture carbon sequestration, methane reduction and nitrous oxide reduction) could rise faster than costs resulting from the legislation. The USDA report also says there would be costs associated with implementing practices to sequester carbon or reduce greenhouse gas emissions. As yet, there is no analysis that compares the magnitude of the net revenue from the offsets market with the estimated income loss due to higher input costs.
Ag opportunity?
Texas A&M University (TAMU) agricultural economist Bruce McCarl says there may be considerable opportunity for agricultural producers to earn and trade credits. It's hard to predict. McCarl does believe most of the benefits would accrue to crop producers. There is incentive to adopt no-till practices and convert some cropland to forest. Covering manure lagoons to capture methane may be an option for dairy and hog operations, but the technology is not cheap. McCarl fears the beef industry may have to shoulder a greater burden.
"Methane capture is much harder to apply in cattle feedlots," McCarl says. "And revenue from pasture and rangeland carbon sequestration may not be high enough to justify the more intensive management that will be required of producers."
Cornell University economist Brent Loy says livestock sectors will likely face increased energy costs and increased prices for purchased feedstuffs. Those prices may be affected by farmers' increased production costs as well as contracted production if land is converted from feed crops to less energy-intensive crops or trees.
"I think the number of beef cattle producers [who] can put in economical capture systems is pretty darn small," Loy states. "And with the costs of producing beef going up, producers will need more revenue. Will consumers be willing to pay higher prices for beef?"
Legislators like Nebraska Sen. Mike Johanns, a former USDA secretary, have argued that proponents of climate change legislation claim agriculture as a whole will benefit, but the impacts to different regions of the country and various production sectors have not been adequately considered. Johanns and other senators say the beef industry is a good example where many producers will pay increased costs of production without benefiting from the offsets market.
The unkowns
Duane Gangwish, vice president of environmental affairs for the Nebraska Cattlemen, believes there are too many unknowns associated with the proposed cap-and-trade legislation. Unknown, he says, is how USDA will run a mandatory program.
Currently, the carbon credits are traded on the Chicago Climate Exchange (CCX). The CCX has set its own criteria for carbon sequestration programs and trading of carbon contracts among buyers and sellers. Participation is completely voluntary.
"With cap-and-trade, we're talking about a mandatory federal program. But USDA has not established how it will be implemented. It has not fully defined the programs that will qualify and which practices must be adhered to," Gangwish explains. "As I read (the Waxman-Markey bill), it does require 'additional' practices. Does that mean early-adapters who already are working [toward] carbon sequestration practices will be out of luck and ineligible to earn credits?"
Gangwish believes the CCX will honor current contracts with producers who have earned and sold credits. But after that, if a new federal program is put in place, it could be a new ballgame with different rules. Previous players may be ineligible unless they can implement new practices.
Advocates of cap-and trade also seem to think a considerable amount of carbon sequestration will result from afforestation — the conversion of crop acres to trees. They predict the conversion of 50 million acres of farmland, with most occurring in the Corn Belt and High Plains regions. It seems unlikely, says Gangwish, that revenue from selling carbon credits will warrant conversion of some of the most productive grain-producing acreage in the country. If that much acreage does come out of production, it would likely have a major effect on feed costs.
All energy-intensive industries will be capped, including steel production and manufacturing of tractors, feedtrucks and other equipment. The increased cost of producing those things will be passed along to [beef] producers. There has been talk of putting a tariff on the products of energy-intensive industries produced outside the U.S. And some cap-and-trade advocates want to set minimum and maximum prices for trading carbon credits, which Gangwish calls contrary to free market principles.
"The success of this kind of legislation is based on presumptions, but there are just too many unknowns," Gangwish states. "We know that the cost of doing business will increase, but more for some producers. And there is just too much uncertainty about opportunities to sell the offsets that are supposed to balance the cost."
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