Transcript Greenhouse Gas Markets as an Economic Driver

An Economic Exploration of Biofuel based
Greenhouse Gas Emission Mitigation
Bruce A. McCarl
Regents Professor of Agricultural Economics
Texas A&M University
Presented at Workshop on
Agriculture as a Producer and Consumer of Energy
Washington D.C.
June 24-25, 2004
Other Collaborators
Darius Adams, Oregon State
Ralph Alig, USDA Forest Service
Brian Murray, RTI
Uwe Schneider, University of Hamburg
Subhrendu Pattanayak, RTI
Ben DeAngelo EPA
Ken Andrasko, EPA
Ron Sands, PNNL, Maryland
Francisco Delachesnaye, EPA
Mahmood El-Halwgi, TAMU
Heng-Chi Lee, University of Western Ontario
Dhazn Gillig, AMEX
Xiaoyun Qin , TAMU
Basic Components of Talk

Project Goals

Policy Context

Project Scope

Key Findings

Policy Implications of Results

Directions Being Pursued
Project Goals

Examine the portfolio of land based GHG mitigation
strategies

Identify ones for further scrutiny considering Afforestation,
Forest management, Biofuels, Ag soil, Animals,
Fertilization, Rice, Grassland expansion, Manure, Crop
mix

Look at market and time conditions under which strategies
dominate

Educate on needed scope of economic analysis

Bring in a full cost and GHG accounting

Look at market effects and co benefits/ costs
Paper/Study Objectives

Assess the economic potential of U.S. agriculture
and forestry to mitigate emissions considering
carbon dioxide, nitrous oxide and methane

Focus on the role of Biofuel strategies

Examine the dynamics of mitigation strategies
Policy Context

U.S. is outside of the context of Kyoto Protocol

U.S. has a largely voluntary policy to reduce GHG emission
intensity by 18% by 2012. Intensity is emissions divided by
GDP. This commitment is 1/6 the size of Kyoto obligation.

Many U.S. states proceeding unilaterally, Northeast, West
Coast, Texas and others.

Virtually all U.S. companies have climate change offices
and emissions are becoming of widespread concern

Chicago Climate Exchange is emerging but price low.

I think something will happen, but when?
Background

Society has concerns about build-up in atmospheric
concentrations of greenhouse gases

Scientific consensus emerging that buildup will affect
the global climate, stimulating warming.

Disturbances caused by GHG concentrations will take a
long time to reverse.

IPPC asserts
a)
b)
c)
centuries for sea level to stop rising
decades for atmospheric GHG to stabilize
once emissions stabilize
decades to retrofit/replace equipment and
technology causing current emissions.
Background

Society faces decision
i)
let emission increases continue
ii)
reduce emissions in effort to stabilize
atmospheric concentrations.

Decision involves uncertain future effects of GHG
induced climate change

Implications for many sectors of the economy

Decision involves whether to insure against possible
future deleterious effects by either reducing emissions,
creating sinks, or creating offsets.

Irreversibility dimensions to decision
Mitigation related role of Ag & Forestry

Agriculture and forestry can play a role

Small emitters of the most prevalent greenhouse gas
(carbon dioxide - CO2),

Other emissions important
U.S. agricultural GHG emissions contribute
7% of total carbon equivalent emissions
28% of methane emissions (GWP 21)
70% of nitrous oxide(GWP 310).


U.S. forests are large but shrinking sink for carbon
dioxide 14% of 1997 emissions, 23% in 1990.
Mitigation related role of Ag & Forestry

Agriculture has substantial potential for offsetting
emissions

Sink augmenting GHG absorption,
changes in tillage
conversion of ag land to grassland or forest.

Increasing production of commodities, which can
serve as
feedstocks for the production of biofuel or offset
GHG emission intensive commodities (steel,
concrete)
Finally Biofuels

Biofuel production contributes to reduction in net
GHG emissions because
As plant grows photosynthesis absorbs CO2 from
atmosphere concentrating it in the feedstock
When burned this is released

Thus Biofuel use involves recycled carbon.

Offsets net GHG emissions relative to fossil fuels by
about 75-95 percent for power use about 35% for
liquid fuel
Finally Biofuels

Never has been an economic proposition.

In U.S. ethanol subsidies often amount to over 50% of
product sale price.

Bolstered by sugar program

It likely to remain uneconomic in the near future in
absence of subsidies.

Can climate change contribute a new subsidy source?
Mitigation Assessment

Multi-period analysis of ag/forest response

Examines overall and component response at
varying carbon equivalent prices

Also observe commodity and factor prices, levels of
production, exports and imports, management
choices, resource usage, and environmental impacts

Simultaneous across all agricultural GHG mitigation
strategies including biofuels

Simultaneous modeling of other agricultural
environmental problems

Based on life cycle comparisons
GHG Activities in FASOMGHG

Multiple GHG mitigation strategy setup

Detailed GHG emission accounting
•
Forest carbon
•
Soil carbon
•
N2O
•
CH4
•
Fuel use carbon emissions

National GHG balance

GWP weighted sum of all GHG accounts

GHG Policy implementation
FASOMGHG MITIGATION OPTIONS
Strategy
Basic Nature
CO2
Crop Mix Alteration
Crop Fertilization Alteration
Crop Input Alteration
Crop Tillage Alteration
Grassland Conversion
Irrigated /Dry land Mix
Emis, Seq
Emis, Seq
Emission
Emission
Sequestration
Emission
X
X
X
X
X
X
Biofuel Production
Offset
X
Afforestation
Existing timberland Management
Deforestation
Sequestration
Sequestration
Emission
X
X
X
Stocker/Feedlot mix
Enteric fermentation
Livestock Herd Size
Livestock System Change
Manure Management
Rice Acreage
Emission
Emission
Emission
Emission
Emission
Emission
X
CH4
N2O
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Biomass Option

Fast growing trees or switchgrass plus corn

Feedstock for electrical power plants or
liquid fuel production

Offsets fossil fuels  recycles emissions

Requires land  Opportunity cost

Sustainable, verifiable
Why not just biofuels
We consider biofuel net contribution to GHG
emissions considering carbon dioxide, nitrous
oxide and methane not biofuels in isolation
We examine relative desirability as compared to
other GHG mitigation strategies
Why?
incredible interrelatedness of ag economy
opportunity cost of resources
Land to crops to feed to cattle all involved with GHG
Portfolio Composition
Afforestation
$ /Ton of CO2
30
Biomass Offsets
25
CH4&N2O
20
Forest Management
15
Crop Management FF
10
Soil Sequestration
5
0
0
500
1000
1500
Emission Reduction in MMT CO 2 Equivalent
Ag soil goes up fast then plateaus and even comes down
Why – Congruence and partial low cost
Lower per acre rates than higher cost alternatives
Biofuel takes higher price
No Ethanol
2000
Dynamic Role of Strategies Results
MMT CO2 Eq
25000
20000
200000
CH4 & N2O
Crop Management FF
All Forest
15000
10000
5000
0
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
150000
MMT CO2 Eq
25000
20000
All Forest
50000
0
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Time
Cumulative Contribution at a $5 per tonne CO2 Price
Biomass offsets
CH4 & N2O
Soil Sequestration
Crop Management FF
All Forest
Soil Sequestration
Crop Management FF
100000
Time
30000
CH4 & N2O
Biomass offsets
Soil Sequestration
MMT CO2 Eq
30000
Cumulative Contribution at a $50 Price
Note
15000
10000
Effects of saturation on sequestration
Growing nonco2 and biofuels
5000
0
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Time
Cumulative Contribution at a $15 Price
Source Lee, H.C., B.A. McCarl and D. Gillig, "The Dynamic Competitiveness of U.S. Agricultural and Forest
Carbon Sequestration," 2003.
>30 years
Limited forest
and afforest
O to30 years
Time from now
Dynamic Role of Strategies Results
Ag soils
Limited Ag soils
Forest
management
Forest and afforest
Non co2
Non co2
Bio fuels
Non co2
Non co2
Biofuels
<$15/metric ton
>$15/metric ton
Level of Price
Source Lee, H.C., B.A. McCarl and D. Gillig, "The Dynamic Competitiveness of U.S. Agricultural and Forest
Carbon Sequestration," 2003.
Dynamic Role of Strategies Results
Saturation of Sequestration Ag Soils and Forests
Results – C accumulation vs. time with
change from conventional till to no-till
Figure 2. Cumulative Carbon sequestration in a Southeastern
U.S. pine plantation
Source: Data Drawn form Birdsey (1996)
120
1000
100
Metric tons C/ac
g /m 2 /y r
500
0
-500
80
C in trees and underst
C in soil and litter
Total C
60
40
20
-1000
0
5
10
15
20
25
ye a r
30
0
35
0
20
40
60
80
100
Age (years)
West and Post, Oakridge NL
Birdsey et al, USFS, FORCARB
Note saturation by year 20
Note saturation by year 80
120
GHG Mitigation and Ag-Markets
220
200
Fisher index
180
160
Crop prices
Livestock prices
140
120
100
Livestock production
80
60
40
20
Crop production
Crop exports
0
50
100
150
200
250
300
Carbon price ($/tce)
Tradeoff between carbon and traditional production –
ag prices rise, forest products fall
Source: Pattanayak, S.K., A.J. Sommer, B.C. Murray, T. Bondelid, B.A. McCarl, and D. Gillig, "Water Quality Co-Benefits of
Greenhouse Gas Reduction Incentives in Agriculture and Forestry," Report to EPA, 2002.
Results: Co-Benefits, Economic & Envir.
Ag-Sector Welfare
Multi-environmental Impacts
150
Nitrogen Subsurface Flow
100
90
U.S. Producers (Net)
50
Foreign Countries
0
Dead Weight Loss
Pollution (%/acre)
Welfare changes (bill $)
100
80
Nitrogen Percolation
70
60
Soil erosion
-50
U.S. Consumers
50
Phosphorus loss
through sediment
-100
0
50
100
150
200
250
300
40
Carbon price ($/tce)

Producers gain & Consumers lose

Exports reduced

Environmental gains

High prices erode co-benefits due to
intensification
0
50
100
150
200
250
300
Carbon price ($/tce)
•
Some co-benefits do not saturate over
time but continue to be accrued (erosion,
runoff, farm income).
•
Ecosystem gains in habitat may saturate
Source: Pattanayak, S.K., A.J. Sommer, B.C. Murray, T. Bondelid, B.A. McCarl, and D. Gillig, "Water Quality Co-Benefits of
Greenhouse Gas Reduction Incentives in Agriculture and Forestry," Report to EPA, 2002.
Co-Benefits: Water Quality Changes
Preliminary Results, at $25/tC
Change in WQI
from Baseline
-40 to -1
0
1 to 5
6 to 100
Source: Pattanayak, S.K., A.J. Sommer, B.C. Murray, T. Bondelid, B.A. McCarl, and D. Gillig, "Water Quality CoBenefits of Greenhouse Gas Reduction Incentives in Agriculture and Forestry," Report to EPA, 2002.
Total Economy Competitive Potential
SGM CGE Model
Composition of U.S. Emissions Reductions (remain at year 2000 emissions)
1,000
900
800
700
million tC
600
other energy system
carbon capture and disposal
afforestation
soil sequestration
commercial biofuels
500
400
300
200
100
0
2000
2005
2010
2015
2020
2025
2030
From Sands, R.D., B.A. McCarl, and D. Gillig, "Assessment of Terrestrial Carbon Sequestration
Options within a United States Market for Greenhouse Gas Emissions Reductions," Presented at the
Second Conference on Carbon Sequestration , Alexandria, VA, May 7, 2003.
Conclusions
200
 Biofuels could play an important part in a GHGE mitigating
world if price was above $50 per ton of carbon.
 150
At low prices opportunity cost of resources exceeds value of
feedstocks generated.
Biomass for Power Plants
 Only the ability to collect benefits Soil
fromCarbon
carbon
savings makes
Sequestration
100
Pine Trees on AG-Land
the biofuels competitive.
Ethanol as Gasoline
 Competitive because biofuels continually offset fossil fuel
emissions in comparison to changing tillage which saturates
50
 Biofuels may also yield other ancillary benefits.
 Big question: Will society choose to reward their carbon
0
recycling
characteristics?
0
100
200
300
400
 This will entail society deciding to attach a substantial price to
Carbon Value in Dollars per TCE
the right to emit GHGs into the atmosphere.
500