1. The Economics of Alternative Energy Sources and Globalization: The Road Ahead Views from the U.S. Senate November 16, 2009 Hayden Milberg Senior Economist Senate Agriculture Committee

2. Climate Change – Legislative Update House Committee on Energy & Commerce reported H.R. 2454 May 21, 2009, by a vote of 33-25. The full House of Representatives passed the bill on June 26, 2009, by a vote of 219 – 212. Senate Committee on Environment & Public Works reported version on November 5, 2009 by a vote of 11-1. All Republican members on the Committee boycotted vote.

3. Cap & Trade Cap – S. 1733 has a more stringent cap than H.R. 2454 between 2017 and 2029. From 2030 onward, both bills have the same cap on emissions. Allowance Allocation – The Senate bill would auction a much larger share of allowances for deficit reduction. This off-the-top allocation reduces the share of allowances available for other purposes. Offset Treatment and Implementation – Both bills would allow covered entities to submit 2 billion tons of offsets each year. However, the House program allows 50% domestic and 50% international, whereas the Senate allows 75% domestic and 25% international.

4. Waxman-Markey w/ Peterson Directs USDA to establish an offset program from domestic agricultural and forestry sources. The Committee-passed bill gave authority to EPA. Requires USDA to publish a list of eligible offset practice types – bill includes list of potential practices. Creates “term offset credits,” which are supposed to allow agriculture producers to adopt mitigation measures for a short (five-year) period of time

5. Kerry-Boxer President to establish an offset program and an initial list of eligible practices; priority given to offset project types that are well-developed. New, special environmental considerations for forestry projects, i.e. enhancing biological diversity and sustainable forestry practices – not required of any other practices. Establishes a Carbon Offsets Integrity Unit within DOJ to supervise and coordinate investigations and civil enforcement of the carbon offsets program.

6. Stabenow S. 2729 introduced as stand-alone bill on 11/4/09. Directs EPA and USDA to jointly establish an offset program; proscribes specific duties for USDA Directs EPA and USDA to establish lists of eligible projects; USDA’s initial list must include many agriculture and forestry practices – initial list of eligible projects and the list of eligible projects are different. Established five and ten year crediting periods, similar to term offset credits

7. Peterson vs. Stabenow Peterson gives all authority to USDA for agriculture/forestry projects. Stabenow creates a joint program with a specific role for USDA. Peterson will likely make more offsets available to producers. Under Stabenow, it’s not likely they will be available in the early years. There’s a subtle bias in her bill toward non-agriculture projects. Stabenow has stronger language for verification, accounting, standards, etc provisions. Both bills require implementation within one year.

8. Impact on Agriculture - Key Questions Net farm income – What is effect of higher input prices? – Will offset income be larger than increased costs? Environmental benefit – Will cost of implementing cap and trade provide real and tangible environmental results? Land use changes – Will new incentive structure result in a change in production practices and outputs?

9. Economic Analyses USDA – Short term costs low. Medium and long term, costs rise but remain modest. Benefits from offset market rise and will likely overtake costs. Agriculture & Food Policy Center – 71 of 98 representative farms have lower ending cash reserves. Nicholas Institute (Baker, et al) – Producer surplus increases; climate mitigation opportunities increase the demand for land, reduce supply, and result in market impacts. 25x25 – Net returns to agriculture are positive, afforestation of cropland and major shifts in commodity cropland will not occur.

10. Impacts on Energy Costs (Change from Baseline) EIA Basic HR 2454 EIA High Offset EIA High Cost EPA HR2454 (Scenario 2) 2020 Diesel fuel 7.1%4.1%7.7%3.9% Electricity 2.6%3.0%4.1%13.5% Industrial natural gas 18.0%10.8%25.8%8.5% Coal 146.9%94.9%164.3%81.0% 2030 Diesel fuel 12.4%7.0%14.4%5.6% Electricity 19.5%10.6%29.2%14.1% Industrial natural gas 21.8%7.4%38.2%10.5% Coal 283.3%185.8%323.5%118.0% Source: EIA and EPA analysis of HR 2454, the House climate change bill, 2007 $

11. Impacts on Energy Use (Change from Baseline) EIA Basic HR 2454 EIA High Offset EIA High Cost EPA HR2454 (Scenario 2) 2020 Liquid Fuels-3.1%-2.3%-2.8%-2.4% Natural Gas-2.7%-2.3%-0.5%-7.4% Coal-15.6%-10.2%-17.2%-20.8% Nuclear7.7%3.3%0.0% Renewable17.3%10.6%20.2%27.3% Source: EIA and EPA analysis of HR 2454, the House climate change bill, Quadrillion Btu

12. Impacts on Energy Use (Change from Baseline) EIA Basic HR 2454 EIA High Offset EIA High Cost EPA HR2454 (Scenario 2) 2030 Liquid Fuels-5.0%1.6%-1.3%-3.8% Natural Gas-12.8%1.9%7.0%-16.6% Coal-44.9%44.3%-18.3%-42.6% Nuclear74.2%-25.9%-20.0%50.0% Renewable26.3%-4.7%9.2%57.1% Source: EIA and EPA analysis of HR 2454, the House climate change bill, Quadrillion Btu

13. H.R. 2454 – Nuclear Production (Scenario 2)

14. Estimated Crop Prices USDAFAPRI-MI*AFPC** Corn Near (2020)0.40%3.35%2.40% Medium (2030)4.60%3.95%- Long (2050)9.60%8.45%7.50% Soybeans Near (2020)0.40%1.60%2.60% Medium (2030)2.20%2.00%- Long (2050)5.19%4.40%4.20% *Average of dryland and irrigated. *Estimates from first and last year of analysis.

15. USDA – Impacts on Net Farm Income (Change from Baseline, 2005 $) ItemNear TermMedium TermLong Term Total Receipts0.0%0.1%0.3% Total Expenses0.3%1.1%2.2% Fuel, oil and electricity 6.4%11.1%22.2% Fertilizer and lime 0.3%9.5%19.9% Net Farm Income-0.9%-3.5%-7.2% Source: Office of the Chief Economist, USDA

16. Offset Revenues USDA/EPA – Estimated gross revenues from offsets associated with H.R. 2454 grows from $2.1 billion in the near term to $28.4 billion in the long term. NI/TAMU/FASOMGHG – Direct GHG payments generate annualized revenues of $7.6 billion ($15/tCO2e) to $35 billion ($50/tCO2e).

17. FASOMGHG – Agriculture Cropland (July 2009) 2020203020402050 Scenario Base308,426.27306,105.43301,916.80297,220.95 $15 @ 5%292,498.20280,623.33262,350.59243,543.68 Change from Base-15,928.07-25,482.09-39,566.21-53,677.27

18. FASOMGHG – Land Use Change (July 2009) 2020203020402050 Allowance $/tCO 2 e EPA$16.31$26.54$43.37$70.40 EIA High Offsets$20.52$41.90 EIA Basic$31.75$64.83 EIA High Cost$35.37$72.23 Scenario Thousand Acres (Cropland & Cropland Pasture) Base 11,555.9112,481.1712,893.7313,730.73 $30 -20,786.88-29,623.98-32,878.58-25,780.30 $15 @ 5% -6,215.58-14,828.97-30,009.13-45,856.50 $50 -26,729.59-37,125.51-43,252.73-42,697.36 $30 @ 5% -11,666.22-26,062.89-39,512.06-51,771.40

19. FASOMGHG (Change in Base, Million bu, July 2009) 2020203020402050 Production Corn-735.62-730.88-1,553.83-4,423.85 Soybeans-358.93-934.27-1,323.59-1,676.58 Exports Corn-164.75-274.77-544.36-1,712.90 Soybeans-153.82-279.89-272.74-146.64

20. Agricultural & Food Policy Center Farms by type with higher or lower ending cash reserves Farm TypeHigherLowerTotal Feedgrain/Oilseed17825 Wheat8311 Cotton11314 Rice014 Dairy12122 Cattle Ranches012 Total277198 Source: Economic Implications of the EPA Analysis of the CAP and Trade Provisions of H.R. 2454 for U.S. Representative Farms, August 2009

21. RFS2 Regulations – Cellulosic Mandate The EISA included a separate carve out for advanced (cellulosic) biofuels starting in 2010, 100 million, gallons growing to 21 billion gallons in 2022. No commercial scale plant yet online. EPA considering lowering 2010 mandate to a unspecified level.

22. E15 On March 6, 2009, Growth Energy (on behalf of 52 U.S. ethanol producers) applied to the EPA for a waiver from the current Clean Air Act limitation on ethanol content in gasoline. Under EISA, the EPA Administrator must grant or deny the waiver request within 270 days of receipt (December 1, 2009). Likelihood that EPA will work past December 1 deadline to “review more test results.”

23. Biomass Crop Assistance Program (BCAP) The BCAP was authorized by Title IX of the 2008 Farm Bill. Provides assistance for the establishment and production of eligible crops for the conversion to bioenergy and matching payments for the collection, harvest, storage and transportation (CHST) of eligible material. June 11, 2009 NOFA for CHST. $25 million available for FY 2009. Establishment provision subject to a pending EIS.

24. Congressional Agenda – 111 th Congress Cap and Trade legislation unlikely to be considered by the Senate until 2010. Unclear if Senate will move a separate energy bill. Suspension of EISA indirect land use change provision unlikely before release of the final RFS2 regulation.