[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



    HEARING TO REVIEW THE COSTS AND BENEFITS OF AGRICULTURE OFFSETS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON CONSERVATION, CREDIT,
                          ENERGY, AND RESEARCH

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 3, 2009

                               __________

                           Serial No. 111-39


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

Robert L. Larew, Chief of Staff      Nicole Scott, Minority Staff 
Andrew W. Baker, Chief Counsel       Director
April Slayton, Communications 
Director

                                  (ii)


       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman

STEPHANIE HERSETH SANDLIN, South     BOB GOODLATTE, Virginia, Ranking 
Dakota                               Minority Member
DEBORAH L. HALVORSON, Illinois       JERRY MORAN, Kansas
KATHLEEN A. DAHLKEMPER,              SAM GRAVES, Missouri
Pennsylvania                         MIKE ROGERS, Alabama
BETSY MARKEY, Colorado               STEVE KING, Iowa
MARK H. SCHAUER, Michigan            RANDY NEUGEBAUER, Texas
LARRY KISSELL, North Carolina        JEAN SCHMIDT, Ohio
JOHN A. BOCCIERI, Ohio               ADRIAN SMITH, Nebraska
MIKE McINTYRE, North Carolina        ROBERT E. LATTA, Ohio
JIM COSTA, California                BLAINE LUETKEMEYER, Missouri
BRAD ELLSWORTH, Indiana              GLENN THOMPSON, Pennsylvania
TIMOTHY J. WALZ, Minnesota           BILL CASSIDY, Louisiana
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
FRANK KRATOVIL, Jr., Maryland
SCOTT MURPHY, New York
WALT MINNICK, Idaho
EARL POMEROY, North Dakota

               Nona Darrell, Subcommittee Staff Director

                                 (iii)










                            C O N T E N T S

                              ----------                              
                                                                   Page
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     2
    Prepared statement...........................................     3
Holden, Hon. Tim, a Representative in Congress from Pennsylvania, 
  opening statement..............................................     1
    Prepared statement...........................................     2
    Submitted report.............................................    93
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     4

                               Witnesses

Glauber, Ph.D., Joseph, Chief Economist, U.S. Department of 
  Agriculture, Washington, D.C...................................     4
    Prepared statement...........................................     6
Kile, Ph.D., Joseph, Assistant Director for Microeconomic 
  Studies, Congressional Budget Office, Washington, D.C..........    21
    Prepared statement...........................................    22
Murray, Ph.D., Brian C., Director for Economic Analysis, Nicholas 
  Institute for Environmental Policy Solutions, Duke University, 
  Durham, NC.....................................................    51
    Prepared statement...........................................    53
McCarl, Ph.D., Bruce A., Distinguished Professor of Agricultural 
  Economics, Texas A&M University, College Station, TX...........    57
    Prepared statement...........................................    58
Sohngen, D.F., Brent L., Professor, Environmental Economics, 
  Department of Agricultural, Environmental, and Development 
  Economics, Ohio State University, Columbus, OH.................    61
    Prepared statement...........................................    63
Hayes, Ph.D., Dermot J., Pioneer Hi-Bred International Chair in 
  Agribusiness, Professor of Finance, and Professor of Economics, 
  Departments of Economics and Finance, Iowa State University, 
  Ames, IA.......................................................    65
    Prepared statement...........................................    66
Wara, Ph.D., Michael, Assistant Professor of Law, Stanford Law 
  School, Stanford, CA...........................................    69
    Prepared statement...........................................    71

 
    HEARING TO REVIEW THE COSTS AND BENEFITS OF AGRICULTURE OFFSETS

                              ----------                              


                       THURSDAY, DECEMBER 3, 2009

                  House of Representatives,
 Subcommittee on Conservation, Credit, Energy, and 
                                          Research,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Tim 
Holden [Chairman of the Subcommittee] presiding.
    Members present: Representatives Holden, Peterson (ex 
officio), Herseth Sandlin, Dahlkemper, Markey, Schauer, 
Boccieri, Walz, Massa, Murphy, Minnick, Goodlatte, Moran, 
Schmidt, Smith, Luetkemeyer, Thompson, and Cassidy.
    Staff present: Nona Darrell, Craig Jagger, John Konya, 
Scott Kuschmider, James Ryder, Anne Simmons, Debbie Smith, 
Rebekah Solem, Patricia Barr, Tamara Hinton, Josh Maxwell, and 
Sangina Wright.

   OPENING STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    The Chairman. This hearing of the Subcommittee on 
Conservation, Credit, Energy, and Research to review the costs 
and benefits of agriculture offsets will come to order.
    Welcome to the second of two hearings on the topic of 
climate change in agriculture. Today our witnesses will provide 
testimony on the costs and benefits of agriculture offsets. The 
implications of the 2007 Supreme Court decision regulating 
greenhouse gas emissions are still unknown, and the extent to 
which agriculture will need to participate in an offset and 
allowance program is still under debate. The efforts of 
Chairman Peterson to prevent EPA regulation of agriculture 
during consideration of the climate change bill would ensure 
that the writing of any offset rules will remain in the hands 
of those who understand agriculture and rural America. However, 
as I mentioned yesterday, the bill passed by the House is a 
long way from the President's desk.
    Yesterday, we heard from witnesses about the impacts that 
regulation and legislation addressing greenhouse gas emissions 
will have on our farms. At the same time, the witnesses 
discussed the effects of a changing climate on our cropland and 
livestock. What was clear from their testimony is that both 
action and inaction come with a price tag.
    The intent of this second hearing is to gather more 
information from those who have the knowledge and expertise on 
the use of offsets to counter these new costs. The researchers, 
economists, educators and analysts of our panel today are part 
of this wide and growing debate about whether or not these 
programs are viable, verifiable and profitable. Regardless of 
which side of the debate we are on, we all agree that there is 
much more work to be done.
    I look forward to today's expert testimony and the 
opportunity to listen, learn and question those on the 
forefront of this issue.
    [The prepared statement of Mr. Holden follows:]

  Prepared Statement of Hon. Tim Holden, a Representative in Congress 
                           from Pennsylvania
    Welcome to the second of two hearings on the topic of climate 
change and agriculture. Today, our witnesses will provide testimony on 
the costs and benefits of agriculture offsets.
    The implications of the 2007 Supreme Court decision regulating 
greenhouse gas emissions are still unknown, and the extent to which 
agriculture will need to participate in an offset and allowance program 
is still under debate. The efforts of Chairman Peterson to prevent EPA 
regulation of agriculture during consideration of the climate change 
bill would ensure that the writing of any offset rules will remain in 
the hands of those who understand agriculture and profitable. 
Regardless of which side of the debate we are on, we all agree there is 
much more work to be done. I look forward to today's expert testimony 
and the opportunity to listen, learn and question those on the 
forefront of this issue.

    The Chairman. I now recognize the Ranking Member, Mr. 
Goodlatte.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate you 
holding this series of hearings.
    Dr. Glauber, welcome again. This is getting to be a regular 
thing. I want to thank the witnesses for their participation 
today.
    Yesterday's witnesses demonstrated that cap-and-trade will 
have serious economic consequences for agriculture. H.R. 2454, 
the American Clean Energy and Security Act (ACES), or as I like 
to call it, the Agriculture Can't Exist Standards, creates a 
cap-and-tax program that will drive up energy and input costs 
for our farmers and ranchers and drive down farm income, 
ultimately putting many producers out of business. Proponents 
of cap-and-trade will point to the agriculture offsets 
provision in ACES and claim that they create potential for 
added farm revenue to mitigate the increase in production 
costs. But this provision also producers winners and losers. 
While every commodity will be hit with increased costs, only 
select producers will be able to take advantage of revenue-
raising offset projects. Meanwhile, entire regions of the 
country will be ignored and placed at an economic disadvantage 
because producers are not able to participate in offsets or 
projects that are economically feasible. Secretary Vilsack has 
often claimed that an offset program will be a major source of 
revenue for farmers, but has yet to produce evidence to back 
this claim except for the example of a producer who stops 
farming and converts cropland to trees. According to the EPA, 
this conversion could potentially be as high as 60 million 
acres, nearly twice the amount of land eligible under CRP.
    Now, let me be clear. In many cases the decision to take 
farmland out of production will not be made by farmers but 
rather it will be made by landowners. Converting this farmland 
would be devastating to agriculture and to rural America. Fewer 
acres would mean, potentially, more expensive feed for 
livestock producers and less revenue for agribusiness. 
Additionally, rural towns and communities will see a decrease 
in tax revenue that is necessary for essential community 
services.
    Rural America is facing an economic crisis and farm income 
is projected to decrease nearly 35 percent in 2009. This is no 
time to further cripple our farm economy with a burdensome cap-
and-tax policy.
    Mr. Chairman, I thank you for holding the hearings this 
week. I thank the Chairman of the full Committee, Mr. Peterson, 
for his efforts in trying to make the cap-and-trade legislation 
better, and certainly in the areas in which this Committee has 
jurisdiction he was successful in doing so, but there are 
wider, larger ramifications of this legislation that I think 
make it a very bad idea and very harmful to American 
agriculture. I look forward to today's testimony and hope the 
Committee will continue to review issues related to cap-and-
trade.
    [The prepared statement of Mr. Goodlatte follows:]

Prepared Statement of Hon. Bob Goodlatte, a Representative in Congress 
                             from Virginia
    Mr. Chairman, thank you for holding today's hearing to review the 
costs and benefits of agriculture offsets.
    Yesterday's witnesses demonstrated that cap-and-trade will have 
serious economic consequences for agriculture. H.R. 2454, the American 
Clean Energy and Security Act (ACES) or as I like to call it, the 
Agriculture Can't Exist Standards, creates a cap-and-tax program that 
will drive up energy and input costs for our farmers and ranchers and 
drive down farm income; ultimately putting many producers out of 
business.
    Proponents of cap-and-trade will point to the agriculture offsets 
provision in ACES and claim that they create potential for added farm 
revenue to mitigate the increase in production costs. But this 
provision also produces winners and losers. While every commodity will 
be hit with increased costs, only select producers will be able to take 
advantage of revenue-raising offset projects. Meanwhile, entire regions 
of the country will be ignored and placed at an economic disadvantage 
because producers are not able to participate in offsets or projects 
that are economically feasible.
    Secretary Vilsack has often claimed that an offset program will be 
a major source of revenue for farmers, but has yet to produce evidence 
to back this claim except for the example of a producer who stops 
farming and converts crop land to trees. According to the EPA, this 
conversion could potentially be as high as 60 million acres, nearly 
twice the amount of land eligible under CRP. Now let me be clear--in 
many cases, the decision to take farm land out of production will not 
be the farmers--it will be with the landowners.
    Converting this farm land would be devastating to agriculture and 
to rural America. Fewer acres would potentially mean more expensive 
feed for livestock producers and less revenue for agribusiness. 
Additionally, rural towns and communities will see a decrease in tax 
revenue that are necessary for essential community services.
    Rural America is facing an economic crisis and farm income is 
projected to decrease nearly 35% in 2009. This is no time to further 
cripple our farm economy with the burdens of a cap-and-tax policy.
    Mr. Chairman, I again thank you for holding the hearings this week. 
I look forward to today's testimony and I hope the Committee will 
continue to review issues related to cap-and-trade.

    The Chairman. The chair thanks the gentleman, and asks all 
other Members of the Subcommittee to submit their statements 
for the record.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Chairman Holden, for your leadership in calling this 
week's hearings. Once again, I will be brief because we have a lot of 
witnesses and a lot of substance to get into regarding the costs and 
benefits of agriculture offsets.
    The agriculture and forestry offset program that was included in 
the House-passed climate change legislation was a prime example of why 
the House Agriculture Committee needed to be at the table if the EPA 
was going to act on climate change without Congress's input.
    Agricultural producers have been leaders when it comes to reducing 
emissions. Many farmers, ranchers, and forest landowners are storing 
carbon, improving their energy efficiency and reducing greenhouse gas 
emissions through no-till, renewable energy production, forest 
management and other methods. Offset provisions in climate change 
legislation should recognize and reward this work, not hold it 
responsible for ideological reasons not based on sound science.
    If Congress fails to act, and if EPA is left in charge of writing 
carbon offset rules, there is no reason to think that agriculture and 
rural America will be fairly included in the process. Unlike USDA, EPA 
doesn't know agriculture, they aren't in the field dealing with 
producers, and they don't have the researchers or soil scientists to 
form a base of knowledge that would help in establishing and 
administering an offset program that credits real emissions reduction.
    That's why we ensured the House bill contains a workable, common-
sense offset option for farmers, ranchers, and private forest 
landowners with USDA in charge. While the bill as a whole is far from 
perfect, I believe the carbon offset provisions we included are the 
foundation for the kind of program farmers, ranchers, and foresters can 
ultimately get behind. And most agricultural groups have agreed. We are 
watching the Senate and hoping they can build on that.
    With that said, we are here today to learn more about the role of 
offsets in recent economic studies of climate legislation, how these 
programs could work, and what it could mean for producers in the long 
run, whether or not Congress decides to act. I look forward to that 
discussion and I yield back my time.

    The Chairman. We would like to welcome our first panel of 
witnesses today. Dr. Glauber, thank you very much for being 
with us again today. As well, we would like to welcome Dr. 
Joseph Kile, Assistant Director of Microeconomic Studies from 
the Congressional Budget Office.
    Dr. Glauber, you may begin when you are ready.

   STATEMENT OF JOSEPH GLAUBER, Ph.D., CHIEF ECONOMIST, U.S. 
          DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Dr. Glauber. Thanks very much. Chairman Holden, Congressman 
Goodlatte, Chairman Peterson and other Members of the 
Committee, again, thank you for the opportunity to discuss the 
effect of greenhouse gas offsets on U.S. agriculture.
    In yesterday's testimony, I summarized the Department's 
analysis of how the American Clean Energy and Security Act 
would likely affect production costs for U.S. farmers and 
ranchers across a wide range of commodities and regions. Today 
I will address how farmers and ranchers can potentially gain 
through the greenhouse gas offset program provided for in H.R. 
2454.
    The role of offsets is important for agriculture as well as 
for the rest of the economy. First, offsets provide a potential 
low-cost option for compliance to greenhouse gas emissions 
reductions for covered sectors under a cap-and-trade system. 
Offsets reduce the cost of compliance for covered entities 
which results in small increases in allowance prices that are 
then passed on to consumers, including farmers, as increased 
energy prices. Conversely, limited offset availability could 
result in higher cost to the economy. In its analysis of H.R. 
2454, the Environmental Protection Agency estimates that 
allowance prices would almost be 90 percent higher if 
international offset markets were not allowed. In a similar 
analysis, the Energy Information Administration estimates that 
allowance prices would be 64 percent higher with no 
international offset market.
    Second, offsets are a potential income source for 
agricultural producers and forest landowners through changes in 
land management practices, for example, reduced tillage, 
increased fertilizer efficiency, afforestation through animal 
management such as dietary modification, and manure management 
such as biogas capture. And while the profitability of 
management practices and the carbon storage that is attainable 
varies widely by region, net revenues from agricultural offsets 
can help mitigate the effects of higher production costs due to 
higher energy costs.
    Last, a domestic carbon offset program could affect land 
use and agricultural production and prices. If afforestation is 
the primary source of carbon offsets, cropland and pastureland 
would be converted to forest, which would raise farm prices and 
increase farm income, but also potentially result in higher 
food prices for both domestic and foreign consumers. Other 
sources of possible offsets such as conservation tillage and 
other agricultural management practices could have potentially 
smaller effect on land use and agricultural production and 
prices.
    Mr. Chairman, as I said in my testimony yesterday, we found 
that farm-level price and income effects due to higher 
production costs under H.R. 2454 will be relatively small, 
particularly over the short run. However, I believe a far more 
significant factor will be the effects of carbon offsets. There 
is no question that offsets will provide producers with 
potential means to enhance farm income and more than compensate 
the effects of higher production costs. The bigger issue, I 
believe, will be the source of the offsets. If too much 
cropland is diverted to afforestation, higher prices will 
result. This will put pressure on the livestock sector and 
ultimately food prices.
    In today's testimony, I review a number of recent studies 
that have focused on how ranchers, farmers and forest 
landowners would respond to various incentives designed to 
increase the use of production practices and land uses that 
increase carbon sequestration or reduce emissions associated 
with commodity production. To estimate the economic potential 
for agriculture and forestry to supply offsets, we relied on 
EPA allowance prices and detailed model analysis provided by 
the EPA using the so-called FASOM model developed at Texas A&M 
by Dr. Bruce McCarl, who you are fortunate to have on the next 
panel. Based on the FASOM results, we estimate the total amount 
of offsets that would be supplied by the agriculture sector 
would be 59 million metric tons of carbon equivalent in 2015, 
rising to over 420 million tons by 2050. The gross value of 
offsets increases from $800 million per year in 2015 to almost 
$30 billion per year in 2050.
    Providing offsets through afforestation has clear land use 
implications. As the value of carbon allowances increases, the 
FASOM estimates show that afforestation occur on large amounts 
of crop and pastureland. Afforestation of cropland and 
pastureland will have production and price impacts. The impact 
of less land in agriculture production leads to higher overall 
returns to agricultural producers with the results suggesting 
net returns to agricultural producers would be 12 percent 
higher than under baseline levels. However, the impact of less 
land also leads to higher commodity prices and ultimately 
higher food prices.
    It is important to point out two caveats about the model, 
and these are quite important. In the FASOM results that were 
provided to us from EPA, the Conservation Reserve Program was 
assumed to be fixed at 32 million acres. Planting trees on CRP 
acreage would provide additional offsets without causing loss 
of cropland. Alternatively, allowing some CRP acreage to come 
out and go into cropland would also help mitigate the price 
impacts while providing potential offset income to producers.
    Second, the FASOM model only evaluates no-till adoption 
relative to baseline levels. Under H.R. 2454, there would be 
potential offsets to early adopters and particularly for those 
adopters using permanent no-till practices. These are not 
accounted for in the model, and in fact the model shows no 
potential offsets coming from no-till. But again, this is a 
function of one of the underlying model assumptions. What these 
results suggest is that it is important to get the offsets 
program right, to provide sufficient income incentives to 
producers to reduce greenhouse gas emissions or sequester 
carbon, but in a way that does not turn an offsets program into 
a food versus fuel versus carbon debate.
    That completes my testimony and I would be happy to take 
any questions.
    [The prepared statement of Dr. Glauber follows:]

  Prepared Statement of Joseph Glauber, Ph.D., Chief Economist, U.S. 
              Department of Agriculture, Washington, D.C.
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to discuss the effects of greenhouse gas (GHG) offset 
programs on U.S. agriculture. In previous testimony I have summarized 
the Department's analysis of how the American Clean Energy and Security 
Act (H.R. 2454) would likely affect production costs for U.S. farmers 
and ranchers across a wide range of commodities and regions. Today I 
will address how farmers and ranchers can potentially gain through the 
GHG offset program provided for in H.R. 2454.
    The role of offsets is important for agriculture as well as to the 
rest of the economy. First, offsets provide a potential low-cost option 
for compliance to GHG emissions reduction targets for covered sectors 
under a cap-and-trade system. Offsets reduce the costs of compliance 
for covered entities which results in smaller increases in allowance 
prices that are then passed on to consumers--including farmers--as 
increased energy prices. Conversely, limited offset availability could 
result in higher costs to the economy. In its analysis of H.R. 2454, 
the Environmental Protection Agency (EPA) estimates that allowance 
prices would be almost 90 percent higher if international offset 
markets were not allowed.\1\ In a similar analysis, the Energy 
Information Administration (EIA) estimates that allowance prices would 
be 64 percent higher with no international offsets market.\2\ The 
Congressional Budget Office estimates that if no offsets were allowed, 
allowance prices would more than triple.\3\ These analyses do not 
consider how allowance prices would change if both international and 
domestic offsets were not available, but the effect would likely be 
magnified. This is because when international offsets are not 
available, demand for domestic offsets increases substantially and acts 
as a limiting factor on allowance price increase.
---------------------------------------------------------------------------
    \1\ The EPA analysis of H.R. 2454 can be found at http://
www.epa.gov/climatechange/economics/economicanalyses.html.
    \2\ The EIA analysis of H.R. 2454 can be found at: http://
www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html.
    \3\ Congressional Budget Office. CBO Cost Estimate: H.R. 2454 
American Clean Energy and Security Act of 2009, June 5, 2009. p. 18.
---------------------------------------------------------------------------
    Second, offsets are a potential income source for agricultural 
producers and forest landowners through changes in land management 
practices (e.g., reduced tillage, increased fertilizer efficiency, 
afforestation/tree planting), animal management (e.g., dietary 
modifications), and manure management (e.g., biogas capture). And while 
the profitability of management practices varies widely by region, as 
does the amount of carbon storage attainable, net revenues from 
agricultural offsets can mitigate the effects of higher production 
costs due to higher energy costs.
    Last, a carbon offsets program could affect land use and 
agricultural production and prices. If afforestation is the primary 
source of carbon offsets, for example, cropland and pastureland would 
be converted to forests which would raise farm prices and increase farm 
income, but also result in higher food prices for both domestic and 
foreign consumers. Other sources of possible offsets such as 
conservation tillage and other agricultural management practices that 
reduce nitrous oxide and methane emissions could have potentially 
smaller effects on land use and agricultural production and prices but 
would be more difficult to monitor and verify.
    Note that the analysis presented here does not examine the impacts 
of international offsets on the U.S. farm sector. International 
offsets, particularly reduced deforestation offsets that limit 
agricultural expansion globally can also affect U.S. farmers by raising 
farm prices. As found in the EPA and EIA analyses, international 
offsets are important for avoiding high allowance prices, which will 
lead to more moderate energy price increases but also result in lower 
prices for domestic offsets.
The Role of Offsets
    Agriculture and forestry have a wide variety of production and land 
management practices that can lower GHG emissions and/or increase the 
quantity of carbon stored in soils and vegetation. These include 
shifting cropland into trees or permanent grasses, managing existing 
forests to store additional carbon, adopting no-till or reduced tillage 
systems on a long-term basis, eliminating fallow periods, planting 
cover crops, changing nitrogen fertilizer management practices 
(including rates, application method, timing, and use of inhibitors), 
altering livestock feed mixes, and changing manure management 
practices.
    A number of recent economic studies have focused on how farmers and 
forest land owners would respond to various incentives designed to 
increase the use of production practices and land uses that increase 
carbon sequestration and/or reduce emissions associated with commodity 
production. For six of these studies, table 1 details the types of 
mitigation activities assessed, the regional and sector coverage, and 
the quantity of GHG mitigation achieved by specific activities at 
selected prices.
    The studies summarized in table 1 employ different methodologies 
and make alternative assumptions regarding key underlying variables, 
trends, and other factors. Additionally, the studies were designed to 
look at different research questions and so differ with respect to 
geographic focus, sector coverage, activity coverage, inclusion of 
relevant Federal policies and measures and time period considered. When 
viewed collectively, however, several overall conclusions emerge 
regarding the potential of the U.S. agriculture and forestry sectors to 
supply greenhouse gas mitigation within the context of a cap-and-trade 
system.
    Collectively, the studies found, depending on the CO2 
price, farmers and forest land owners generate measurable amounts of 
greenhouse gas mitigation through changes in tillage practices, crop 
rotations, elimination of fallow periods, switching marginal cropland 
to permanent grassland, reducing methane (CH4) and nitrous 
oxide (N2O) emissions from agricultural sources, making 
changes in forest management, and afforestation.
    The offset supply curves from these studies indicate than even at 
low CO2 prices, the domestic agriculture and forestry 
sectors could supply a significant amount of GHG offsets to entities 
covered under a cap-and-trade system. At very low CO2 prices 
(e.g., under $10 per ton), these offsets would be generated mostly by 
changes in agricultural production practices. Lewandrowski et al. 
(2004), EPA (2005), and Antle et al. (2001, 2007) found some shifting 
to less GHG intense production practices (such as increased adoption of 
no-till, elimination of fallow periods, and shifts to less energy 
intensive rotations) at CO2 prices of $5 per ton or less. In 
many areas no-till, conservation tillage, and conventional tillage 
systems are practiced in relatively close geographic proximity. This 
suggests the economic returns to different tillage systems are often 
relatively similar. Where this is the case, a relatively small economic 
incentive favoring one system over another--such as a carbon market 
could provide for no-till, would be sufficient to induce some farmers 
to change tillage systems. Similar reasoning applies to increases in 
the use of other less GHG intense production practices and rotations.
    Results in the two studies that include forest management as a 
mitigation option (EPA 2005, 2006) suggest these activities would also 
start generating significant offsets at a CO2 price as low 
as $5 per ton. At a CO2 price of about $10 per ton, 
afforestation becomes economically attractive and dominates mitigation 
activities in the agricultural sector. Although explicitly accounted 
for only in the EPA (2005) study, changes in forest management dominate 
mitigation activity in the forest sector. Across studies, afforestation 
accounts for an increasing share of total offsets as CO2 
prices rise--at least through the price ranges considered ($33.1 per 
ton in Lewandrowski et al., $50 per ton in EPA (2005), and $54.4 per 
ton in Lubowski et al.). Opportunities to generate offsets from 
reducing N2O and CH4 emissions from agricultural 
sources appear positive but relatively modest through the range of 
CO2 prices considered (EPA, 2005 and 2006). Results in the 
one study that looks at farms and forests as suppliers of biofuel 
feedstocks for electricity generation suggest this activity could be 
important source of offsets at CO2 prices above $30 per ton 
(EPA 2005).
    Finally, the studies by Lewandrowski et al. and EPA (2005) discuss 
the difference between the technical and economic potentials of the 
agriculture and forestry sectors to mitigate GHG emissions through 
changes in production and land management practices. As with the 
empirical results, these discussions are not directly comparable. 
Lewandrowski et al. combine published technical assessments of the 
carbon sequestering potential of various crop and livestock activities 
with published estimates of the total land suitable for each practice 
to develop a table describing the aggregate technical potential of 
specific farm sector activities to sequester carbon (see Lewandrowski 
et al., table 2.2, page 5). The discussion in EPA (2005) is conceptual 
and drawn from an earlier paper McCarl and Schneider (2001). Also, the 
studies differ in terms of evaluation period, as the EPA 2005 results 
are from 2010-2100 while the Lewandrowski et al. study evaluates a 
shorter, 15 year time period.
    It is also important to understand the regional economic 
implications of a national cap-and-trade framework such as contained in 
H.R. 2454. Insights regarding these impacts can be developed from the 
studies by Lewandrowski et al. (2004) and EPA (2005). Although the 
studies vary significantly in timeframe and other underlying 
assumptions, this brief synopsis highlights the regional difference in 
adoption rates of offset options, using afforestation as an example.
    Regional results of offset potential by source from Lewandrowski et 
al. with GHG mitigation priced at $34 per ton CO2, and, EPA 
(2005) with GHG mitigation priced at $30 per ton CO2 are 
shown in figures 1a and 1b. In both cases, afforestation is the largest 
potential source of offsets.\4\ In the EPA (2005) study, 90 percent of 
the 434.9 MMT of CO2 sequestered by afforestation occurs in 
the Corn Belt and South Central regions. The remainder occurs in 
Southeast, Lake States, and Rock Mountain regions. In the Lewandrowski 
et al. study, over 60 percent of the CO2 sequestered by 
afforestation occurs in Appalachia, the Southeast, Delta States, Lake 
States, and Corn Belt. One region where the afforestation results 
differ significantly between the two studies is the Pacific Northwest 
and California. In Lewandrowski et al., these areas sequester 160 MMT 
CO2 via afforestation (all from conversion of pasture to 
trees). It is worth noting that in this study, afforestation in the PNW 
region requires a relatively high price for CO2 before it is 
economically attractive. At prices below $15 per ton CO2 
virtually no afforestation occurs. In the EPA (2005) analysis the PNW 
and California sequester only 4.7 MMT CO2 from 
afforestation.
---------------------------------------------------------------------------
    \4\ In the Lewandrowski et al. study, afforestation was assumed to 
be zero in the North Plains, South Plains and Mountain regions.
---------------------------------------------------------------------------
Agricultural Offsets in H.R. 2454
    The economic profitability to supply offsets depends on the price 
that industries in covered sectors are willing to pay for offsets. The 
June EPA analysis of H.R. 2454 (2009) estimates the real ($2005) price 
of allowances to increase from about $13 per ton of carbon dioxide 
equivalent (CO2eq) in 2015 to over $70 per ton 
CO2eq by 2050; an increase of five percent per year \5\ 
(table 2).
---------------------------------------------------------------------------
    \5\ For the June EPA H.R. 2454 analysis, scenario 2 was used. The 
EPA analysis of H.R. 2454 can be found at: http://www.epa.gov/
climatechange/economics/economicanalyses.html.
---------------------------------------------------------------------------
    To estimate the economic potential for agriculture and forestry to 
supply offsets we rely on EPA allowance prices and detailed modeling 
analysis provided by EPA.\6\ The results presented are similar to but 
not identical to the results provided in the EPA (2009) analysis of 
H.R. 2454 or our preliminary analysis of H.R. 2454 (USDA, OCE, 2009). 
The results presented in this analysis reflect the estimates from FASOM 
based on an average of two scenarios: an inflation adjusted carbon 
allowance price of $5 per ton in 2010 and increasing at five percent 
per year over time and an inflation adjusted carbon allowance price of 
$15 per ton in 2010 and increasing at five percent per year over time. 
The average of these carbon prices paths generates a carbon price path 
that approximates the carbon price allowance path estimated by EPA. In 
addition, in this paper we focus exclusively on agricultural activities 
and include afforestation as an agricultural activity.
---------------------------------------------------------------------------
    \6\ To estimate the economic potential of the agriculture and 
forestry sectors in the United States to provide carbon offsets, EPA 
(2009) used an economic model, the Forest and Agricultural Sector 
Optimization Model (FASOM), developed by Bruce McCarl at the Texas A&M 
University. The results presented in this paper reflect simulations 
during March 2009. A more complete description of FASOM modeling 
framework and a complete list of commodities can be found at: http://
agecon2.tamu.edu/people/faculty/mccarl-bruce/FASOM.html.
---------------------------------------------------------------------------
    The FASOM modeling did not account for several categories of GHG 
reductions, including: improvements in organic soil management; 
advances in feed management of ruminants; changes in the timing, form, 
and method of fertilizer application; and alternative manure management 
systems other than anaerobic digesters.\7\ The model only evaluates 
additional no-till adoption relative to a historic baseline. To the 
extent legislation awards offsets to no-till prior to the start of the 
program, it is not accounted for here. It is important to note that 
these emissions reductions would not be additional relative to the 
baseline.
---------------------------------------------------------------------------
    \7\ Because of how it is handled in the FASOM model, agricultural 
soil sequestration does not show significant supply. However, detailed 
FASOM output indicates a 50 percent increase in the percent of cropland 
using conservation tillage and no-till by 202 in response to a $15/ton 
CO2 incentive payment. Because overall land area in crops 
declines due to afforestation, the modeling indicates a net decrease in 
total agricultural soil carbon storage as carbon is transferred from 
the agricultural soils pool to the afforestation carbon pool.
---------------------------------------------------------------------------
    It is also important to note that, as with any economic model, 
predictions far out into the future are inherently more uncertain than 
nearer term estimates. USDA typically only forecasts agricultural 
prices and incomes a handful of years into the future. As such, 
results--particularly for 2030 and 2050--should not be interpreted as 
precise estimates but rather as indications of the direction and 
magnitude of the expected effect.
    From 2015 to 2050, the total amount of offsets that would be 
supplied by the agricultural sector increases from 59 million metric 
tons of carbon equivalent (MMTCO2eq) per year to over 420 
MMTCO2eq by 2050 (table 3). With allowance prices increasing 
over time, the real gross revenues resulting from agricultural offsets 
increases from about $800 million per year in 2015 to almost $30 
billion per year by 2050.
    The primary source of agricultural offsets would be increased 
carbon sequestration through afforestation of crop and pastureland.\8\ 
The gross revenues--before accounting for the cost of the offset-
generating activity--associated with offsets from afforestation account 
for about 85 percent of the total agricultural offset revenues from 
2015 to 2050 (table 3). Reductions in methane (CH4) and 
nitrous oxide (N2O) emissions account for second largest 
share of agricultural offsets. These offsets total about 11 MMT 
CO2eq in 2015 and 78 MMT CO2eq in 2050. Many of 
the opportunities to generate these offsets would be concentrated among 
specific groups of producers. Examples include changes in manure 
management practices for confined dairy, hog, and poultry operations, 
changes in diet for confined cattle operations, changes in fertilizer 
management for nitrogen intensive commodities such as corn and cotton, 
and, changes in rice production practices.
---------------------------------------------------------------------------
    \8\ This includes soil carbon sequestration on afforested 
agricultural lands, in addition to carbon sequestered from new trees.
---------------------------------------------------------------------------
    Regionally, the Corn Belt region is the largest supplier of GHG 
offsets across time periods and the Lake States region is the second 
largest supplier (table 4).\9\ In each 5 year period between 2015 and 
2050, the Corn Belt region accounts for between 30 and 50 percent of 
all agricultural sector offsets supplied while the Lake States region 
account for between 20 and 30 percent of the total supply of 
agricultural offsets. The South Central, Northeast, and Rocky Mountain 
regions account for, on average and respectively, 11, 8, and 6 percent 
of all agricultural offsets supplied between 2015 and 2050.
---------------------------------------------------------------------------
    \8\ FASOM regions are presented in Figure 1.
---------------------------------------------------------------------------
Implications for Land Use
    Providing offsets through afforestation has clear land use 
implications. As the value of carbon allowances increase, FASOM 
estimates show that afforestation occurs on larger amounts of crop and 
pastureland (table 5). In 2015, when the price of carbon allowances is 
about $13 per ton of CO2eq, additional afforestation occurs 
on about 8 million acres. This represents a three percent increase in 
forestland against the projected baseline. By 2030, when the price of 
carbon allowances increases to almost $27 per ton of CO2eq, 
additional afforestation occurs on almost 27 million of acres. By 2050, 
when the price of carbon allowances increases to $70 per ton of 
CO2eq, additional afforestation occurs on almost 60 million 
acres, 35 million acres of which comes from cropland (14 percent 
decline from baseline) and 24 million acres from pasture (almost nine 
percent decline from baseline).
    As the value of carbon allowances increase, the share of cropland 
used for afforestation also increases. For example, in 2015, when the 
price of carbon allowances is relatively low, almost all the 
afforestation occurs on pastureland. By 2030, when price of carbon 
allowances rises to about twice the price in 2015, slightly more than 
half of the additional afforestation occurs on cropland. The source of 
land being used for afforestation matters as well. In the early 
periods, more pastureland is converted to forests than cropland. By 
2050, when the price of carbon allowances increases to over $70 per ton 
of CO2eq, about 60 percent of the afforestation occurs on 
cropland compared to about 40 percent for pastureland. Studies that 
have shown a greater portion of mitigation coming from pasturelands 
have shown smaller aggregate impacts on commodity production and food 
prices (de la Torre Ugarte et al. 2009).
    The amount of land where additional afforestation occurs also 
varies by region. As shown in table 6, in 2015, almost all of the 
additional afforestation occurs in four regions of the country: the 
Corn Belt, Lake States, Rocky Mountains, and South Central. While most 
of the additional afforestation occurs in the Corn Belt, there is also 
a growing concentration of afforestation over time. In 2015, for 
example, about 55 percent of the afforestation occurs in the Corn Belt 
and Lake States. By 2050, almost 65 percent of the additional 
afforestation in the United States occurs in those two regions.
Impacts on Crop Production and Prices
    Afforestation of cropland will have production and price impacts. 
As carbon allowance prices increase, the magnitude of the impact 
compared to baseline production and prices grows. In 2015, the 
commodity production impacts are relatively modest except for rice 
(table 7). Corn and soybean production are 3.5 and 1.4 percent lower, 
respectively, compared to baseline production levels. By 2030, corn and 
soybean production are about seven and nine percent lower, 
respectively, when compared to baseline levels of production in 2030. 
By 2050, corn and soybean production are 22 and 29 percent lower than 
baseline levels.
    It is important to note that under the FASOM baseline, crop 
production generally increases over time due to yield growth. Thus, the 
impacts of higher carbon allowance prices on future production relative 
to current levels are less than the impacts compared to baseline 
levels. For example, while corn production is 22 percent less than 
baseline production levels for 2050, this lower level of production is 
13 percent higher than baseline levels of production in 2015. Only for 
soybeans and sorghum are 2050 levels of production under cap-and-trade 
less than baseline levels of production in 2015.
    Lower levels of production relative to baseline levels translate 
into higher real prices. As shown in table 8, by 2030, corn, rice, and 
wheat prices are 15, 5.5, and three percent higher compared to baseline 
prices. By 2050 corn, rice, wheat prices are 28, 8, and 13 percent 
higher, respectively, compared to baseline prices. In addition, 
soybean, cotton, sorghum, and barley prices are 21, 25, 40, and 57 
percent higher compared to baseline prices. While baseline corn yield 
growth mitigates increases in corn, wheat, rice and oat prices over 
time, crop prices in real terms are higher in 2050 compared to current 
prices for sorghum, barley, cotton and soybeans.
    Lower domestic crop production and higher prices could spur 
increases in agricultural production abroad as producers make up for 
reductions in U.S. crop exports relative to the baseline. These trade 
impacts could moderate the anticipated rise in crop prices over the 
baseline. At the same time, expansion of agricultural production abroad 
could lead to emissions leakage if forests and grasslands are cleared 
to produce crops. However, international offset programs, such as 
reducing deforestation, could limit this effect.
Implications for Livestock
    Higher real commodity prices also affect livestock production and 
prices through higher production costs. Hog slaughter is estimated to 
fall by about seven percent in 2030 and fed beef slaughter is estimated 
to fall by about three percent compared to 2030 baseline production 
levels (table 9). As greater and greater amounts of cropland are 
afforested and crop prices rise, the impacts on livestock producers 
increase. By 2050, hog slaughter is 23 percent lower compared to 
baseline levels while fed beef slaughter is estimated to fall by almost 
ten percent compared to baseline levels. Milk production is estimated 
to fall by about 7 and 17 percent compared to baseline levels in 2030 
and 2050, respectively. Chicken, turkey, and egg production appear to 
be relatively less impacted.
    Lower livestock supplies will cause real prices to increase 
relative to baseline levels (table 9). Those livestock categories which 
showed the largest production impacts translate into the smallest price 
changes. For example, for 2030, the seven and three percent declines in 
hog and fed beef slaughter result in price increases of 12 and 4 
percent, respectively; by 2050, the decline in hog and fed beef 
slaughter result in price increases of 27 and 14 percent, respectively. 
However, while egg, broiler, and turkey production are only two, seven, 
and eight percent lower than baseline production levels in 2050, 
respectively; egg, broiler, and turkey prices are 20, 16, and 15 
percent higher, respectively. The prices for eggs, broilers, and 
turkeys are far more responsive to a change in production relative to 
the prices for beef and hogs. Similarly, milk prices are expected to 
increase by 33 percent in 2050 compared to the baseline in response to 
the 17 percent decline in production. The relatively larger price 
impacts for eggs, broilers, turkeys, and milk compared to beef and pork 
reflects the availability of alternatives in consumers food spending. 
Price increases for beef and pork are limited because consumers can 
switch to relatively lower priced alternatives such as chicken and 
turkey. However, there are few alternatives in the consumer food basket 
to chicken, turkey, and milk.
    Price increases in livestock due to cap-and-trade could be 
mitigated in part if foreign producers increase their production of 
livestock beyond baseline levels in response to higher prices. Similar 
to the trade impacts associated with changes in crop production, 
increase in foreign livestock production could lead to increases in GHG 
emissions abroad if producers clear native ecosystems to expand 
pastureland. As with crop production, well designed international 
offset programs could limit this effect.
Implications for Farm Income/Producer Surplus
    Higher real commodity prices coupled with lower production, changes 
in input costs and offset net revenues will have an impact on net farm 
income or producer surplus. FASOM modeling results provided by EPA show 
the annuity value of changes in producer surplus over the entire 
simulation period.\10\ As was presented in my December 2 testimony, the 
annuity value of the change in producer surplus is expected to be 
almost $22 billion higher; an increase of 12 percent compared to 
baseline producer surplus (table 9). About 78 percent of this increase 
is due to higher commodity prices as a result of the afforestation of 
cropland. Only about 22 percent of the increase in producer surplus is 
due to GHG related payments. Almost 30 percent of the gains would occur 
in the Corn Belt followed by the South East region (16 percent of the 
gains), Great Plains region (13 percent), and South Central region (10 
percent).
---------------------------------------------------------------------------
    \10\ FASOM estimates the impact on producer surplus, a measure of 
farm income. The annuity value is calculated over the period 2015-2075.
---------------------------------------------------------------------------
    The producer surplus impacts exclude earnings from the sale of 
carbon from afforestation. USDA estimates the annuity value of the 
gross revenues associated with the sale of afforestation offsets would 
result in approximately $3 billion of additional farm revenue.\11\ 
About 90 percent of that additional revenue would be generated in four 
regions of the country: the Corn Belt (40 percent), Lake States (25 
percent), South Central (14 percent), and Northeast (11 percent). 
However, part of that increase in revenue will be offset by the 
continued costs associated with maintaining afforestation projects.
---------------------------------------------------------------------------
    \11\ The annuity value of afforestation offsets were not directly 
taken from model results but estimated based on the EPA allowance 
prices, the amount of offsets in each region, and a real discount rate 
of five percent.
---------------------------------------------------------------------------
Impacts on Consumer Food Prices
    Higher commodity prices will also affect the prices consumers pay 
for food.\12\ The predicted effect on the overall Food CPI is dependent 
upon the assumed relationship between the Food at Home (FAH) and Food 
Away from Home (FAFH) price indices. An upper and lower bound estimate 
is presented based on the following two possible assumptions: a lower 
bound estimate which assumes the FAFH index is not changed by higher 
costs and an upper bound estimate which assumes that FAFH effects are 
the same as the FAH effects. Combining the FAH and FAFH results to the 
overall CPI for Food implies that the changes in food costs due to 
higher commodity prices will increase the Food CPI by 0.1 to 0.2 
percentage points above the expected inflation trend in 2015 and 1.2 to 
2.1 percentage points in 2050. In comparison, the average annual food 
inflation rate has been 3.1 percent over the past 20 years. Adding the 
impact of higher energy costs could add an additional 0.4 to 0.8 
percentage points to the Food CPI in 2015 and an additional 1.4 to 2.5 
percentage point to the Food CPI by 2050. Thus, the total increase to 
the food CPI from both higher commodity and energy prices is expected 
to be 0.5 to 1.0 percentage points in 2015 and 2.6 to 4.6 percentage 
points in 2050.
---------------------------------------------------------------------------
    \12\ FASOM does not estimate the impact of changes in primary and 
secondary commodity prices on the consumer prices index (CPI). To 
estimate the impacts on the CPI, USDA's Economic Research Service 
matched the FASOM results to analogous categories of Producer Price 
Index (PPI) food items. The analysis assumes that consumer spending 
patterns remain relative constant over time. To the degree to which 
there may be shifts in consumption patterns due changes in tastes and 
preferences, the effects may be overstated or understated.
---------------------------------------------------------------------------
Conclusions
    The ability to generate and sell offsets provides an additional 
source of farm income which can more than compensate for any loss in 
income due to higher energy costs, in addition to increased revenues 
from higher commodity prices. The agricultural sector is estimated to 
supply 59 to 150 MMT CO2eq. in offsets annually between 2015 
and 2020 at a carbon price starting around $10 per ton and rising at 
five percent per year (assuming they are all additional reductions 
relative to the baseline). With the real (inflation adjusted) price of 
carbon allowances estimated at about $13 per ton CO2eq in 
2015 and $16 per ton CO2eq in 2020, potential gross offset 
revenue to farmers is between $0.8 and $2.4 billion annually in the 
early years of the program. Between 2025 and 2035, agriculture is 
estimated to supply 167 to 342 MMT CO2eq per year, 
generating $3.5 to $11.6 billion per year. In the longer-term, from 
2040 to 2050, agriculture is estimated to supply over 400 MMT 
CO2eq per year, which generates $18 to $30 billion per year 
in gross revenue at carbon allowance prices of $43 to $70 per ton 
CO2eq.
    Providing offsets through afforestation will also take land out of 
agricultural production. The impact of less land in agricultural 
production leads to higher overall returns to agricultural producers. 
The effect of higher prices outweighs the effect of less production 
and, on average, net returns to agricultural producers are about 12 
percent higher, with an annuity value in excess of $20 billion.
    Consumers will feel the effect of higher commodity prices through 
increases in the prices paid for food. The overall impact on the Food 
CPI is estimated to be an increase of about 0.1 to 0.2 percentage 
points above the expected historical trend in the Food CPI in 2015 and 
1.2 to 2.1 percentage points above the expected historical trend in the 
Food CPI in 2050 with the years in between showing steady increases in 
the index.
    Allowing domestic agriculture and forest offsets into a regulatory 
cap-and-trade system has a significant effect on the costs of allowance 
prices. By allowing agriculture and forestry to provide offsets to 
regulated entities, the cost associated with meeting GHG reduction 
goals can be greatly reduced and, if implemented correctly, provide the 
same environmental benefits.
References Cited
    Antle, J.M., S.M. Capalbo, S. Mooney, E.T. Elliot, and K.H. 
Paustian. 2001. ``Economic Analysis of Agricultural Soil Carbon 
Sequestration: An Integrated Approach.'' Journal of Agricultural and 
Resource Economics. 26(2): pp. 344-367.
    Antle, J.M., S.M. Capalbo, K. Paustian, and Md Kamar Ali. 2007. 
``Estimating the economic potential for agricultural soil carbon 
sequestration in the Central United State using an aggregate 
econometric-process simulation model''. Climatic Change. 80: pp. 145-
171.
    Congressional Budget Office. 2009. ``CBO Cost Estimate: H.R. 2454 
American Clean Energy and Security Act of 2009'', June. Available at: 
http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf.
    De La Torre Ugarte, D., B.C. Englis, C. Hellwinckel, T.O. West, 
K.L. Jensen, C.D. Clark, and R. J. Menard. 2009. ``Analysis of the 
Implications of Climate Change and Energy Legislation to the 
Agricultural Sector.'' Department of Agricultural Economics, Institute 
of Agriculture, The University of Tennessee. November. Available at: 
http://www.25x25.org/storage/25x25/documents/
ut_climate_energy_report_25x25_november11.pdf.
    Department of Energy. Energy Information Administration. 2009. 
``Energy Market and Economic Impacts of H.R. 2454, the American Clean 
Energy and Security Act of 2009.'' July. Available at: http://
www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html.
    Lewandrowski, J., M. Peters, C. Jones, R. House, M. Sperow, M. Eve, 
and K. Paustian. 2004. Economics of Sequestering Carbon in the 
Agricultural Sector. USDA ERS Technical Bulletin No. 1909. (April).
    Lubowski, R.N., A.J. Plantinga, and R.N. Stavins. 2006. ``Land-use 
change and carbon sinks: Econometric estimation of the carbon 
sequestration supply function''. Journal of Environmental Economics 
Management. Vol. 51(2006): pp. 135-152.
    McCarl, B.A., and U.A. Schneider. 2001. ``Greenhouse Gas Mitigation 
in U.S. Agriculture and Forestry.'' Science. 294: 2481-82.
    U.S. Department of Agriculture. Office of the Chief Economist. 
2009. ``A Preliminary Analysis of the Effects of H.R. 2454 on U.S. 
Agriculture.'' July 22. Available at http://www.usda.gov/oce/newsroom/
archives/releases/2009files/HR2454.pdf.
    U.S. Environment Protection Agency. 2005. Greenhouse Gas Mitigation 
Potential in U.S. Forestry and Agriculture. EPA 430-R-05-006. November.
    U.S. Environmental Protection Agency. 2006. Global Mitigation of 
Non-CO2 Greenhouse Gases. EPA 430-R-06-005 (June).
    U.S. Environmental Protection Agency. 2009. ``EPA Analysis of the 
American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th 
Congress''. June 23. Available at http://www.epa.gov/climatechange/
economics/economicanalyses.html.
                                 Tables

Table 1: GHG Offset Potential for Selected Practices and CO2 Prices From
                            Recent Studies *
------------------------------------------------------------------------
                                                         Potential GHG
   GHG Mitigation                                         mitigation
      Practice           Study          Coverage        (MMTCO2e/yr @ $
                                                         per ton CO2)
------------------------------------------------------------------------
                                 Tillage
------------------------------------------------------------------------
Conservation         Lewandrowski   U.S. agriculture    31 @ $13.62
 tillage (primarily   et al.         sector             101 @ $34.06
 no-till)             (2004)
                     EPA (2005)     U.S. agriculture  In 2015:
                                     and forestry       194 @ $15.00
                                     sectors            191 @ $30.00
                                                      In 2025:
                                                        204 @ $15.00
                                                        187 @ $30.00
                     Antle et al.   Central U.S.      No-till corn-soy-
                      (2007)         cropland          feed systems
                                                        14.6 @ $16.4
                                                        18.6 @ $27.3
                                                      No-till wheat
                                                       systems
                                                        1.9 @ $16.4
                                                        2.2 @ $27.3
------------------------------------------------------------------------
                 Other Agricultural Management Practices
------------------------------------------------------------------------
All Agricultural     EPA (2005)     U.S. agriculture  In 2015:
 CH4 and N2O                         and forestry       28 @ $15.00
                                     sectors            48 @ $30.00
                                                      In 2025:
                                                        36 @ $15.00
                                                        76 @ $30.00
                     EPA (2006)     Global            In 2020 (Base =
                                     Agriculture       200 MMT CO2)
                                     U.S. Cropland      21% Reduction @
                                     sources          $15
                                                        26 % Reduction @
                                                      $30
                                    U.S. Livestock    In 2020 (Base =
                                     sources           171 MMT CO2)
                                                        11.8% Reduction
                                                      @ $15
                                                        19.8% Reduction
                                                      @ $30
Reduced fossil fuel  EPA (2005)     U.S. agriculture  In 2015:
 use                                 and forestry       35 @ $15.00
                                     sectors            46 @ $30.00
                                                      In 2025:
                                                        32 @ $15.00
                                                        49 @ $30.00
Biofuel Offsets      EPA (2005)     U.S. agriculture  In 2015:
 (primarily biomass                  and forestry       0 @ $15.00
 for power                           sectors            16 @ $30.00
 generation)                                          In 2025:
                                                        0 @ $15.00
                                                        21 @ $30.00
Cropland to          Antle et al.   Northern U.S.       8.7 @ $24.9
 permanent grass      (2001)         Great Plains       13.6 @ $49.2
Continuous cropping  Antle et al.   Northern U.S.       44.9 @ $14.4
 (reducing fallow)    (2001)         Great Plains       63.4 @ $28.7
                     Antle et al.   Central U.S.        2.23 @ $16.35
                      (2007)                            2.85 @ $27.25
------------------------------------------------------------------------
                              Afforestation
------------------------------------------------------------------------
Afforestation        Lewandrowski   U.S. agriculture    265.7 @ $13.62
                      et al.         sector               74.1 from
                      (2004)                             cropland
                                                          191.6 from
                                                         grassland
                                                        488.8 @ $34.06
                                                          147.2 from
                                                         cropland
                                                          341.7 from
                                                         grassland
                     EPA (2005)     U.S. agriculture  In 2015:
                                     and forestry       145 @ $15.00
                                     sectors            557 @ $30.00
                                                      In 2025:
                                                        228 @ $15.00
                                                        806 @ $30.00
                     Lubowski et    U.S. land base      734-917 @ $13
                      al. (2006)                        2,110-2,899 @
                                                      $27.2
                                                      (range shows with
                                                       & without
                                                       harvests)
------------------------------------------------------------------------
                            Forest Management
------------------------------------------------------------------------
Forest management    EPA (2005)     U.S. agriculture  In 2015:
 (e.g., extend                       and forestry       227 @ $15.00
 rotations, thin,                    sectors            271 @ $30.00
 and fertilize)                                       In 2025:
                                                        156 @ $15.00
                                                        250 @ $30.00
------------------------------------------------------------------------
* Some values have been derived from numerical results or interpreted
  off of graphs in associated publications. Some studies report results
  in units of carbon. In this table, all GHG values have been converted
  to metric tons of CO2.


                                     Table 2. EPA Estimated Allowance Prices
----------------------------------------------------------------------------------------------------------------
      Year           2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
                                      Allowance Price ($2005 per ton CO2eq)
----------------------------------------------------------------------------------------------------------------
                    $12.64      $16.31      $20.78      $26.54      $33.92      $43.37      $55.27      $70.40
----------------------------------------------------------------------------------------------------------------
Source: USEPA. EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th
  Congress. June 23, 2009.


                  Table 3. Agricultural Offsets--by Source, Quantity, and Gross Offset Revenue
----------------------------------------------------------------------------------------------------------------
                     2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
                                      Allowance Price ($2005 per ton CO2eq)
----------------------------------------------------------------------------------------------------------------
Afforestation          48         132         146         170         307         372         368         344
Animal Wastes           3           4           6           8          10          12          17          25
          CH4
Other Ag CH4 &          8          12          15          19          26          35          44          53
          N2O
     Ag Soils           0           0           0           0           0           0           0           0
                 -----------------------------------------------------------------------------------------------
  Total.........       59         148         167         197         342         419         429         422
----------------------------------------------------------------------------------------------------------------
                                   Annual Gross Offset Revenue ($2004 billion)
----------------------------------------------------------------------------------------------------------------
Afforestation          0.6         2.1         3.0         4.5        10.4        16.1        20.3        24.2
Animal Wastes          0.0         0.1         0.1         0.2         0.3         0.5         1.0         1.8
          CH4
Other Ag CH4 &         0.1         0.2         0.3         0.5         0.9         1.5         2.4         3.8
          N2O
     Ag Soils          0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
                 -----------------------------------------------------------------------------------------------
  Total.........       0.8         2.4         3.5         5.2        11.6        18.1        23.7        29.7
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


                     Table 4. Annual Agricultural Offsets and Gross Offset Revenue by Region
----------------------------------------------------------------------------------------------------------------
      Year           2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
                                    Agricultural Offsets (MMT CO2eq per year)
----------------------------------------------------------------------------------------------------------------
   U.S. Total         59.0       148.4       167.5       197.4       342.4       419.0       429.0       422.0
    Corn Belt         26.5        70.8        82.4        79.3       109.0       138.0       127.1       141.7
 Great Plains          5.4         7.5         8.5         8.8        10.3        20.0        28.6        37.0
             Lake Stat16.8        36.4        48.5        47.7        70.4        96.0        92.0       108.9
    Northeast          1.5         6.4        10.4        15.0        35.7        53.0        49.4        45.0
Rocky Mountains        4.9         6.2         9.6        10.0        13.5        19.6        24.2        39.2
      Pacific          1.9         2.1         3.4         1.3         2.1         2.2         1.6         2.4
     Southwest
      Pacific          0.7         0.8         0.7         0.7         1.0         1.3         1.2         3.0
     Northwest
South Central          0.1        15.9         0.9        24.4        86.0        68.7        69.9        15.4
    Southeast          0.0         0.9         1.0         7.7         9.9        17.1        32.1        25.0
   South West          1.3         1.4         2.0         2.5         4.3         3.1         3.0         4.4
----------------------------------------------------------------------------------------------------------------
                                   Annual Gross Offset Revenue ($2004 billion)
----------------------------------------------------------------------------------------------------------------
   U.S. Total         $0.8        $2.4        $3.5        $5.2       $11.6       $18.1       $23.7       $29.7
    Corn Belt          0.3         1.2         1.7         2.1         3.7         6.0         7.0        10.0
 Great Plains          0.1         0.1         0.2         0.2         0.4         0.8         1.6         2.6
             Lake State0.2         0.6         1.0         1.3         2.4         4.1         5.1         7.7
    Northeast          0.0         0.1         0.2         0.4         1.2         2.3         2.7         3.2
Rocky Mountains        0.1         0.1         0.2         0.3         0.5         0.9         1.3         2.8
      Pacific          0.0         0.0         0.1         0.0         0.1         0.1         0.1         0.2
     Southwest
      Pacific          0.0         0.0         0.0         0.0         0.0         0.1         0.1         0.2
     Northwest
South Central          0.0         0.3         0.0         0.7         2.9         3.0         3.9         1.1
    Southeast          0.0         0.0         0.0         0.2         0.3         0.7         1.8         1.8
   South West          0.0         0.0         0.0         0.1         0.2         0.1         0.2         0.3
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.
Totals may not add due to rounding.


                                     Table 5. National Changes in Land Use.
----------------------------------------------------------------------------------------------------------------
                     2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
                                                  Million Acres
----------------------------------------------------------------------------------------------------------------
       Forest          8.3        16.6        20.3        26.6        34.4        43.6        55.4        59.0
     Cropland          0.1        ^6.0       ^10.2       ^14.6       ^21.0       ^28.3       ^32.5       ^35.0
      Pasture         ^6.7        ^8.5        ^9.7       ^12.0       ^13.3       ^15.3       ^22.8       ^24.0
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


                                       Table 6. Regional Changes in Acres.
----------------------------------------------------------------------------------------------------------------
                     2015        2020        2025        2030        2035        2040        2045        2050
----------------------------------------------------------------------------------------------------------------
                                             Forest (million acres)
----------------------------------------------------------------------------------------------------------------
    Corn Belt          2.9         4.9         6.9         9.7        13.5        16.3        20.1        22.5
 Great Plains           --          --          --          --          --          --          --          --
             Lake State1.7         3.1         4.9         4.9         8.7        10.6        13.4        15.1
    Northeast         ^0.1         1.1         1.9         2.5         3.2         3.2         3.2         2.4
Rocky Mountains        2.3         3.4         4.0         4.7         5.5         6.2         7.0         7.7
      Pacific          0.2         0.2         0.2         0.2         0.2         0.0         0.0         0.0
     Southwest
      Pacific          0.2         0.2         0.2         0.2         0.2         0.2         0.2         0.2
     Northwest
South Central          1.2         3.3         2.1         2.0         2.8         6.0        10.4        10.0
    Southeast         ^0.1         0.4         0.2         0.3         0.4         1.2         1.2         1.1
   South West           --          --          --          --          --          --          --          --
----------------------------------------------------------------------------------------------------------------
                                            Cropland (million acres)
----------------------------------------------------------------------------------------------------------------
    Corn Belt         ^2.3        ^4.2        ^6.3        ^8.5       ^12.2       ^15.5       ^18.1       ^20.6
 Great Plains         ^0.2        ^0.2        ^0.2        ^0.2        ^0.2        ^0.2         1.7         1.7
             Lake Stat^1.2        ^2.2        ^4.0        ^5.2        ^6.9        ^8.7       ^10.5       ^12.1
    Northeast          0.6         0.0        ^0.7        ^1.2        ^1.5        ^1.5        ^1.5        ^1.9
Rocky Mountains       ^0.4        ^1.0        ^1.6        ^2.3        ^3.1        ^3.8        ^4.6        ^5.3
      Pacific          0.0         0.0         0.0         0.0         0.0         0.0         0.0         0.0
     Southwest
      Pacific          0.1         0.2         0.2         0.2         0.2         0.2         0.2         0.2
     Northwest
South Central         ^0.2        ^2.0        ^2.1        ^2.1        ^2.1        ^3.1        ^7.0        ^6.4
    Southeast          0.6         0.3         1.4         1.7         1.7         1.1         1.2         1.2
   South West          3.1         3.1         3.1         3.1         3.1         3.1         6.0         8.2
----------------------------------------------------------------------------------------------------------------
                                             Pasture (million acres)
----------------------------------------------------------------------------------------------------------------
    Corn Belt         ^0.5        ^0.4        ^0.4        ^1.1        ^1.0        ^0.6        ^1.8        ^1.8
 Great Plains         ^1.9        ^1.9        ^1.9        ^1.9        ^1.9        ^1.9        ^3.8        ^3.8
             Lake State0.0        ^0.2        ^0.2        ^1.1        ^1.1        ^1.2        ^2.2        ^2.2
    Northeast         ^0.5        ^1.1        ^1.2        ^1.2        ^1.7        ^1.7        ^1.7        ^0.5
Rocky Mountains       ^1.2        ^1.7        ^1.7        ^1.7        ^1.7        ^1.7        ^1.7        ^1.7
      Pacific         ^0.2        ^0.2        ^0.2        ^0.2        ^0.2         0.0         0.0         0.0
     Southwest
      Pacific         ^0.2        ^0.2        ^0.2        ^0.2        ^0.2        ^0.2        ^0.2        ^0.2
     Northwest
South Central          0.7         0.4         0.4         0.2        ^0.7        ^3.0        ^3.4        ^3.6
    Southeast          0.3         0.1        ^1.1        ^1.6        ^1.7        ^1.9        ^2.0        ^1.9
   South West         ^3.1        ^3.1        ^3.1        ^3.1        ^3.1        ^3.1        ^6.0        ^8.2
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.
Note: FASOM does not allow afforestation in the Great Plains and Southwest regions and does not allow
  agriculture in the west side of the Pacific Northwest region.


                                        Table 7. Crop Production Impacts
----------------------------------------------------------------------------------------------------------------
    Crop (unit)        2015        2020        2025        2030        2035        2040        2045       2050
----------------------------------------------------------------------------------------------------------------
millions
----------------------------------------------------------------------------------------------------------------
Cotton (bales)
  Baseline........      16.1        18.0        18.6        18.6        19.6        19.9        20.6       20.8
  Scenario........      16.3        17.3        17.9        18.3        19.1        18.8        17.7       18.2
  % Change........       1.2        ^3.9        ^3.6        ^1.5        ^2.7        ^5.3       ^14.1      ^12.5
Corn (bushels)
  Baseline........   14,222      14,619      15,585      16,520      17,536      17,547      18,274     20,627
  Scenario........   14,022      14,212      14,735      15,326      15,852      16,003      15,794     16,109
  % Change........      ^1.4        ^2.8        ^5.5        ^7.2        ^9.6        ^8.8       ^13.6      ^21.9
Soybeans (bushels)
  Baseline........    2,609       2,671       2,734       2,777       2,888       2,818       2,861      2,848
  Scenario........    2,518       2,539       2,534       2,527       2,481       2,319       2,126      2,028
  % Change........      ^3.5        ^5.0        ^7.3        ^9.0       ^14.1       ^17.7       ^25.7      ^28.8
Wheat (bushels)
  Baseline........    2,433       2,509       2,601       2,660       2,795       3,108       3,212      3,412
  Scenario........    2,433       2,498       2,563       2,611       2,724       2,988       3,059      3,065
  % Change........       0.0        ^0.4        ^1.5        ^1.8        ^2.6        ^3.8        ^4.8      ^10.2
Sorghum (bushels)
  Baseline........      522         317         300         289         307         304         315        333
  Scenario........      588         325         304         297         303         262         262        251
  % Change........      12.7         2.6         1.3         2.8        ^1.4       ^13.7       ^16.9      ^24.5
Rice (cwt)
  Baseline........      273         346         391         444         484         536         590        632
  Scenario........      237         306         334         359         397         419         440        474
  % Change........     ^13.1       ^11.4       ^14.5       ^19.2       ^18.0       ^21.7       ^25.3      ^25.1
Oats (bushels)
  Baseline........      114          96         104         114         134         190         212        217
  Scenario........      127         102         100         108         110         140         154        149
  % Change........      11.4         6.0        ^3.8        ^5.1       ^18.1       ^26.1       ^27.2      ^31.5
Barley (bushels)
  Baseline........      310         283         296         312         342         398         400        428
  Scenario........      324         285         293         309         314         358         375        363
  % Change........       4.8         0.8        ^1.1        ^1.0        ^8.4       ^10.1        ^6.2      ^15.2
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


                                           Table 8. Crop Price Impacts
----------------------------------------------------------------------------------------------------------------
                       2015        2020        2025        2030        2035        2040        2045       2050
----------------------------------------------------------------------------------------------------------------
$2004 per unit
----------------------------------------------------------------------------------------------------------------
Cotton ($/bale)
  Baseline........    273.45      241.60      241.60      258.62      249.79      263.67      267.94     278.53
  Scenario........    267.71      259.38      260.11      264.20      264.20      287.80      339.60     347.10
  % Change........      ^2.1        7.4         7.7         2.1         5.8         9.2        26.8       24.6
Corn ($/bu)
  Baseline........      4.03        4.03        3.63        3.26        2.97        2.72        2.61       2.50
  Scenario........      4.32        4.50        4.05        3.77        3.53        3.19        3.14       3.21
  % Change........      7.2        11.5        11.4        15.4        19.0        17.3        20.6       28.1
Soybeans ($/bu)
  Baseline........      9.04        9.03        9.01        9.00        8.85        8.83        8.71       8.79
  Scenario........      9.04        9.03        9.02        9.06        9.07        9.06        9.81      10.63
  % Change........      0.0         0.0         0.1         0.7         2.5         2.6        12.7       20.9
Wheat ($/bu)
  Baseline........      5.40        5.10        5.03        4.80        4.59        4.50        4.31       4.11
  Scenario........      5.35        4.85        4.95        4.94        4.76        4.94        4.78       4.66
  % Change........     ^0.9        ^4.9        ^1.6         3.0         3.7         9.8        10.9       13.4
Sorghum ($/bu)
  Baseline........      7.73        5.99        6.27        5.98        5.92        7.39        7.97       8.12
  Scenario........      7.77        5.96        6.01        6.17        6.02        8.13        9.68      11.35
  % Change........      0.5        ^0.5        ^4.2         3.2         1.6        10.0        21.4       39.8
Rice ($/cwt)
  Baseline........      7.30        6.87        6.51        6.24        5.97        5.80        5.57       5.29
  Scenario........      7.42        6.97        6.77        6.58        6.29        6.14        5.89       5.72
  % Change........      1.6         1.5         4.0         5.5         5.3         5.9         5.8        8.1
Oats ($/bu)
  Baseline........      1.35        1.96        1.41        1.01        0.47        1.15        0.47       0.72
  Scenario........      1.42        1.43        1.49        1.10        0.95        1.44        1.04       1.04
  % Change........      5.5       ^27.1         5.9         8.9       100.5        25.3       120.0       45.1
Barley ($/bu)
  Baseline........      2.92        3.24        3.32        3.53        3.76        3.36        4.78       5.50
  Scenario........      2.99        2.80        3.28        3.53        4.33        4.51        5.32       8.61
  % Change........      2.5       ^13.6        ^1.1         0.0        15.0        34.2        11.3       56.5
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


                                      Table 9. Livestock Production Impacts
----------------------------------------------------------------------------------------------------------------
                       2015        2020        2025        2030        2035        2040        2045       2050
----------------------------------------------------------------------------------------------------------------
Million cwt except eggs (million dozen)
----------------------------------------------------------------------------------------------------------------
Fed Beef
  Baseline........      510         525         547         555         560         614         640        649
  Scenario........      508         507         523         536         546         576         591        587
  % Change........      ^0.4        ^3.5        ^4.4        ^3.4        ^2.6        ^6.1        ^7.7       ^9.6
Hogs
  Baseline........      453         474         518         555         615         647         674        699
  Scenario........      427         437         481         500         525         547         557        541
  % Change........      ^5.7        ^7.9        ^7.2        ^9.9       ^14.6       ^15.3       ^17.3      ^22.7
Milk
  Baseline........    2,017       2,153       2,243       2,420       2,547       2,654       2,773      2,911
  Scenario........    2,005       2,095       2,181       2,255       2,329       2,427       2,410      2,418
  % Change........      ^0.6        ^2.7        ^2.8        ^6.8        ^8.6        ^8.6       ^13.1      ^16.9
Eggs
  Baseline........    7,506       7,749       8,000       8,259       8,615       8,803       9,088      9,480
  Scenario........    7,467       7,629       7,945       8,212       8,483       8,696       8,994      9,285
  % Change........      ^0.5        ^1.6        ^0.7        ^0.6        ^1.5        ^1.2        ^1.0       ^2.1
Broilers
  Baseline........      471         484         514         540         568         596         618        643
  Scenario........      466         481         506         531         557         579         593        596
  % Change........      ^1.0        ^0.7        ^1.6        ^1.6        ^1.8        ^2.8        ^4.1       ^7.3
Turkeys
  Baseline........       92         105         111         124         130         137         146        154
  Scenario........       92         102         109         114         122         133         136        142
  % Change........       0.1        ^3.1        ^2.1        ^8.2        ^6.3        ^2.7        ^6.9       ^7.6
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


                                        Table 10. Livestock Price Impacts
----------------------------------------------------------------------------------------------------------------
                       2015        2020        2025        2030        2035        2040        2045       2050
----------------------------------------------------------------------------------------------------------------
$2004 per unit
----------------------------------------------------------------------------------------------------------------
Fed Beef ($/cwt)
  Baseline........     57.60       58.57       57.91       60.24       62.07       58.12       58.10      60.17
  Scenario........     58.29       61.07       61.53       62.58       64.30       63.45       65.04      68.79
  % Change........      1.2         4.3         6.3         3.9         3.6         9.2        11.9       14.3
Hogs ($/cwt)
  Baseline........     41.77       40.42       38.73       37.43       36.44       36.97       35.29      36.19
  Scenario........     43.60       44.08       42.38       41.96       41.64       41.29       43.13      45.94
  % Change........      4.4         9.0         9.4        12.1        14.3        14.8        22.2       26.9
Milk ($/cwt)
  Baseline........     15.51       14.78       14.65       13.90       13.45       13.41       12.98      12.98
  Scenario........     15.72       15.49       15.44       15.51       15.68       15.58       16.21      17.27
  % Change........      1.4         4.8         5.4        11.5        16.6        16.2        24.9       33.1
Eggs ($/dz)
  Baseline........      0.92        0.96        0.90        0.94        0.88        0.92        0.89       0.87
  Scenario........      0.96        1.02        1.01        0.97        0.97        1.03        1.03       1.05
  % Change........      4.2         6.3        12.1         2.6        10.8        12.5        15.3       19.9
Broilers ($/cwt)
  Baseline........     49.01       49.23       47.63       46.56       45.16       44.56       44.65      44.06
  Scenario........     49.65       50.30       48.88       47.79       47.05       46.77       48.54      51.09
  % Change........      1.3         2.2         2.6         2.6         4.2         5.0         8.7       16.0
Turkeys ($/cwt)
  Baseline........     46.03       39.21       38.96       33.40       32.56       31.00       31.00      28.96
  Scenario........     46.03       41.28       39.25       38.21       36.14       33.46       33.85      33.29
  % Change........      0.0         5.3         3.4        14.4        11.0         8.0         9.2       14.9
----------------------------------------------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.


  Table 11. Annuity Impacts on Producer Surplus/Farm Income, by Region.
------------------------------------------------------------------------
                               $2004 billion
                            annualized annuity          % of total
                                   value
------------------------------------------------------------------------
        Corn Belt                       6.4                    29.3
 Great Plains (no                       2.9                    13.3
         forestry)
                 Lake States            1.6                     7.3
        Northeast                       0.4                     1.8
  Rocky Mountains                       1.5                     6.7
Pacific Southwest                       0.7                     3.3
Pacific Northwest                       0.7                     3.3
    South Central                       2.3                    10.4
        Southeast                       3.4                    15.6
South West (no forestry)                1.9                     8.9
                         -----------------------------------------------
  U.S. Total............                22                     100
------------------------------------------------------------------------
USDA analysis based on FASOM simulations provided by EPA.

                                Figures
Figure 1a--Regional Potential

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



        Source: USDA, ERS, 2004.
Figure 1b--Regional Potential

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Source: EPA 2005.
Figure 2. FASOM Regional Map

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The Chairman. Thank you, Dr. Glauber.
    Dr. Kile.

    STATEMENT OF JOSEPH KILE, Ph.D., ASSISTANT DIRECTOR FOR 
MICROECONOMIC STUDIES, CONGRESSIONAL BUDGET OFFICE, WASHINGTON, 
                              D.C.

    Dr. Kile. Chairman Holden, Congressman Goodlatte, Members 
of the Subcommittee, Chairman Peterson, I am pleased to be here 
today to discuss the role of agricultural offsets as part of a 
cap-and-trade program for reducing greenhouse gas emissions.
    The buildup of greenhouse gases in the atmosphere poses 
risks for the United States from climate change. Reducing 
emissions of those gases would decrease that risk, but as you 
heard yesterday, it would also impose costs on the U.S. economy 
including the agricultural sector. H.R. 2454 would reduce 
emissions of greenhouse gases and it would also allow for the 
use of offsets to limit the costs of those reductions. Offsets 
replace reductions of greenhouse gases that are expensive to 
achieve with reductions that are less expensive, but from 
sources that are not subject to the cap. For example, a farmer 
might change land-use practices or capture methane emissions 
from animal wastes more cheaply than an electric utility could 
replace use of fossil fuels.
    Under a wide range of scenarios, researchers have concluded 
that the use of offsets could reduce the cost of controlling 
greenhouse gas emissions. As a general rule, the more stringent 
a cap on greenhouse gases might be, the greater the opportunity 
to reduce the cost by including offsets. In practice, reducing 
the concentration of such gases in the atmosphere would depend 
on whether the activities that produce the offsets result in 
actual reductions in greenhouse gases, and ensuring that would 
entail addressing four challenges with offsets.
    First, offsets would need to bring about additional 
reductions in greenhouse gases that otherwise would not have 
occurred. Second, the offsets would need to be quantifiable so 
that any reductions in greenhouse gases could be reliably 
measured. Third, offsets would need to be permanent rather than 
simply delaying the release of greenhouse gases into the 
atmosphere. And finally, offsets would need to be created in a 
way that accounted for leakage in the form of higher emissions 
elsewhere in the economy.
    Those challenges can be daunting and may be more difficult 
to resolve in some areas than in others. For example, it might 
be relatively easy to establish criteria to address those 
challenges in the context of a system to capture methane from 
animal waste. In contrast, reducing the use of fertilizer to 
avoid emissions of nitrous oxide might simply reduce crop 
yields and thereby increase the price of those crops. In turn, 
the higher prices would encourage the production of those crops 
elsewhere and potentially undermine the environmental goal.
    Using the projections from EPA on the likely sources of 
offsets, CBO's analysis of H.R. 2454 concluded that offsets 
would reduce the price of allowances and the net cost of 
limiting greenhouse gas emissions by about 70 percent. Over the 
course of the program, CBO expects the regulated entities would 
substitute offsets for about 45 percent of the total emission 
reductions that they otherwise would be required to make.
    Let me illustrate with an example. A cap in 2030 would 
allow for about 3.4 billion tons of emissions from regulated 
entities. CBO expects that actual emissions from those entities 
would be about 5 billion tons during that year. The additional 
emissions would be offset by reductions of about 1.8 billion 
tons of emissions from other sources. The effect of those 
offsets would be to reduce the cost of meeting the cap in that 
year by about 60 percent. Most of the offsets would come from 
changes in agriculture and forestry. Of the offsets from those 
sectors, fewer than half would be produced domestically. Most 
of those would come from the forestry sector. Offsets from 
changes in agricultural practices are expected to account for 
only about ten percent of the offsets from those sectors. In 
addition, however, the remaining 90 percent would include 
planting trees on some crop and grazing land. Internationally, 
the source of offsets is likely to be more evenly split between 
those sectors than in the United States.
    Finally, I want to close by noting the uncertainty around 
those estimates. Like any estimate of the supply of offsets and 
the effect of those offsets on containing costs, CBO's 
estimates should be interpreted cautiously. It is likely that 
the qualitative conclusions are correct, but the specific 
quantitative projections are subject to several sources of 
uncertainty. For example, the decisions that would be made by 
regulatory authorities such as EPA and the Department of 
Agriculture could be different than those anticipated in CBO's 
analysis. Similarly, the models used to project the supply of 
offsets are subject to uncertainty themselves, and it is 
difficult to anticipate how quickly the United States would 
enter into agreements for international offsets.
    Thank you again for the invitation. I would be delighted to 
take any questions that you might have.
    [The prepared statement of Dr. Kile follows:]

   Prepared Statement of Joseph Kile, Ph.D., Assistant Director for 
  Microeconomic Studies, Congressional Budget Office, Washington, D.C.
    Chairman Holden, Congressman Goodlatte, and Members of the 
Subcommittee, thank you for the invitation to testify on the use of 
agricultural offsets as part of a cap-and-trade program for reducing 
greenhouse gases.
    H.R. 2454, the American Clean Energy and Security Act of 2009, 
which was passed by the House of Representatives, would set an annual 
limit, or cap, on greenhouse-gas emissions for each year between 2012 
and 2050 and would distribute ``allowances,'' or rights to produce 
those emissions. After the allowances were distributed, regulated 
entities--those that generate electricity or refine petroleum products, 
for example--would be free to trade them, so entities that could reduce 
their emissions at lower costs would sell allowances to others facing 
higher costs.
    The provisions of H.R. 2454 reflect the fact that a variety of 
other actions--including changing agricultural practices and reducing 
deforestation--can also reduce the concentration of greenhouse gases in 
the atmosphere. Those actions have the potential to ``offset'' the 
extent to which more costly actions, such as reducing the use of fossil 
fuels, would have to be undertaken to meet a chosen target for total 
greenhouse-gas emissions. Under the bill, regulated entities would be 
allowed to use offsets--meaning reductions in greenhouse gases from 
activities not subject to limits on emissions--in lieu of reducing 
their emissions or purchasing allowances. Yet the difficulty of 
verifying offsets raises concerns about whether the specified overall 
limit would actually be met. Such concerns may be especially acute 
when, as under H.R. 2454, allowable offsets include actions taken 
outside the United States.
    My testimony makes the following key points:

   Researchers have concluded that a cap-and-trade program that 
        allowed for offsets--such as those that might be generated by 
        changes in agricultural practices and forestry--could reduce 
        greenhouse gases more cheaply than a cap-and-trade program that 
        did not include offsets, but instead relied entirely on 
        reducing the consumption of fossil fuels.

   Because of concerns that the use of offsets could undermine the 
        environmental goals of a cap-and-trade program, four challenges 
        would have to be addressed if offsets are to play a meaningful 
        role in reducing the concentration of greenhouse gases in the 
        atmosphere. In particular, offsets would have to bring about 
        reductions in greenhouse gases that (1) would not have 
        otherwise occurred; (2) could be quantified; (3) were permanent 
        rather than merely a delay in the release of greenhouse gases 
        into the atmosphere; and (4) accounted for ``leakage,'' that 
        is, higher emissions elsewhere or in different sectors of the 
        economy as a result of the activities producing the offsets.

   On the basis of data from the Environmental Protection Agency 
        (EPA), the Congressional Budget Office (CBO) expects that, 
        under the provisions of H.R. 2454, most offsets would be 
        generated by changes in forestry and agricultural practices. Of 
        the offsets from those sectors, fewer than half would be 
        produced domestically in most years, and only about ten percent 
        of the domestically produced offsets would be from changes in 
        agricultural practices. The remaining offsets from those 
        sectors would come from international sources and would be more 
        evenly split between agriculture and forestry.

   CBO estimates that the savings generated by offsets under H.R. 
        2454 would be substantial--reducing the price of allowances and 
        the net cost of the program to the economy by about 70 percent. 
        By CBO's estimates, regulated entities would use offsets for 
        about 45 percent of the total emission reductions that they 
        would be required to make over the 2012-2050 period covered by 
        the policy.

   Any assessment of the use of offsets is subject to many 
        uncertainties, which are inherent in the models used, about 
        such things as the types of activities that would be eligible 
        to generate offsets and the amount supplied by those 
        activities, the prospects for concluding agreements with other 
        nations to allow the use of international offsets, and the cost 
        of ensuring that activities generating offsets actually reduce 
        greenhouse gases.
Potential Benefits of Offsets in Reducing the Cost of Meeting a Target 
        for Emissions
    Offsets used as a part of a cap-and-trade program for greenhouse-
gas emissions have the potential to reduce the cost of meeting the cap 
by substituting cheaper reductions in greenhouse gases for more 
expensive ones. The effect of greenhouse gases on the climate does not 
depend on where and how those gases are produced, but rather on the 
concentration of those gases in the atmosphere. Consequently, the 
cheapest way to reduce greenhouse gases by a chosen amount is to create 
a system that encourages reductions wherever and however they are least 
costly to make.
    In principle, a comprehensive cap could apply to all sources of 
greenhouse gases. In practice, however, policies currently in effect in 
parts of the United States and in other countries, as well as those 
being considered by the Congress, cap only emissions from significant 
sources of greenhouse gases that can be easily and reliably measured.
    The electric power industry, for instance, which produces over \1/
3\ of all greenhouse gases in the United States, can use systems that 
continuously monitor emissions (such as methods currently required 
under the Acid Rain program) to accurately measure the release of 
carbon dioxide. In contrast, entities whose emissions are much less 
significant or more difficult to monitor systematically are generally 
excluded from existing and proposed caps. Nonetheless, some of those 
entities may be able to reduce greenhouse gases more cheaply than the 
electric power industry or other industries subject to a cap. Owners of 
livestock are one example. When livestock waste decomposes, methane 
(which is more damaging to the climate on a per-ton basis than carbon 
dioxide) is produced, but manure can be collected and processed with 
special bacteria in airtight holding tanks or covered lagoons that 
allow operators to trap and recover methane. If capturing methane was 
cheaper than reducing carbon dioxide emissions from other sources by an 
amount that would have an equivalent impact on the climate, then taking 
steps to capture methane would reduce the cost of meeting a specified 
cap on greenhouse gases. As another example, greenhouse gases might be 
reduced at relatively low cost in developing countries through 
practices that would preserve existing forests and encourage 
reforestation.
    The potential for reducing costs in a cap-and-trade program through 
the use of offsets would depend on the stringency of the cap over time 
and on the scope and amount of allowed offsets. The more stringent the 
cap, the greater the opportunity to reduce costs by using offsets. The 
sooner that significant emission reductions were required under the 
cap, the more expensive compliance would be (because there would be 
less time to develop and adopt new lower-emission technologies)--and 
the greater the opportunity to reduce costs by using offsets. 
Similarly, that opportunity grows with increases in the types of 
allowable offsets, the number of potential providers, and the 
proportion of compliance for which offsets could be used.
    There are many potential types of offsets. Within the United 
States, offsets can be generated by changing forest management 
practices and planting trees to increase carbon storage or changing 
livestock management and crop production, among other methods. For 
example, farmers can alter various crop management practices to reduce 
the amount of nitrous oxide produced and released by soils through 
decreasing the use of fertilizers or adopting practices involving 
little or no tilling. Outside of the United States, in developing 
countries, important potential sources of offsets include reducing 
deforestation and changing forest management practices, planting trees, 
and reducing methane and nitrous oxide emissions from livestock, 
cropland, and rice paddies.
    To illustrate the potential savings from reducing greenhouse gases 
partly through using offsets rather than exclusively through reducing 
emissions from carbon-intensive fuels, one can compare the estimated 
cost of emission reductions for cap-and-trade proposals that would 
allow the use of offsets and proposals that would not. Different 
researchers, using a number of different modeling approaches, have 
analyzed a variety of proposals and developed a range of estimated 
costs (see Figure 1). The pattern of the estimates is clear: When 
offsets are allowed, the costs of achieving a given reduction in 
greenhouse gases are lower--substantially so for large reductions.
Potential Limitations of Offsets
    Despite the large cost savings that may be realized from including 
offsets in a cap-and-trade program, some observers are concerned that 
the use of offsets can undermine the program's environmental goals. 
Those concerns arise because the reductions in greenhouse gases from 
offsets are generally more difficult to verify than the reductions from 
sources whose emissions are subject to the cap. Moreover, some types of 
offsets are more difficult to verify than others. For example, although 
it is relatively easy to measure the amount of methane captured in the 
United States from using special processes to treat animal waste, it is 
quite difficult to measure the amount of carbon removed from the 
atmosphere because of efforts to plant trees or avoid deforestation in 
developing countries.
Figure 1.
Various Estimates of the Costs of Reducing Greenhouse-Gas Emissions 
        Under Cap-and-Trade Programs With and Without Offsets
(Allowance price in 2007 dollars per metric ton of CO2e)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Source: Congressional Budget Office based on estimates from the 
        National Commission on Energy Policy, the Environmental 
        Protection Agency, the Energy Information Administration, the 
        Nicholas Institute for Environmental Policy Solutions, and the 
        Massachusetts Institute of Technology.

        Notes: The figure shows, for 2030, the allowance prices and 
        emission reductions under various cap-and-trade proposals, 
        including variations on S. 280, the Climate Stewardship and 
        Innovation Act of 2007, and S. 2191, America's Climate Security 
        Act of 2007. Costs are reported in terms of the price per 
        metric ton of carbon dioxide equivalent (CO2e) 
        emissions associated with achieving a given reduction in 
        greenhouse gases. A metric ton of CO2e is the amount 
        of a given greenhouse gas (for example, methane or nitrous 
        oxide) that makes the same contribution to global warming as a 
        metric ton of carbon dioxide.

        The estimates do not account for the costs of measures to 
        address concerns about the credibility of offsets.

    Offsets are used by a number of existing climate programs, which 
employ a variety of strategies, varying in rigor and cost, for 
verifying the reductions in greenhouse gases claimed by an entity 
offering an offset.\1\
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, The Use of Offsets to Reduce 
Greenhouse Gases, Issue Brief (http://www.cbo.gov/doc.cfm?index=10497) 
(August 3, 2009).
---------------------------------------------------------------------------
    The Clean Development Mechanism was created in December 1997 under 
the United Nations Framework Convention on Climate Change, to assist 
countries in meeting the goal for reducing emissions under the Kyoto 
Protocol. Industrialized countries can purchase offsets from developing 
countries and use them to meet a portion of their commitment to reduce 
greenhouse gases.
    The Regional Greenhouse Gas Initiative in the United States, 
established in 2005, requires power plants that rely on fossil fuels 
and are located in ten Northeastern member states to reduce emissions. 
Members can purchase offsets generated in participating states and, 
under certain circumstances, elsewhere in the United States and 
internationally to meet a portion of their compliance obligation.
    The Chicago Climate Exchange was established in 2003. Members have 
made voluntary, but legally binding, commitments to reduce their 
greenhouse gases. Members can use domestic and international offsets to 
help meet those commitments.
    The Voluntary Carbon Standard was developed in 2007 to establish 
uniform and transparent standards for a worldwide voluntary market made 
up of a number of mechanisms through which buyers from the public and 
private spheres can achieve self-defined objectives by funding 
activities that reduce greenhouse gases. Projects that do so can have 
their offsets certified by adhering to the standards.
    Verifying that offsets actually reduce greenhouse-gas emissions 
generally involves addressing four issues:

   Offsets would need to bring about additional reductions in 
        greenhouse gases. That is, they would need to result in 
        reductions that would not have occurred in the absence of the 
        program that grants credit for offsets.

   Offsets would need to be quantifiable so that any reductions in 
        greenhouse gases could be reliably measured.

   Offsets would need to be permanent rather than simply delay the 
        release of greenhouse gases into the atmosphere.

   Offsets would need to be credited in a way that accounted for 
        leakage in the form of higher emissions elsewhere or in 
        different sectors of the economy as a result of the offset 
        activity.
Identifying Additional Reductions Attributable to the Policy
    Different climate programs use a variety to strategies to ensure 
that offsets credited in a cap-and-trade program satisfy 
``additionality''--that is, that they effect reductions in greenhouse 
gases that would not have occurred otherwise. Simple strategies for 
identifying reductions attributable to offset policies include 
accepting only activities that are not mandated by other laws, 
activities that reduce greenhouse gases after a specified date, and 
activities that are not common practice. Other possible strategies 
involve performance standards or the use of specific technologies. 
Still more complex assurances can be sought through demonstrations that 
the production of offsets--by planting trees, for example--would 
constrain an alternative use of resources that (apart from the value of 
the offsets) would be more profitable--such as using that land as 
pasture for livestock.
    The United Nations Clean Development Mechanism, for example, 
employs all three of the simple checks. In addition, it requires that 
providers of offsets either document that their projects could not be 
implemented without the offset program's support or demonstrate that 
the projects are not prompted by intrinsic financial gains. To document 
the need for the program's support, offset providers must offer 
evidence of barriers to implementation. Those barriers may relate to 
investment (such as limited access to capital markets), technology 
(such as a lack of skilled labor or of access to materials and 
equipment), institutions (such as uncertain land ownership and tenure), 
or other factors. As evidence, the Clean Development Mechanism accepts 
market and statistical data, sector studies, legislative and regulatory 
information, and assessments by independent experts. Alternatively, 
offset providers can show that the financial benefits of producing the 
offsets (aside from selling them to entities subject to the cap) are 
less than the benefits available through alternative uses of the 
resources. Evidence must be based on standard market measures that are 
not linked to subjective expectations of profitability, and they must 
be bolstered by an analysis showing how the conclusions would vary with 
reasonable changes to key assumptions.
Quantifying Reductions
    Processes employed by different climate programs for quantifying 
reductions vary in their level of detail, degree of transparency, and 
procedures for external verification. Depending on the activity, 
offsets may be estimated on the basis of general relationships (such as 
estimates of the amount of carbon storage expected when minimizing the 
extent to which soil is disturbed by agriculture in different 
geographic regions) or measured directly (for example, the amount of 
methane captured from the decomposition of animal waste in holding 
tanks). Direct measurement may provide greater certainty but often 
comes at greater cost. Quantification processes that are more 
transparent promote oversight by interested parties, and many programs 
require that third parties verify the reductions of greenhouse gases 
reported by offset providers.
    The Regional Greenhouse Gas Initiative, for instance, requires that 
offset providers use pre-approved, publicly available methodologies for 
calculating offsets, have quality control programs, and hire accredited 
third parties to validate the calculations. The initiative then follows 
those steps with a separate determination to award credit for offsets.
Ensuring That Reductions Are Permanent
    Concerns about the permanence of reductions in greenhouse gases 
brought about by offsets are heightened if no one is liable for 
unintended or unforeseen releases. Ascertaining permanence is a 
particular challenge for carbon offsets generated from land use, 
because carbon stored in plants and soils can be released to the 
atmosphere by environmental changes such as forest fires and pest 
infestations as well as by human activities such as logging and 
plowing.
    Climate programs address concerns about permanence in various ways. 
Some programs require legal assurances that carbon will remain stored. 
Others assign expiration dates to offsets, and once those dates have 
passed, entities subject to the cap can no longer use those offsets to 
meet compliance obligations and must replace them.\2\ Some programs 
hold in reserve a portion of the credits earned by each offset activity 
and use that pooled reserve to compensate for any reversals of carbon 
storage.\3\ For example, the Voluntary Carbon Standard calls for 
holding in reserve between ten percent and 60 percent of the offsets 
produced by an agriculture or forestry project, depending on the 
project's risk of reversal. That risk is regularly reevaluated and the 
reserve amount adjusted as needed to account for changes in the 
project's financial, technical, and management situation; the economic 
risk of changing land values; the risk posed by regulatory and social 
instability; and the risk of natural disturbances.
---------------------------------------------------------------------------
    \2\ In addition to providing for the use of standard offsets, H.R. 
2454 also provides for the use of expiring offsets generated by 
agricultural practices that sequester greenhouse gases.
    \3\ H.R. 2454 lists that approach as one mechanism that regulators 
should consider using to address concerns about the permanence of 
reductions.
---------------------------------------------------------------------------
Accounting for ``Leakage,'' or Related Increases in Emissions
    Leakage--increases in emissions elsewhere that stem from the 
activities producing offsets--diminishes the net effect of offsets in 
reducing greenhouse gases, but it can be hard to identify and quantify, 
which makes it extremely difficult to address. The smaller the scope of 
leakage--within the holdings of the offset provider, for example--the 
easier it is to account for, but when leakage occurs on a national or 
international level or in economic sectors other than the one 
generating the offset, accounting for it is a bigger challenge. For 
instance, offsets produced by capturing methane emissions from 
livestock waste may not result in increased emissions elsewhere; 
however, preserving trees in one location would reduce the supply of 
timber on the world market, thereby raising its price and encouraging 
increased production elsewhere, which would be difficult to prevent or 
measure.
    Programs try to deal with leakage in two ways: by requiring certain 
design features that minimize it and by applying discounts when issuing 
offsets to account for leakage that cannot be avoided. The Chicago 
Climate Exchange, for example, requires offset providers to manage 
their forestry holdings in a sustainable way. The program also requires 
projects to quantify leakage, but only within a developer's own land 
holdings. That approach ignores changes in land use that are less 
proximate to the offset but nonetheless attributable to the offset 
project.
The Effect of Offsets on the Cost of H.R. 2454
    In analyzing the cap-and-trade program in H.R. 2454, the American 
Clean Energy and Security Act of 2009, which was passed by the House of 
Representatives, CBO estimates that the availability and use of offsets 
would reduce the net cost of complying with the cap by about 70 percent 
between 2012 and 2050. The net cost includes the gross cost of 
complying with the cap minus the sum of the allowance value that would 
be returned to U.S. households and the net revenues resulting from the 
domestic production of offsets.\4\
---------------------------------------------------------------------------
    \4\ The net cost represents the loss in purchasing power that 
households would experience as a result of the policy. See 
Congressional Budget Office, The Economic Effects of Legislation to 
Reduce Greenhouse-Gas Emissions (http://www.cbo.gov/
doc.cfm?index=10561) (September 2009) for a discussion of how the loss 
in purchasing power resulting from H.R. 2454 would be distributed among 
households in different income brackets.
---------------------------------------------------------------------------
    H.R. 2454 would allow regulated entities to substitute offsets in 
lieu of up to two billion greenhouse-gas allowances each year. By 
comparison, total greenhouse-gas emissions in the United States were 
about 7 billion tons in 2007. Under the bill, domestic offsets could be 
used in place of up to one billion allowances per year and 
international offsets, in place of an additional one billion 
allowances. In recognition of the greater challenge of verifying 
international offsets, after 2017 the legislation would require 1.25 
tons of reductions from international offsets to substitute for an 
allowance representing 1 ton of emissions--thus discounting 
international offsets by 20 percent. If fewer than 900 million domestic 
offsets were used, the use of international offsets could be increased 
to make up the shortfall but could never substitute for more than 1.5 
billion allowances in a given year. In no case could domestic and 
international offsets together substitute for more than two billion 
allowances.
    CBO expects that regulated entities would take advantage of those 
provisions when the costs were less than those for other methods of 
compliance--such as reducing their own emissions or purchasing 
allowances. CBO estimates that regulated entities would use domestic 
offsets in place of about 230 million allowances in 2012 and about 300 
million allowances in 2020. Annual use of domestic offsets would 
probably not reach the limit of 1 billion tons until after 2040. 
Regulated entities would use international offsets in place of about 
190 million allowances in 2012 and about 340 million allowances in 
2020. The constraint of 2 billion metric tons on the overall use of 
offsets would become restrictive for the first time shortly after 2030. 
Over the 2012-2050 period, by CBO's estimates, offsets would account 
for about 45 percent of the total emission reductions resulting from 
the cap, including reductions made by regulated entities as well as 
those made through offsets. A little fewer than half of those offsets 
would be produced domestically (see Figure 2).
Figure 2.
Estimated U.S. Emissions Under H.R. 2454, the American Clean Energy and 
        Security Act of 2009
(Millions of metric tons of CO2e)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Source: Congressional Budget Office.

        Notes: CO2e = carbon dioxide equivalent.

        The figure includes both cap-and-trade programs specified under 
        H.R. 2454: the one for hydrofluorocarbons and the one for all 
        other greenhouse gases.

    By reducing the cost of complying with the cap, the use of offsets 
would have a significant effect on allowance prices. Together, the 
provisions allowing the use of domestic and international offsets would 
decrease the price of greenhouse-gas allowances by about 70 percent 
over the 2012-2050 period because they would provide a cheaper 
alternative for reducing greenhouse gases than relying exclusively on 
reductions from regulated entities.\5\
---------------------------------------------------------------------------
    \5\ Under H.R. 2454, regulated entities would be allowed to hold 
for later use as many allowances as they chose. Thus, their profit-
maximizing behavior would cause the price of an allowance to increase 
at the same rate as the return they expected to receive on comparable 
alternative investments. As a result, even though the composition of 
reductions in greenhouse gases (that is, from regulated entities, from 
domestic offsets, and from international offsets) would change over 
time, the use of offsets would lower the price of allowances in any 
given year by the same amount.
---------------------------------------------------------------------------
    Domestic offsets would probably come predominantly from the 
forestry sector, where producers would find it profitable to make 
changes in forest management and increase the planting of trees to 
increase carbon storage. Only about ten percent of the offsets 
generated in the United States would come from agriculture. In the 
supply of international offsets, ones deriving from agriculture would 
probably be roughly equal in importance to ones from forestry. Those 
agricultural offsets would be generated primarily through the reduction 
of methane and nitrous oxide emissions from livestock, cropland, and 
rice paddies.
Estimating the Supply of Offsets
    CBO's approach to estimating the supply of offsets incorporates 
three factors: the direct costs of an activity that produces an offset, 
such as the cost of planting trees; the forgone value of other uses of 
the land; and the costs associated with verifying and bringing offsets 
to the market.
    CBO's analysis drew on data from the Environmental Protection 
Agency, which are the most comprehensive available.\6\ The data 
incorporate direct costs and the forgone value of other uses of the 
land. EPA's estimates of the costs of offsets supplied by the 
agriculture and forestry sectors in the United States and by the 
forestry sector outside the United States were generated by models that 
simulate profit-maximizing decisions by landowners and acknowledge, to 
different degrees, the choices that they face among different land uses 
(including different strategies for generating offsets) and the market 
responses associated with those choices. For example, a landowner takes 
into account information on how the value of the current use of the 
land compares with that of, say, growing crops for biofuels or growing 
trees to store carbon if a climate program is in place. EPA's estimates 
of the number of offsets supplied by the agriculture sector outside the 
United States came from engineering studies that focus on direct 
costs--for which the quality of data varies by region and by practice--
and are less effective at accounting for alternative uses of resources 
that may be more profitable to landowners.\7\
---------------------------------------------------------------------------
    \6\ See the data annex for EPA's analysis of H.R. 2454 in the 111th 
Congress, the American Clean Energy and Security Act of 2009, available 
at www.epa.gov/climatechange/economics/economicanalyses.html. The data 
sources are described in three publications: Environmental Protection 
Agency, Greenhouse Gas Mitigation Potential in U.S. Forestry and 
Agriculture, EPA 430-R-05-006 (November 2005); Environmental Protection 
Agency, Global Mitigation of Non-CO2 Greenhouse Gases, EPA 
430-R-06-005 (June 2006); and Brent Sohngen and Robert Mendelsohn, ``A 
Sensitivity Analysis of Carbon Sequestration,'' in Human-Induced 
Climate Change: An Interdisciplinary Assessment, edited by Michael E. 
Schlesinger and others (Cambridge: Cambridge University Press, 2007).
    \7\ Estimates of the supply of offsets from outside the agriculture 
and forestry sectors, both within and outside of the United States, 
have also been derived from those engineering models.
---------------------------------------------------------------------------
    CBO adjusted EPA's data for the costs of verifying and bringing 
offsets to the market, in two ways. First, for both international and 
domestic offsets, CBO added an estimated verification cost of $5 per 
metric ton of carbon dioxide equivalent (CO2e).\8\ (By way 
of comparison, that $5 verification cost is less than ten percent of 
CBO's estimate of what the allowance price would be in 2012 without 
offsets.) CBO's estimate reflects information from the few available 
studies that use data from pilot projects involving offsets and 
projects in the agriculture, forestry, waste, and energy sectors, but 
there is no consensus on how to define, quantify, and predict such 
costs.\9\ The studies define costs differently and may include expenses 
for feasibility studies, technical assistance, verification, 
administration, regulatory approval, and efforts to locate offset 
buyers and sellers and negotiate transactions.\10\ Those costs, which 
vary by type of project and region, are lower in more mature markets--
indicating a potential benefit in adopting verification procedures with 
which there is some familiarity gained through existing offset markets. 
Some researchers have found, however, that the apparent influence of a 
mature market on the costs is actually attributable to economies of 
scale and that projects generating greater numbers of offsets are 
simply the ones that have lower per-ton verification costs.
---------------------------------------------------------------------------
    \8\ A metric ton of carbon dioxide equivalent is the amount of a 
given greenhouse gas, such as methane or nitrous oxide, that makes the 
same contribution to global warming as a metric ton of carbon dioxide.
    \9\ See Oscar Cacho and others, Economic Potential of Land-Use 
Change and Forestry for Carbon Sequestration and Poverty Reduction, 
Technical Report 68 (Australian Center for International Agricultural 
Research, 2008); Camille Antinori and Jayant Sathaye, Assessing 
Transaction Costs of Project-Based Greenhouse Gas Emissions Trading 
(Lawrence Berkeley National Laboratory, Environmental Energy 
Technologies Division, January 25, 2007); Neeff Till and others, Update 
on Markets for Forestry Offsets (Tropical Agricultural Research and 
Higher Education Center, September 2007); and Axel Michaelowa and Frank 
Jotzo, ``Transaction Costs, Institutional Rigidities, and the Size of 
the Clean Development Mechanism,'' Energy Policy, vol. 33, no. 4 (March 
2005), pp. 511-523.
    \10\ Verification costs estimated by the four studies range from 
$0.10 to $4.30 per metric ton of carbon dioxide equivalent.
---------------------------------------------------------------------------
    Second, CBO adjusted EPA's projected supplies of international 
offsets to account for the challenges of bringing offsets to the cap-
and-trade market. Under H.R. 2454, developing countries generating 
international offsets for the market would have to be party to an 
agreement with the United States. CBO expects that such agreements 
would address developing countries' institutional and technical 
capacity to verify offsets, that negotiating the agreements would take 
a significant amount of time, and that it would not be possible to 
reach agreements to produce carbon offsets from the energy sectors of 
developing countries. CBO concluded that the number of agreements and 
the scope of their coverage would increase over the 2012-2050 period 
covered by the legislation but that throughout the period the supply of 
offsets would be lower than that estimated by EPA.\11\ CBO's 
assessment, which is subject to significant uncertainty, is based on 
indicators of regulatory bodies' capacity to verify offsets and on 
information from the Department of State, EPA, and outside experts on 
negotiating agreements.\12\
---------------------------------------------------------------------------
    \11\ CBO's adjustment also takes into account provisions for 
allocations of allowances to support emission reductions from reduced 
deforestation. Under H.R. 2454, entities receiving such support would 
be prohibited from generating offsets for direct sale into the U.S. 
market.
    \12\ CBO also modified EPA's projected supply of offsets to reflect 
the judgment that activities producing offsets could not be undertaken 
at negative cost--that is, there are no extensive opportunities for 
suppliers to adopt practices that would reduce greenhouse gases while 
also yielding a profit. In EPA's data, the projected availability of 
offsets at negative cost, which probably derives from not accounting 
for some barriers to adoption or from omitting some costs, is 
particularly significant for the practice of controlling methane and 
nitrous oxide emissions from livestock and cropland in developing 
countries.
---------------------------------------------------------------------------
The Projected Use of Offsets
    To illustrate the role of offsets under H.R. 2454, CBO has 
estimated their impact in 2030 after making adjustments for the costs 
of verifying and bringing offsets to the market and taking into account 
the fact that other developed countries would also wish to purchase 
international offsets (see Table 1). The legislation would establish a 
cap on greenhouse-gas emissions in 2030 of 3,427 million metric tons of 
CO2e, so the government would distribute 3,427 million 
allowances in that year. Without offsets, 3,555 million metric tons of 
emissions would occur in 2030, CBO estimates, which would be equal to 
the number of allowances distributed that year plus 128 million 
allowances that entities would have banked in previous years and chose 
to use in 2030.
    With offsets, as allowed for in the bill, sources with compliance 
obligations would emit 5,031 million metric tons and purchase offsets 
for 1,790 million metric tons--about \1/3\ supplied domestically and 
about \2/3\ supplied internationally, CBO estimates. About 60 percent 
of those domestic offsets would come from forestry and agriculture--the 
vast majority (roughly 90 percent) from forestry. About 80 percent of 
those international offsets would come from agriculture and forestry--
the majority (roughly 60 percent) from agriculture.
    If the offsets represented true incremental reductions, then net 
emissions would be 3,241 million metric tons (5,031 minus 1,790). The 
sources subject to the cap would use 3,241 million allowances to cover 
their net emissions and would bank 186 million allowances (3,427 
distributed minus 3,241 used) to cover future emissions.
The Impact of Offsets on Net Costs and the Price of Allowances
    The substantial use of offsets would significantly reduce the net 
cost of the cap-and-trade program that H.R. 2454 would establish. 
Without offsets, net costs would be an estimated $248 billion in 2030 
(expressed in 2007 dollars), or about one percent of gross domestic 
product in that year. By CBO's estimate, the availability of offsets 
would reduce those costs by about 60 percent during that year--to an 
estimated $101 billion. On average during the overall period that the 
legislation would be in effect, offsets would reduce net costs by about 
70 percent.
Table 1.
Effects of H.R. 2454, the American Clean Energy Security Act, With and 
        Without Offsets, 2030

------------------------------------------------------------------------
                                  With Offsets         Without Offsets
------------------------------------------------------------------------
                                       Billions of 2007 Dollars
                             -------------------------------------------
            Net Cost a                     101                   248
                             -------------------------------------------
                                       Million Metric Tons CO2e
                             -------------------------------------------
Net Cap on Greenhouse Gases              3,427                 3,427
  Emissions from Sources                 5,031                 3,555
   Subject to Limits........
  Allowances Banked b.......               186                c ^128
  Emissions Covered by                   1,790                     0
   Offsets..................
                             -------------------------------------------
                                        Dollars/Metric Ton CO2e
                             -------------------------------------------
       Allowance Price                      40                   138
------------------------------------------------------------------------
Source: Congressional Budget Office.
Notes: Emissions are represented in terms of carbon dioxide equivalent
  (CO2e). A metric ton of CO2e is the amount of a given greenhouse gas
  (for example, methane or nitrous oxide) that makes the same
  contribution to global warming as a metric ton of carbon dioxide.
Whereas the dollar figures in this table (as well as the text) are
  reported in constant 2007 dollars, those in CBO's cost estimates,
  including the one for H.R. 2454, the American Clean Energy and
  Security Act of 2009, as reported by the House Committee on Energy and
  Commerce on May 21, 2009 (June 5, 2009), are in nominal dollars.
a As measured here, the United States' net cost includes the gross cost
  of complying with the cap minus the sum of the allowance value that
  would be returned to U.S. households under H.R. 2454 and the net
  revenues resulting from the domestic production of offsets. The net
  cost also represents the loss in purchasing power that households
  would experience as a result of the policy. As measured here, the net
  cost does not include the costs that some current investors and
  workers in sectors of the economy that produce energy and energy-
  intensive goods and services would incur as the economy moved away
  from the use of fossil fuels or the full range of effects on the
  economy, nor does it include the benefits of the reduction in
  greenhouse gases and the associated slowing of climate change. For
  more information, see Congressional Budget Office, The Economic
  Effects of Legislation to Reduce Greenhouse-Gas Emissions (http://
  www.cbo.gov/doc.cfm?index=10573) (September 2009).
b Under H.R. 2454, allowances could be banked and used to cover future
  emissions. (Borrowing future allowances for current use could also
  occur for up to 5 years, with certain restrictions.)
c The negative amount indicates that entities would be using allowances
  that they banked in previous years.

    With offsets, more emissions would be allowed from sources subject 
to the cap, thus making allowances less valuable. Without offsets, the 
price of an allowance in 2030 would be $138 per metric ton (in 2007 
dollars), CBO estimates; with offsets, the allowance price would be 
only $40 per metric ton.
    Finally, if international offsets were not available to regulated 
entities, the use of domestic offsets would expand. Entities subject to 
the cap would use an estimated 891 million domestic offsets in 2030 
(more than the use of domestic offsets projected under H.R. 2454 but 
not as much as the use of international offsets under the legislation), 
and the allowance price and the net cost of the policy would be greater 
than that under the legislation. This alternative would benefit offset 
producers in the domestic agriculture and forestry sectors, but the 
program would be less effective at lowering net costs to the economy as 
a whole.
Sources of Uncertainty
    The potential for offsets to reduce net costs depends critically on 
the types and sources of offsets allowed and on the costs of producing 
and verifying offsets. H.R. 2454 provides neither detailed 
specifications for the types and sources of offsets to be included in 
the cap-and-trade program nor the methodologies necessary to verify 
those offsets; it assigns primary responsibilities for those 
determinations to two Federal agencies. For domestic offsets from 
changes in agriculture and forestry, that responsibility would fall to 
the Department of Agriculture, which would take into account the 
recommendations of its Greenhouse Gas Emission Reduction and 
Sequestration Advisory Committee, established under the legislation. 
For all other offsets, that responsibility would fall to EPA. That 
agency would consult with appropriate Federal agencies; take into 
account the recommendations of the Offsets Integrity Advisory Board, 
also established by the legislation; and accept international offsets 
only if the country providing them had negotiated an agreement or 
arrangement with the United States.
    CBO's estimates of the costs to produce offsets are based on data 
from EPA that take into account a wide range of types and sources of 
activities that could generate offsets. CBO adjusted those data to 
reflect its best judgment of how regulators might identify classes of 
offsets and how methodologies required for verification might affect 
costs. Actual developments might turn out quite differently.
    There are uncertainties inherent in the modeling used to generate 
initial estimates of the supply of offsets--such as the extent to which 
they are able to account for competition among different land uses and 
other market responses.\13\ Moreover, the data used in modeling are 
themselves uncertain. For example, recently revised estimates of past 
deforestation rates imply lower potential for generating offsets 
through avoided deforestation. Also, the types and sources of offsets 
that would ultimately be allowed under a cap-and-trade program in the 
United States could be different from those envisioned in EPA's data 
and CBO's estimates. Verification costs, too, are uncertain because of 
a lack of relevant experience. All of those factors have implications 
for the ultimate impact of offsets on the net cost of the policy to 
reduce the concentration of greenhouse gases that would be established 
by H.R. 2454.
---------------------------------------------------------------------------
    \13\ One consideration is the potential for concentration of market 
power in the hands of a limited number of offset providers--if, for 
instance, a few parties control significant expanses of forests or if 
requirements for verification significantly limit entry into the offset 
market.

    The Chairman. Thank you, Dr. Kile.
    Dr. Glauber, do you agree with Dr. Kile's assessment, only 
ten percent of offsets would likely come from agriculture 
practices, and in your opinion, what practices should be 
eligible for the offsets?
    Dr. Glauber. Under the modeling results provided by EPA, 
under those of the 2 billion metric tons of offsets, about 400 
million or so were provided by agriculture, so a slightly 
higher figure obviously than what CBO would estimate. But I 
would certainly agree with his opening statement of the amount 
of uncertainty in these estimates, and again, it depends on 
when you are looking at these. If you look at the path for 
offsets, and I would have to go back and look at the data here 
and, again, would be happy to get back to you on this, but if 
you look over time, early on as the carbon prices are lower, 
there is very little coming in on the agriculture side. A 
little bit of pastureland is being converted to forests. But as 
you move out and carbon prices get higher and higher, that is 
when you see a lot of the accumulation is in the out-years. So 
a lot depends on what time period we are talking about. When I 
say the 400 million, that is in the year 2050.
    The Chairman. Also Dr. Glauber, Chairman Peterson's 
amendment that was contained in H.R. 2454 gave USDA control of 
implementing an offset program for agriculture and forestry. 
Has the Department looked at this language and thought about 
how to implement such a program, and do you think USDA has the 
staff and resources to implement such a program? And finally, 
in your personal opinion, do you think USDA could get a program 
up and running in 1 year?
    Dr. Glauber. It certainly is a daunting task, to say the 
least. One of the big issues will be quantifying these various 
practices, and I think that is a key part of these offsets. We 
need to have practices where there are standards established 
and they are verifiable, and that there is some certainty, at 
least in terms of the carbon that is being sequestered or the 
amount of greenhouse gas emissions that are being reduced, so 
that there is actually a market there and that the full prices 
are paid for these credits. What USDA has embarked upon, and we 
are doing a lot of work on this year, is trying to get a very 
large matrix that outlines agricultural practices with the 
specific carbon reduction or potential sequestration numbers by 
region and by practice to outline a whole menu of these sorts 
of things and develop standards. It is a big part of my own 
office's program that we are intending to do with the monies 
that were provided in this most recent budget.
    The good thing about USDA, as you well know, is we have a 
very elaborate field office structure with a lot of NRCS and 
FSA employees on the ground and I think that is a potential 
benefit in establishing an offset program.
    The Chairman. Do you think you have enough staff and 
resources to implement a program?
    Dr. Glauber. I think that, frankly, I would need a little 
more time to evaluate the full needs on this. With the monies 
that have been provided our office, we are embarking on looking 
at this data. I can't say that all these practices would come 
online right away, but the important thing is that they are 
jump started with resources to be looking at this one way or 
the other.
    The Chairman. Thank you.
    Dr. Kile, are you aware of the chain of actions that are 
leading to the reality that EPA is likely going to be 
regulating greenhouse gases under existing Clean Air Act 
authorities? Are you aware of whether anyone is looking at the 
impacts of that, as opposed to a cap-and-trade system with 
allowances for offsets?
    Dr. Kile. Well, I anticipate that someone is looking at 
that. That is not something that CBO has looked at. We were 
charged with estimating the budgetary impact of H.R. 2454 and 
that was our focus. I am aware that EPA is looking at other 
possible avenues, but that is not something we have examined 
carefully.
    The Chairman. You haven't? Thank you.
    The gentleman from Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Gentlemen, welcome. Dr. Glauber, yesterday we talked in 
more general terms about what the prognosis was for agriculture 
under cap-and-trade legislation, and I appreciate very much 
your testimony. We received your testimony for today last night 
so we have only just recently been able to look at some of the 
more specific projections that you have given us, but quite 
frankly, they are stunning. The estimates are that we will have 
130 million more people in the United States in 2050 than we 
have today. Yet, by 2050 you project that hog slaughter is 
going to be 23 percent lower compared to baseline levels, 
compared to what it would be if we did not have this 
legislation taking effect, and I hope it never does take 
effect. Beef slaughter is estimated to fall by almost ten 
percent compared to baseline levels, milk production to fall by 
7 to 17 percent in 2030 and 2050, respectively. The price 
increases for beef and pork, you indicate, are limited because 
consumers can switch to relatively lower priced alternatives 
such as chicken and turkey. That will be great news to my 
poultry farmers in the Shenandoah Valley, but I also have 7,000 
small beef cattle operations and they are not going to be happy 
about that at all. Price increases in livestock due to cap-and-
trade could be mitigated in part if foreign producers increase 
their production of livestock beyond baseline levels in 
response to higher prices. In other words, we will face greater 
availability of supply, but that supply will be coming from 
outside of the United States. And, of course that will be a 
downward pressure on the prices that farmers will receive for 
their livestock. So the net effect of this is to make the 
United States a net importer of agricultural products, and we 
may be headed that way anyway, but this is going to accelerate 
that process, and that greatly concerns me.
    Dr. Glauber, how are we expected to feed the additional 130 
million people in the United States in 2050?
    Dr. Glauber. Well, thanks. Let me say at the outset that I 
think it is important to recognize what the model results 
represent. What we did in this analysis that we put in the 
testimony here, and again, I apologize for the lateness of 
this--some things are outside of my control--but what we tried 
to do is, we took the EPA results in their June 23rd analysis, 
both their carbon price projections but also their offset 
projections. What we asked them to provide us was all the 
output that had been provided that they were able to estimate 
those things using the FASOM model. We then took that output, 
approximated the same price path to find out what the 
agricultural implications were, and there again the big driver 
here is afforestation. As I said in my opening statement, there 
are some caveats and this is one scenario and one that again 
overlies the EPA estimates, but it is only one scenario. There 
are, as I pointed out, some underlying assumptions in this 
model that if relaxed would mitigate these price impacts. I 
agree, if you take out 30 million acres of cropland or 35 
million acres of cropland, you will have price increases and--
--
    Mr. Goodlatte. Let me follow up on that point, because--do 
we know what percentage of crop acres are rented? I am 
concerned that if a large quantity of cropland would be 
converted to trees that this decision will be made by 
landowners, not by farmers, and this would also mean that 
farmers might not see the benefits of the offset revenue.
    Dr. Glauber. Congressman, you have raised an interesting 
point, and we do have, of course, several programs that we 
operate currently under the farm bill, things like the 
Conservation Reserve Program that do treat tenants and 
landlords in certain ways. There are potential ways in 
establishing these programs where benefits could be shared in 
one way.
    Mr. Goodlatte. I am also very concerned about what impact 
converting 60 million acres of land into tree production does 
for both the crop markets of various kinds, and what it does in 
forestry as well. I mean, we have right now 191 million acres 
of national forestland in this country that have been nearly 
fenced off from any use of those products. Obviously the trend 
away from carbon-based fuels means that these 60 million new 
acres of trees available on the market are not going to be very 
attractive for use in energy production. This is certainly 
something that I think we ought to be looking at, and ought to 
be turning to with our existing forestry base, but this 
legislation is going to make the value of that considerably 
diminished. Sequestering the carbon will be viewed positively, 
but what you do with the product once these trees are grown is 
very much open to a great deal of speculation. There is a whole 
lot more that we don't know about what this legislation will do 
than we do know about it. I appreciate both of your efforts to 
project that, but the fact of the matter is that the law of 
unintended consequences is going to hit us very, very hard with 
regard to this legislation, I fear.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the Chairman of the full Committee, Mr. Peterson.
    Mr. Peterson. Thank you, Mr. Chairman. I thank you and 
Ranking Member for your leadership.
    Dr. Glauber and Dr. Kile, your analysis is off of the EPA 
baseline, I assume, because I understand that's really the only 
baseline that is out there. Is that correct?
    Dr. Kile. Yes.
    Dr. Glauber. That is true for us as well.
    Mr. Peterson. And I am hearing from a lot of--one of the 
things we are trying to do is to get to the bottom of what, 
potentially, this legislation would do, and we have a panel of 
folks from the university coming next. But, as I understand it, 
everybody is working off of that EPA baseline, whoever they are 
that are looking at this, and I am being told by people that 
they don't think that this baseline is right or realistic. So 
my question is, I guess to you guys and the second panel, Mr. 
Chairman, I may not be here but the panel that follows, is 
there anybody out there doing another baseline that would take 
another shot at trying to have some other place to start to 
look at this? Is that effort going on anyplace that you are 
aware of?
    Dr. Glauber. Mr. Chairman, the answer is yes. I would say 
part of the problem, and a lot of us are facing this, is that 
USDA, for example, we have had years of looking at--we do a 10 
year baseline. We look out 10 years. We do projections. We use 
that for forecasting purposes. We use it for budgeting 
purposes. Any time there is a new bill before Congress, we will 
look at it in the context of a 10 year baseline. We just--most 
of the time we don't have to look out 30, 40 years and it is a 
dangerous thing to do that just because of the great 
uncertainties there. With something like climate change 
legislation where you have changes occurring now 20, 30, 40 
years out, obviously people have questions about, ``What does 
that mean,'' so we are all struggling to do that. We have 
modeling efforts going on right now where we are trying to 
extend out baselines. We are bringing in forestry models. We 
have done this in the past, but only for models that will look 
at any given year. Luckily there is a model, and most of us 
have drawn on results that have been done at Texas A&M, and you 
will have an opportunity in the next panel to quiz Dr. McCarl 
on some of the aspects of it. I would just say there are other 
efforts--Dr. Hayes from Iowa State--they have been developing a 
model. There are other models at Purdue, for example. But to 
get the sort of information that people legitimately want to 
find out requires a very detailed, well-structured model. The 
first we have been dealing with this has been in sort of the 
greenhouse gas indirect land use issues coming out of renewable 
fuels because all of us were caught off guard by the analysis 
that was put forward. We have been trying to--my office, now we 
are supporting research at Iowa State, supporting research at 
University of Missouri to get a better idea of some of those 
issues.
    Mr. Peterson. When is that all going to happen or when are 
you going to have----
    Dr. Glauber. Well, I hope to have--certainly with both of 
those contracts, we are hoping for results later in the year. 
Now, to have a fully well-structured forestry model, I think 
that is going to take, frankly, a little longer. It is just 
unfortunate but models are--again, you will have an opportunity 
to ask some of the gentlemen behind me, they build models over 
a very long period of time, but we are trying to catch up and I 
wish today I had my own set of model results to----
    Mr. Peterson. Well, tell me, you said next year, sometime 
next year?
    Dr. Glauber. Well, certainly with the research that I have 
going on with University of Missouri, we will be able to 
address some of the issues that are being raised in terms of 
land use, which I think is an important consideration.
    Mr. Peterson. Can you give me a date?
    Dr. Glauber. Let me consult with my--since it is in the 
hands of someone who is not here right now, and I am talking 
about my university collaborator. We can find out and get back 
with you on that.
    Mr. Peterson. Yes, I would like to know. And you said on 
the forestry it is going to take a long time?
    Dr. Glauber. Well, we have--again, I will have to check. 
The Economic Research Service has some cooperative work going 
on, trying to build a forestry model, and they have hired an 
expert on forestry that should be a big benefit to them. I will 
be happy to get back with you and the Committee on this.
    Mr. Peterson. Are you studying the Indonesian forests and 
the Brazilian forests in this process, or not?
    Dr. Glauber. I will have to check with the cooperators. I 
know, certainly, on the land use issues we have been very much 
interested in Brazil and looking at Brazilian land use.
    Mr. Peterson. It sounds to me like Indonesia is a bigger 
problem.
    Dr. Glauber. Well, it certainly is a large----
    Mr. Peterson. I mean, they deforested that to grow palm oil 
plants and then it all caught on fire, and I was reading some 
article where they put four times the amount of carbon that we 
do into the atmosphere in 1 year because they cut down that 
forest. It was peat underneath and it caught on fire, and I 
don't know, apparently they have it somewhat under control, but 
I don't think agriculture had anything to do with that here in 
the United States, you know.
    Anyway, somebody needs to get some alternative analysis 
because we have a lot of folks that really question the 
methodology of EPA, question whether EPA understands what we 
are doing here in agriculture and we would be more comfortable 
if we had some other baseline. Thank you, Mr. Chairman.
    The Chairman. The chair recognizes Mr. Luetkemeyer, the 
gentleman from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    As we discuss the forestry issue here, what is the 
percentage of forestry involved in the total amount of credits, 
Dr. Glauber?
    Dr. Glauber. I am sorry. Could you repeat the question?
    Mr. Luetkemeyer. What is the total amount? Can you give me 
a fraction or the percentage of afforestation that is involved 
in the total amounts of credits that you are looking at when 
you come up with your models?
    Dr. Glauber. Afforestation is a very, very large part of 
it. Of the 30+--excuse me. Of the 422+ million metric tons, I 
would say about 75 percent or so of that is coming from 
afforestation in this model.
    Mr. Luetkemeyer. Was that about right, Dr. Kile, whenever 
you do your analysis? Is that, roughly, the figure that you use 
as well?
    Dr. Kile. Yes. What we found was that both domestically and 
overseas, afforestation accounts for a large portion of the 
offset credits that would be earned under H.R. 2454.
    Mr. Luetkemeyer. Is there a restriction, are there rules or 
qualifications on a farmer whenever he uses his land and does 
plant trees? Are there restrictions on how he can use the land, 
how he can use the trees? I mean, can he grow them, cut them 
down eventually? Does he have to plant a certain number of 
them? Can he use it to hunt on? Can he cut the hay underneath 
the tree limbs? I mean, are there restrictions on usage of the 
land that he plants trees on?
    Dr. Kile. My understanding of that is that those would 
ultimately be rules that would be set in place by USDA and 
others.
    Mr. Luetkemeyer. Okay. Dr. Glauber, do you have any idea 
what----
    Dr. Glauber. You are raising good questions about 
implementation. I think the key part of any of this is the 
permanence in terms of storing the carbon. That is, if you cut 
down the trees, you emit carbon, and that is fine, you can emit 
carbon, but understanding that in doing so that has to be taken 
into account somewhere, and that will show up as an emission.
    Mr. Luetkemeyer. Well, if you cut one down, you plant a new 
one. I mean, my question is obviously what kind of restrictions 
are there going to be placed on the farmer if he goes along 
with this program and he plants trees to comply to get his 
credits? Can he use the land for other purposes? And if the 
tree grows up at a certain point, it is a nice log. If he cuts 
it down, does he have to replace it with one, two or three? How 
do you administer that? Are there rules in place at all? I 
mean----
    Dr. Glauber. Well, there are no rules in place right now. 
We would be developing those rules, certainly. I would have 
to--I am probably best getting back with you with a little more 
detailed answer on this, but just my off-the-cuff remark would 
be, for most activities in the forest like hunting and 
everything, that would be perfectly fine. I think the real 
issue is cutting down the tree, and because the assumption of a 
payment, unless you are going to pay on a rental basis--in a 
rental basis, you could do that. You could pay annually. How 
much carbon did you sequester this year, and then if you cut 
down the tree, that is okay, you pay for the rental. But 
understand a rental payment would be far less than what we are 
talking about in terms of planting the tree and committing to 
leaving it as an acre of trees for 60 years or whatever.
    Mr. Luetkemeyer. Okay. As you were developing these models, 
did you look at what Europe did? I mean, they have this program 
in place already. Is that not correct?
    Dr. Glauber. They do have a cap-and-trade system in place.
    Mr. Luetkemeyer. Did you look at their model of how they 
were administering the afforestation portion of this? Did you 
come up with your models by using what has happened there to 
model your stuff?
    Dr. Glauber. Again, I just want to--in the sense that we--
we took our modeling results--these were all outputs that were 
provided to us from EPA. This is what I was just going through 
with Chairman Peterson. So in that sense we are using the 
modeling results that were provided to us, but we certainly are 
looking at the European system to see how that system has 
functioned. This would be in one sense because of the amount of 
emission caps and everything under this bill, I think we are 
talking about larger reductions with higher carbon prices than 
what has been seen under the European system.
    Mr. Luetkemeyer. Dr. Kile, before my time runs out, what 
about your analysis? Were you looking to compare with the 
European model at all and how things are working over there, 
how they implemented it, how they managed it, the 
ramifications? Did you use them as a model at all?
    Dr. Kile. Right. So we are certainly--we have been looking 
at what has been going on in the ETS, the European Trading 
System, with their Clean Development Mechanism where they do 
recognize forestry offsets.
    Mr. Luetkemeyer. Do they have a plan like this in place 
over there?
    Dr. Kile. Sorry?
    Mr. Luetkemeyer. Do they have a plan like this, 
afforestation plan to capture credits, trade credits? Do they 
have something like this in Europe?
    Dr. Kile. They do have a plan that captures forestry 
credits under their Clean Development Mechanism. I don't know 
how much that lowers the allowance price in the EU, but as Dr. 
Glauber noted, I think that the prices that we have seen 
recently in Europe are below what would be anticipated under 
H.R. 2454.
    Mr. Luetkemeyer. Okay. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman and recognize the 
gentleman from Minnesota, Mr. Walz.
    Mr. Walz. I thank the Chairman, and I thank you both again 
for testifying. I am very appreciative of you helping us get a 
handle on this.
    I do want to say, Chairman Peterson, the Chairman of the 
full Committee, brought up a very good point about multiple 
baselines on this is critically important. I am glad that got 
brought up. I am looking forward to the next panel, talking a 
little bit about it because I have been using a recent one from 
the University of Tennessee that takes USDA's baseline out to 
2030, takes EPA's baseline out, takes multiple baselines 
including RFS standards and those types of things and also 
includes a baseline of doing nothing. I come back to the issue 
again, and I thank the Ranking Member. He is an incredible 
asset for me because he challenges me to look at issues in 
different ways and he asked yesterday, he said, ``I think you 
are setting up a false dichotomy of, we implement this or we go 
with EPA.'' I agree with him on that point, that the 
possibility is that the EPA doesn't enforce this and we stay 
the same. I think it is important to draw that baseline of what 
happens if we don't do anything because quite honestly, coastal 
areas, your input cost would go up relatively significantly if 
some of the projections on climate change forces you to pump 
out the ocean to grow anything on that, so those things are 
really critical.
    So my question to you is, this afforestation issue, is it 
correct that the afforestation issue really only kicks in in 
terms of offsetting production land once those carbon prices 
start at around $80 per metric ton, and at $160 per metric ton 
which is quite a ways out before you ever see that. Is there 
any guarantee as you two see it that it will ever reach those 
numbers? Now, this is the assumption, again, I brought up 
yesterday is that we are making the assumption that no changes 
are being made on energy production whether it be nuclear or 
other types of energy production to offset these costs. Has 
that been looked at, that we may never reach $160 if you never 
reach $160 per metric ton in the modeling I am seeing--and it 
seems like that seems very consistent from what I am hearing--
you will never see the afforestation issue to the extent that 
it will offset agricultural land. Would either of you like to--
--
    Dr. Kile. Over time CBO's expectation is that prices would 
start around $15 a ton under H.R. 2454 and they would rise over 
the course of the bill at about 5.8 percent per year under our 
expectation, and over time that would encourage more and more 
people to look for offset opportunities. Some of those would 
obviously--many of them obviously would come in the forestry 
area and people would go to the least expensive options of 
those first. By 2030, we had about 600 million domestic tons of 
offsets from forestry and agricultural sources primarily. Most 
of those were from forestry practices.
    Mr. Walz. In your modeling, does it account for changes in 
energy production and energy usage if we are becoming less 
energy intensive, we are seeing a reduction in the energy-
intensive measure in this country as actually dropping? Does 
that play into that?
    Dr. Kile. Right. So CBO's analysis, CBO's modeling draws 
primarily from EPA and the Energy Information Administration, 
EIA, and those include the kinds of shifts in energy sources 
over time.
    Mr. Walz. My other question I guess on this is, and maybe 
this is for the next panel. Dr. Glauber, you might be able to 
help me with this one, and I am trying to get a handle on it. I 
think this modeling question is very good. I think it is a very 
valid question. The conclusions that came out of this 
University of Tennessee study using the POLYSYS model, and I 
guess maybe the folks from A&M can help me with that, was it 
absolute, and are all the questions that are being asked, the 
Ranking Member's questions are absolutely correct on the impact 
and the negative impact it could have. The real question here 
is, the variables are how you design this. A well-designed, 
well-constructed, multi-offset model really makes a huge 
difference. Would you agree with that, Dr. Glauber?
    Dr. Glauber. Absolutely, and I think you are absolutely 
correct, and as you pointed out, under the University of 
Tennessee model, they see most of the carbon credits coming 
from pastureland going into biofuel production and other sorts 
of things, which is a very different path than planting trees 
obviously. The price effects that we see under the model that 
we have been reporting based on the results out of the EPA that 
afforestation is the big source of offsets. Under the Tennessee 
one, it is more in biofuels.
    Mr. Walz. And maybe I will ask the next group, because I am 
concerned about this, and I will just leave this as a 
rhetorical for you. What I do want to do is, I don't want to be 
cherry-picking data to support my ideology but I do want to add 
it to the discussion to make sure that these things are 
addressed. So I thank you both for the work you are doing. I 
yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Louisiana, Mr. Cassidy.
    Mr. Cassidy. For either one of you, is there any estimate 
of how many of these credits will be purchased internationally 
versus domestically?
    Dr. Kile. In CBO's analysis, our split varies over time 
between roughly 30 and 50 percent of offset allowances, and the 
example that I have----
    Mr. Cassidy. Thirty to 50 percent will be international 
or----
    Dr. Kile. Will be domestic.
    Mr. Cassidy. I am sorry?
    Dr. Kile. Will be domestic, so 50 to 70 percent would come 
from international sources.
    Mr. Cassidy. Next, I have also gathered from this testimony 
there will be a net increase in the amount of food that we are 
going to import. I gather that is implied because we are going 
to have decreased acreage, we are going to have decreased 
amounts, we are going to have increased costs and we are going 
to have an expanded population. Is that a fair statement?
    Dr. Glauber. Frankly, imports don't increase under this, 
but I tell you what does decrease is exports. So any sort of 
exportable surplus falls considerably reflecting that, and that 
is the flip side of it.
    Mr. Cassidy. And my next question, we have a lot of money 
going out, has there been any estimate in the net decrease in 
U.S. wealth that will be created by this? Because we are buying 
50 to 70 percent of our credits overseas, we are exporting less 
and perhaps importing more, particularly in the case of rice, 
for example. We are going to be sending all kinds of--this is 
going to be like OPEC when it comes to credits and food. Has 
there been any estimate of our net decrease in U.S. wealth 
because of these policies?
    Dr. Kile. That is not something we have looked at directly, 
but it is important to remember that offsets are designed as a 
cost control mechanism in a climate bill. It is the cost of the 
climate action versus the benefits that one might get from that 
action; and then to look at what is the way of, what is the 
method of minimizing the cost of whatever policy is taken, 
offsets are driven by that rather than other factors.
    Mr. Cassidy. But it does seem intuitively that if we are 
spending a lot of money overseas to buy credits, we are 
exporting less, and we have decreased acreage under production, 
that there is going to be a net decrease in U.S. wealth.
    Dr. Kile. The policy itself would impose costs on the 
United States, that is correct, and----
    Mr. Cassidy. Now, do we have any estimate of how many jobs 
will be lost in the agricultural sector because of this? In the 
case of rice, page 24 of your testimony, Dr. Glauber, by 2050 
there will be a 25 percent decrease in the amount of production 
and also some corresponding decrease in acreage. How many jobs 
are going to be lost from this? Any estimates of that?
    Dr. Glauber. I do not have any job estimates.
    Mr. Cassidy. Intuitively, we know there will be some, 
correct?
    Dr. Glauber. It depends on how the activity flows. There is 
more money in the sector itself and so how that money is spent, 
et cetera. You know, with an income increase you get jobs as 
well but trying to sort out what shifts in acreage, shifts in 
production would entail, we have not done that.
    Mr. Cassidy. I will tell you also I am concerned because 
there seems to be an aggregation of the benefits of offsets 
versus an aggregation of the cost of compliance. If you just 
look particularly at Louisiana--which I represent and which 
this bill frankly seems to have a huge bulls eye on my state--
on page 23 from your testimony yesterday, Dr. Glauber, it looks 
like rice has the most increased input cost because it is the 
most energy intensive, if you will, most carbon intensive. Yet, 
on page 24 of your testimony today, you speak about there is 
going to be a 25 percent decrease in rice production. Now, it 
seems that most of the benefit of the offset goes to the corn-
growing states and relatively little goes to the rice-producing 
states. It just seems like we just got an incredibly tilted 
table against the rice farmers and those folks in the 
Mississippi Delta region.
    Dr. Glauber. The only thing I would caution with drawing 
too many conclusions from that is the fact that, again, back to 
the model itself that was used, it is a very elaborate model 
that includes a lot of various greenhouse gas reduction 
practices. There are others, and there is certainly a number 
that could potentially affect rice cultivation, practices like 
mid-season drainage, shallow flooding; nitrogen inhibitors; 
upland cultivation; and improved irrigation, water management. 
There is a lot of research out there that suggests there are 
greenhouse gas emission reductions connected with these 
practices and again, what behooves whoever implements this 
program is to be able to quantify this in a way that allows 
producers to take advantage of these technologies to gain 
greenhouse gas offsets.
    Mr. Cassidy. My last comment, just because I am out of time 
and I know we are sensitive to that, presumably that has been 
included in these complex models to at least some extent. It 
appears that if you are in a rice-growing state, the 
Mississippi Delta region, for example, it is just a bulls eye 
for economic development. I yield back.
    The Chairman. I thank the gentleman and recognize the 
gentlewoman from South Dakota.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman. I thank our 
witnesses for their testimony today.
    I represent the State of South Dakota and there remains a 
lot of uncertainty and skepticism as to how an offsets program 
would work for our farmers and ranchers, and whether those 
already participating in the voluntary offsets market would be 
able to benefit under a new offsets program established in cap-
and-trade legislation. As we heard from some of the questions 
today and yesterday, how such a program would, perhaps, be 
expected to increase energy inputs and how an offsets program 
would offset some of those input costs.
    Dr. Glauber, yesterday in your testimony you said that an 
offsets program done the right way would reduce any projected 
increases in production costs for agriculture. Is the offsets 
program setup that was established in the Peterson amendment to 
the House bill the best way of creating an offsets program and 
how might it be strengthened, if at all?
    Dr. Glauber. Well, of course, H.R. 2454 as amended has a 
lot of very detailed provisions on offsets. We have been going 
through those. I think one of the key ones of course is for any 
practice that could be potentially reversed, that there would 
be an ability to give credits back to 2001 for those producers 
which brings in a whole lot of carbon that otherwise would not 
be accounted for in the system, and it, again, benefits the 
producers. And so it doesn't penalize early adopters or other 
sorts of things. Again, from USDA's standpoint, we stand by 
ready to implement any bill or do whatever Congress requires us 
to do. I do think there is a lot, as I mentioned earlier, a lot 
of--USDA does have a lot of resources to put on this issue, 
again because of the extensive field staff, the fact that we 
already manage a lot of contracts through CRP and other sorts 
of things. So again, I think there is a lot of potential there.
    Ms. Herseth Sandlin. Is there anything, though, that USDA 
can offer more proactively to strengthen an offsets program? In 
a conversation I had a few months ago with former Secretary of 
Agriculture Ann Veneman, she indicated to me that for a number 
of years USDA was doing important research as it relates to 
climate and opportunities for American agriculture. And so how 
might we strengthen the offsets program knowing of this 
Committee's desire that if this type of system were even 
established, that any offsets program would be administered by 
USDA, particularly because of that expertise and field presence 
that we have across the country?
    Dr. Glauber. Well, two key things. One is the extensive 
amount of research that is ongoing right now. You have alluded 
to it, and former Secretary Veneman, I am sure, spoke of it as 
well because this has been a lot of effort that has been 
ongoing for many years. We are trying to come up with very 
well-quantified estimates of sequestration values and 
greenhouse gas emissions, because these are key. The other 
thing, as I mentioned earlier, in answer to a question from the 
Chairman, that we are looking at--one of the things my own 
office is planning on doing this year is coming up with a very 
large document for various regions, various practices, trying 
to standardize these measures. And so we are taking this very 
seriously, and again, without knowing what the fate of climate 
legislation will be, the point is when it is enacted we will 
have to hit the ground running so we are trying to prepare for 
that.
    Ms. Herseth Sandlin. Well, in light of that, in light of 
the uncertainty related to climate change legislation, whether 
it would be established and when, it is clearly an objective 
and priority of the Administration as they head to Copenhagen 
and some other things that they have been looking at in terms 
of administrative options. Has USDA considered the option of 
creating supplemental incentives for carbon reduction at USDA 
separate from an offsets program?
    Dr. Glauber. There has been--I guess the short answer is no 
but I will check on that. Yes. My guy told me what I thought I 
was going to say anyway, so that is always good. We are looking 
at that, particularly for the Conservation Reserve Program. We 
have already in the Conservation Reserve Program and throughout 
a lot of the strategic plan that we are developing that 
accompanies budget, et cetera, we are looking at greenhouse gas 
reduction as being one of the factors that are looked at.
    Ms. Herseth Sandlin. Thank you, Dr. Glauber.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentlewoman and 
recognizes the gentleman from Nebraska, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Dr. Kile, I was wondering, have you quantified the 
transactional cost of carbon credits and how much of that will 
be going to the brokers and similar folks?
    Dr. Kile. So one of the things that we looked at when we 
were trying to figure out what the supply of international and 
domestic offsets would be was exactly this issue of transaction 
cost. It is something that is considered in the literature but 
not as extensively as one might like. We took what we thought 
was a fairly cautious approach of including a $5 per-ton 
transaction cost and that reduced the number of offsets 
supplied both in the United States and elsewhere, and that was 
just based on analysis of other offset programs throughout the 
world.
    Mr. Smith. In arriving at that or using that information, 
how do you see that as impacting the overall cost of food?
    Dr. Kile. I don't have any information on the cost of food. 
As a general notion, it would reduce somewhat the number of 
domestic and international offsets supplied. Perhaps Dr. 
Glauber has some insight as to what that would do to food 
prices.
    Dr. Glauber. Well, I think Dr. Kile is absolutely right. 
Any sort of discount on transaction costs would lower the 
effect of price that a producer would receive or a forest 
landowner for embarking on some practice. In that sense, 
whatever that percent discount would be effectively reduces--
would have the effect of reducing those offset activities by 
some amount. That said, I must say, if I am not mistaken, the 
results that we were looking at assumed perfect foresight. That 
is, they assumed that there is perfect foresight for carbon 
prices throughout the period so no uncertainty built in there, 
and zero transaction costs. So to the degree that those were 
included, I think there would be some effect.
    Mr. Smith. I am trying to sift through all of this, the 
technicalities, and we heard earlier that we really don't have 
the regulations that would result or that would apply for a lot 
of the offset opportunities, if one might call them an 
opportunity or not. But my concern is for consumers and 
obviously producers. I represent many producers but I also 
represent consumers, and I am concerned about the impact to 
consumers not only paying their electricity bill but putting 
food on the table. When I see the actions and activities of 
Congress and other entities trying to grapple with the 
increasing cost of food, it is a bit frustrating, if you will. 
Can you speak to anything like that?
    Dr. Kile. I would go back again to the general notion of 
the role of offsets in a cap-and-trade program, and the goal 
with including offsets, or the intention of including offsets, 
or the effect of including offsets would be to lower the prices 
of goods and services that have a high carbon content by 
substituting cheaper emissions from one source for more 
expensive emissions elsewhere. Obviously those would play 
through to the prices that consumers pay for food and for 
electricity, and for other goods and services that have carbon 
embedded in them. To the extent that that could be done more 
cheaply, it would have less of an effect on those prices than 
if offsets were ignored as an opportunity.
    Mr. Smith. So do you see the cost to consumers going down 
over time if somehow this program is highly successful?
    Dr. Kile. By ``this program,'' you mean the offset program?
    Mr. Smith. Well, not necessarily the offset program but the 
net cost to consumers.
    Dr. Kile. The net cost to consumers of a cap-and-trade 
program would be positive. It would increase the price of goods 
and services that people pay for goods and services that have a 
lot of carbon in them, most obviously fossil fuels and 
electricity, but also other goods and services that require a 
lot of energy to produce. Those prices would be expected to 
rise under a cap-and-trade program. An offset portion of that 
program would limit those price increases, could restrain those 
price increases.
    Mr. Smith. I understand that, and my time is expired, so 
thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentlewoman from Pennsylvania, Mrs. Dahlkemper.
    Mrs. Dahlkemper. Thank you, Mr. Chairman, and thank you, 
Dr. Glauber, Dr. Kile, for joining us today, Dr. Glauber again 
today. Thank you for your time.
    Dr. Kile, I wanted to ask you if you could just expand on 
something in your testimony where you talked about leakage, and 
if you could just maybe expand on that a little bit for me.
    Dr. Kile. The notion of leakage is one of several problems 
that would need to be addressed by USDA, EPA, or any regulatory 
authority, to ensure that offsets met the environmental goal 
that the cap-and-trade would be designed to address. Leakage 
occurs when reductions in emissions from the creation of 
offsets are simply replaced by emissions elsewhere in the 
economy. In some cases that might be fairly easy to protect 
against. In my example of processing of animal wastes to 
capture the methane, it is pretty clear that that is not going 
to cause increased emissions of methane elsewhere. In other 
instances where the price of a good was changed in the market 
by, say, limiting the use of fertilizer to capture an offset, 
that might simply raise the price of crops that would encourage 
someone to produce them elsewhere, thus potentially offsetting 
the emission reductions that would be claimed.
    Mrs. Dahlkemper. So in terms of determining that leakage, 
how would you go about the methodology for that?
    Dr. Kile. So that is something that is a step down in the 
details that CBO hasn't analyzed, and that would fall 
ultimately to USDA and EPA.
    Mrs. Dahlkemper. Dr. Glauber, would you have anything more 
to say on that in terms of leakage?
    Dr. Glauber. Well, I would just second that. I think there 
are certain practices, potential sequestration activities or 
activities that would lower greenhouse gas emissions where the 
leakage issues are small. I would agree, the bigger ones are 
the ones that would big, large increases of activities that 
would have carbon. Again, the issue for some of this is it is a 
bigger issue. I mean, it is an issue in the general sense for 
accounting purposes, and particularly for international 
accounting, and a lot of the concerns on leakage is of 
particular concern with overseas projects.
    Mrs. Dahlkemper. I just have one final question. As we are 
looking at this entire thing, and we believe in the free 
market, in your opinion, how can the free market work in a 
positive way as we are looking at this entire issue?
    Dr. Glauber. Well, I think one----
    Mrs. Dahlkemper. Both for the producers and the consumers.
    Dr. Glauber. Yes. No, I think the one way is through the 
whole cap-and-trade mechanism, the ability for covered sectors 
who are having to meet what may be stringent reduction 
requirements to be able to meet them in a cheaper way than they 
would otherwise. I think that there--I believe a free market in 
trading of these permits, or in these offset markets, rather, 
is the way to sort of try to eliminate the costs and get that 
down as much as possible. It is, I believe, a more efficient 
way to do this. And so the government's role is in establishing 
standards and making sure that enforcement and all that, 
helping with that, but, ultimately, I at least, personally, 
would think that a market-based system is the way to do that 
most efficiently.
    Mrs. Dahlkemper. Dr. Kile, do you have anything on that?
    Dr. Kile. Well, I would second many of the notions, that 
the purpose of going to a system like a cap-and-trade is to 
allow the market to figure out what the cheapest way of 
achieving environmental goals is. One of the roles of offsets 
is to allow the market to figure out if there are people who 
are not covered by the cap who could reduce emissions more 
cheaply in substitute for those who are.
    Mrs. Dahlkemper. Thank you. I yield back.
    The Chairman. The chair thanks the gentlewoman and 
recognizes the gentleman from Pennsylvania, Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman. Dr. Glauber, good to 
see you again today. Dr. Kile, welcome.
    Dr. Glauber, I appreciate the discussions you have had on 
afforestation, and I want to look at that just a little closer 
from a standpoint of recommended forest management practices. 
My district, we have the Allegheny National Forest, 513,000 
acres, home of the world's best hardwood cherry and other 
species, and a significant number of state and private forests. 
We certainly take forest management very seriously, both for 
the economic benefits that the management provides, as well as 
an essential part of keeping our forests healthy. In my 
experience, we have had too much land in the United States that 
is under lock and key, areas that we can't manage or access 
their natural resources. Now, I have concern that there may be 
effects that this legislation will have on the overall forest 
management practices. So my question is very simple: Has there 
been an analysis of how this legislation aligns with the 
recommended forest management practices of the Forest Service?
    Dr. Glauber. Thanks. My understanding is the Forest Service 
is concerned about this and is looking at integrating 
greenhouse gas targets and emission issues into their current 
forest management plans. They are looking at greenhouse gas, 
both emissions and reductions, looking at those as indicators 
in those plans. These efforts have been underway for 2 or 3 
years now where they have been looking at practices and trying 
to integrate this because this is very important, as you say, 
and in fact, if I am not mistaken, we don't report them here 
but are in the broader EPA study. Greenhouse gas reductions or 
offset credits, rather, from forest management are a 
significant--provide significant income for forest landowners.
    Mr. Thompson. And I understand that part of it but I guess 
my concern is related to that. The fact is that a forest is a 
living organism, and no matter what we do, it is going to die. 
So that carbon sink will go away, and in the meantime we create 
situations where we expedite the death of that forest when the 
Forest Service is not even--and not just the Forest Service. I 
am talking of any kind of regulations be driven out or 
unintended consequences of this legislation that would be 
imposed upon private owners, state forests where we don't have 
proper management because we are driven to achieve that dollar. 
It circumvents proper forest management which involves select 
cutting, it involves keeping the forest healthy, it involves 
keeping that forest duff from building up to the point where 
you have a fire load that results in more forest fires. 
Frankly, for those who are concerned with carbon emissions, ten 
percent--one statistic I saw--that ten percent of all carbon 
emissions come from wildfires annually. I guess I am wondering, 
are those concerns being looked at? Because by creating these 
forest carbon sinks that we may not properly manage with all 
the points that I have made, we may actually be contributing to 
more carbon emissions at a minimum as we build up fire loads 
with potential fires.
    Dr. Glauber. Well, I am glad you asked that question for no 
other reason so that I can amend a response I gave your 
colleague from Missouri. When I was speaking about 
afforestation, the question was asked, well, what happens when 
you cut down the tree and I said well, it is an emission. Well, 
it is an emission if you don't use it. If indeed it is going 
into wood products or whatever, those can be taken into account 
and that is also sequestering, obviously. Or it can go into 
bioenergy, which also has a greenhouse gas impact. And so, in 
answer to your question, there are those potential mitigating 
effects here. Again, I realize that for thinnings and things 
like that you are not necessarily talking about wood products, 
but you could be potentially talking about things like 
bioenergy.
    Mr. Thompson. Thank you, Dr. Glauber.
    Mr. Chairman, based on my time, I will yield back.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Michigan.
    Mr. Schauer. Thank you, Mr. Chairman. Dr. Glauber, good to 
see you again. Dr. Kile, thanks for being with us. I appreciate 
your testimony. Yesterday, Dr. Glauber talked to us about the 
impact on ag prices and I know today we are primarily talking 
about offsets. Dr. Glauber's research yesterday didn't really 
take into account bioenergy production. Obviously that is a key 
part of offset programs. I wonder if you could talk about 
whether you feel your testimony really, accurately projects the 
potential for bioenergy. Several weeks ago we heard from a 
company in Michigan, as well as a number of other panelists, 
that talked about because of the unpredictability in terms of 
credit availability and some other definitions, they felt 
constrained by their ability to produce bioenergy and biofuel. 
I wonder if you could talk about that and how it might impact 
your numbers and your research.
    Dr. Kile. The majority of the offsets that we studied under 
H.R. 2454 do come from forestry and some from agriculture as 
well. In terms of looking at bioenergy, biofuels as a source of 
energy in this country, that is actually something that we are 
studying right now. We haven't completed that analysis at this 
point.
    Mr. Schauer. Your report also talks about a variety of 
other actions including changing agricultural practices and 
reducing deforestation can also reduce the concentration of 
greenhouse gases in the atmosphere. I wonder if you have some 
additional thoughts to share with us about that, or what 
additional research you could do to help get a handle on that.
    Dr. Kile. CBO's primary responsibility is to figure out, of 
course, the budgetary impact of the bill, and in order to do 
that, we need to understand the price of emissions and the role 
that offsets play in determining that price. We have less--and 
I can break down somewhat between agriculture and forestry and 
think about where the major pieces come from. We have less 
detailed modeling of what happens beneath that with different 
types of crops and exactly where it would come from, from 
either reduced deforestation or afforestation, and there we 
really rely on the USDA models of offsets.
    Mr. Schauer. Thank you.
    Dr. Glauber, did you have anything you wanted to add?
    Dr. Glauber. Yes. We talked about this a little earlier, 
and that is when there was reference made to the University of 
Tennessee's study that was done. A lot depends on what your 
underlying assumptions are under the baseline, and the model 
results that we received from EPA have a fairly aggressive path 
in the baseline itself on bioenergy production, so by virtue of 
that, that doesn't really come into play here. The University 
of Tennessee, I might add, has less in their baseline and so 
they get a lot of land going into bioenergy production, and 
again, with the RES and other sorts of things, you can see 
where that could be a potential very big source, and so a lot 
depends on the underlying assumptions of the baseline. It is 
something that we are looking at in our modeling work now as 
well.
    Mr. Schauer. Great. Thank you. I yield back.
    The Chairman. The chair thanks the gentleman.
    Mr. Cassidy has asked for a follow-up question. The chair 
recognizes the gentleman from Louisiana.
    Mr. Cassidy. First, let me apologize, gentlemen. I am not 
trying to be unpleasant. My back hurts and so I am here kind of 
grimacing. It is not your testimony. It may be the bill but it 
is not your testimony.
    I would like to return to the topic of leakage. I also read 
that report, in The New York Times or maybe the Post about the 
peat burning in Indonesia. We heard testimony, not long ago, 
how in Brazil in response to corn-based ethanol production that 
they are cutting down the Amazon basin trees in order to plant 
more cropland, resulting in a net increase of carbon production 
according to both the California environmental agency and the 
EPA for corn-based ethanol. Now, it occurs to me that not all 
land is carbon equivalent, so if we are encouraging people in 
Indonesia to chop down trees and plant on peat, fires start, 
more carbon is released, we actually have a net negative for 
carbon emissions if we just turned land into forest in the 
United States. Is that a fair assumption?
    Dr. Kile. It is certainly the case that as forestry land 
would be taken out of forestry and put into crop production. 
That releases carbon, as you noted, and particularly Indonesia 
and Brazil are very large sources of net greenhouse gas 
emissions, primarily from deforestation. That creates a large 
increase or potentially a large increase in emissions that 
might only be very slowly offset. So increases in biofuel would 
depend very critically on where they came from.
    Mr. Cassidy. But it wouldn't actually have to depend upon 
increases in biofuels because if we are increasing input costs 
for, say, corn, we are decreasing acreage, we have an expanding 
population worldwide, that we are going to have more corn grown 
someplace. And so if they are cutting down very lush, luxuriant 
tall trees in the Amazon in order to plant more corn, and we 
are taking relatively small forests compared to the Amazon and 
replanting them. We may have a net increase in global carbon 
dioxide production based upon this policy.
    Dr. Kile. Right, and that is the fundamental issue with 
leakage, does activity for which you might get an offset credit 
cause increased emissions elsewhere that would either 
eliminate, or the example that you cited, more than eliminate 
the reductions from that offset.
    Mr. Cassidy. Now, frankly, it seems almost an inevitability 
if we base it upon recent history because we know that trees 
grow taller in the Amazon than they do in, say, Minnesota. So, 
is it not just an inevitability as much as we can say such 
things that the more we encourage crop production in places 
like Indonesia and the Amazon and elsewhere in the tropics that 
we are going to have relative increases in CO2 
because of this policy?
    Dr. Kile. That level of specificity is just something that 
CBO hasn't analyzed and it is something that would ultimately 
need to fall to one of the regulatory agencies, but it is a 
serious issue that----
    Mr. Cassidy. Let me ask, and I don't mean to be rude. Now, 
EPA has done this and so you have not borrowed from the 
California environmental agency's methodology to estimate this? 
Because this seems so important because we may end up worsening 
the environment because of this bill. We may have more 
CO2 production because of this bill. It kind of 
boggles my mind that it has not been explored more fully.
    Dr. Kile. This is obviously an important issue and it is 
the central issue with leakage, and it is something that we 
haven't looked at that level of detail. We do take the offset 
supplies from EPA.
    Mr. Cassidy. Now, tell me, intuitively it seems to me as if 
it will. Do you agree with that intuition or do you say no, my 
intuition is that we will have a net decrease in 
CO2?
    Dr. Kile. From?
    Mr. Cassidy. From basically forcing crop production in the 
tropics in which we will end up with deforestation, as we have 
already seen, in places like the Amazon or Indonesia.
    Dr. Kile. I don't have a good intuition on any particular 
example. My sense is that there are examples like that where 
leakage could be a very serious problem. I think there are 
other places where leakage could be easier to account for in 
the creation of offsets.
    Mr. Cassidy. Now, let me also ask, because it seems like we 
always think of a family farm, but as we know, companies like 
ADM really are major players in food production and I can 
imagine, since I understand Australia just rejected such a 
plan, that ADM would just move wheat production to Australia, 
another example of leakage, a major trading partner, a 
developed country, and they have rejected this protocol, this 
cap-and-trade, whatever. It seems more examples that 
internationals would move crop production elsewhere, perhaps at 
the expense of family farms. Does that also make sense?
    Dr. Kile. That is at least plausible to the extent that if 
the United States were to adopt practices and policies that 
weren't similar to what was going on in the rest of the world, 
obviously it would create that. Whether or not those incentives 
were large enough to actually move substantial portions of 
production, that I don't know.
    Mr. Cassidy. And if I may, one last question. I think 
bottom line though is we know that the offsets will not 
entirely increase the cost of the increased input cost. Is that 
also true?
    Dr. Kile. I am sorry. I didn't get the question.
    Mr. Cassidy. The profits from offsets will not offset 
entirely the increased input costs associated with this 
legislation.
    Dr. Kile. So the--I go back again. The purpose of offsets 
is to lower the cost of the legislation itself, not to reduce 
that cost to a negative number, if you will.
    Mr. Cassidy. Thank you. I yield back.
    The Chairman. The chair thanks the gentleman. Does the 
gentleman from Ohio have any questions? The gentleman is 
recognized.
    Mr. Boccieri. Thank you, Mr. Chairman.
    I appreciate your testimony today. We had an opportunity to 
talk to Dr. Glauber yesterday. I want to speak to you, Dr. 
Kile, if you could and just answer this question for me because 
I asked the same to Dr. Glauber yesterday. Will the offset 
provisions that are in the plan, obviously forestry and 
agriculture exempt under the bill, would the offsets that are 
on the table right now provide a net income gain for farmers 
and the agriculture community?
    Dr. Kile. That is something that we just haven't looked at 
that level of granularity. We have the sense that ag and 
forestry would obviously be important suppliers of offsets. 
Whether or not the income from those to farmers and ranchers 
would exceed the cost increases that in the aggregate they paid 
elsewhere, I don't----
    Mr. Boccieri. So you are suggesting that the offsets would 
not exceed a postage stamp for a day, which is the potential 
cost, if there is a cost? In fact, Ohio is predicting that 
there may be a net income gain from this but they suggested a 
postage stamp a day would be the net cost of this bill. Are you 
suggesting that the offset programs are not going to be the 
cost of a postage stamp?
    Dr. Kile. Well, I certainly heard that figure in----
    Mr. Boccieri. Those are your figures, I believe, or the 
CBO's figures, right?
    Dr. Kile. The CBO's figures were on the aggregate costs and 
per household in 2020 and 2050 which were the net costs of the 
program, which is the cost of reducing emissions and buying 
allowances and money that would be sent overseas minus the cost 
of, or the value of, the allowances that would be rebated back 
to households, and I think that came out to $160 a year in 
2020.
    Mr. Boccieri. So $160. The agriculture community is not 
going to be able to make up with offsets $160?
    Dr. Kile. That is not something that we have looked at per 
se, but again that is a figure that comes--that is a net figure 
that would include the value of offsets earned by the providers 
of offsets.
    Mr. Boccieri. Okay. Well, we will proceed to my next 
question, if we could, please. The Department of Defense issued 
a study back in 2003 and said that the risk of abrupt climate 
change--now, I am not a scientist, I am not into this whole 
aspect of this. When the Department of Defense and CIA say what 
they are saying in these studies, I want to know if there is an 
added cost in this. The 2003 U.S. Department of Defense said 
that the risk of abrupt climate change should be elevated 
beyond a scientific debate to a U.S. national security concern. 
Economic disruptions associated with global climate change are 
projected by the CIA, and other intelligence experts, to place 
increased pressure on weak nations that may be unable to 
provide the basic needs and maintain order for their citizens. 
Have you factored, has the CBO factored into the cost, the 
overall cost of doing nothing, the military commitment that 
would be associated if this were real with respect to what that 
would mean for the United States?
    Dr. Kile. We take under our current baseline--under CBO's 
baseline we take current law and under current law best 
expectations and current practices. I would have to get back to 
you on whether or not that includes specific changes in defense 
posture.
    Mr. Boccieri. And our military commitment. I would just add 
as a comment that it is pretty ironic that last year during the 
Presidential campaign every candidate running for office last 
year, from the most conservative to the most liberal, said that 
this was a threat to our national security. John McCain himself 
said, ``Suppose climate change is real and we have done 
nothing, what kind of planet are we going to pass on to our 
next generation of Americans. It is real and we have to address 
it.'' He said, ``The cap-and-trade portion of this, there will 
be incentives for people to reduce greenhouse emissions. It is 
a free market approach. It won't cost the American taxpayers, 
and we have been doing this in a profit-making business mode.'' 
I think Mike Huckabee summed it up best. He said, ``A nation 
that can't feed itself, fuel itself or produce the weapons to 
fight for itself will be a nation forever enslaved,'' and I 
think that we have to be real about what these costs are. In 
Ohio, we have regulated utilities, we have a renewable energy 
portfolio. They cannot come and just make arbitrary blanket 
increases in cost without having to meet the performance 
indicators that have been put in place. So I hope over this 
discussion and over this debate that we have about whether this 
is real or not, and I suggest that we ought to pay attention as 
Members of Congress to what the DOD and the CIA and our 
intelligence experts are suggesting. I hope that those are 
factored into the costs of doing nothing that the CBO purports, 
but in the long term, this is a debate that transcends party. 
It is about what our country is going to be faced with here in 
years to come. With that I will yield back, Mr. Chairman.
    The Chairman. Does the gentleman from New York have any 
questions? Okay. The chair thanks our witnesses for their 
testimony, Dr. Glauber for spending 2 days with us. We 
appreciate it very much. There are three votes on the House 
floor so the Committee will stand in recess until the votes are 
concluded.
    [Recess.]
    The Chairman. The Committee will come back to order, and we 
would like to welcome our second panel. Dr. Brian C. Murray, 
Director for Economic Analysis, Nicholas Institute for 
Environmental Policy Solutions, Duke University; Dr. Bruce A. 
McCarl, Distinguished Professor of Agricultural Economics, 
Texas A&M University; Dr. Brent Sohngen, Professor, Department 
of Agricultural, Environmental and Developmental Economics, the 
Ohio State University; Dr. Dermot Hayes, Professor of 
Economics, Center for Agricultural and Rural Development, Iowa 
State University; and Dr. Michael Wara, Assistant Professor, 
Stanford Law School.
    Dr. Murray, you may begin when you are ready.

       STATEMENT OF BRIAN C. MURRAY, Ph.D., DIRECTOR FOR
           ECONOMIC ANALYSIS, NICHOLAS INSTITUTE FOR
  ENVIRONMENTAL POLICY SOLUTIONS, DUKE UNIVERSITY, DURHAM, NC

    Dr. Murray. Mr. Chairman, thank you for inviting me to 
address the Subcommittee today.
    I have worked on land use and environmental policy for 20 
years and offsets policy for the last 10 years. Offsets have 
received much attention, both positive and negative, as a 
policy option to address greenhouse gases and climate change. 
In the next 5 minutes I will define offsets, why they are 
proposed, opportunities they present for farmers, challenges 
and potential solutions to those challenges.
    First, I will define an offset as an agreement where one 
party voluntarily reduces its emissions or increases carbon 
stored in agricultural soils or forests in exchange for a 
payment. The paying party may represent an entity such as an 
electric power plant obligated to reduce its emissions either 
by law or as part of a voluntary program. The seller may be a 
farmer who has no such obligation. Any action the farmer takes 
to reduce emissions or increase sequestration can be viewed as 
a potentially creditable offset action. The power plant can use 
the offset credits to help meet its compliance obligation 
rather than rely solely on cutting its own emissions.
    There is a precedent for using offsets in environmental 
policy. All recent cap-and-trade proposals in the U.S. Congress 
have included offset provisions drawing on examples elsewhere 
from the Clean Development Mechanism of the Kyoto Protocol to 
the voluntary market, Chicago Climate Exchange, to the newly 
emerging regulatory market in the Northeast United States, the 
Regional Greenhouse Gas Initiative, and from clean water 
regulations offsets are used as part of wetlands mitigation 
banking.
    Why offsets? The basic rationale for offsets can be 
summarized as follows: A greenhouse gas reduction delivers the 
same environmental benefit no matter where it occurs. This 
situation lends itself to emissions trading where regulated 
entities buy and sell emissions rights to more cost-effectively 
achieve their target. It is more economically efficient to 
achieve the target through trade, and because market forces 
induce those who can cut emissions cheaper to do so and profit. 
Emission reductions and sequestration in agriculture and 
forests are among the least expensive mitigation options. No 
legislation proposals mandate a cap for agriculture and forest 
emissions. This leaves the voluntary supply of offsets as the 
only way to bring these reductions into an economy-wide market-
based reduction strategy.
    Economic modeling estimates of the cap-and-trade bill such 
as Waxman-Markey and Kerry-Boxer show that offsets can reduce 
marginal cost by about half. In addition, agriculture and 
forest offsets can deliver revenue for rural communities and 
environmental co-benefits such as soil retention, clean water 
and habitat retention.
    Agriculture accounts for about six percent of all 
greenhouse gases in the United States. Prominent offset 
opportunities in agriculture include soil carbon management, 
nutrient management, manure management, and grazing and grass 
management. Our nation's forests are a net carbon sink, meaning 
they absorb more carbon dioxide than they emit. This counters 
about 13 to 14 percent of our country's emissions at this point 
in time. Offset activities in forest include afforestation, 
forest management, and reduced deforestation. There is also 
tremendous potential for agriculture and forestry and biofuel 
production from existing energy policies and climate proposals.
    Research studies have shown that a properly designed 
agriculture and forest offset program could generate hundreds 
of millions of tons of emission reductions in the United 
States. Internationally, the potentially is even larger for 
agriculture and forest offsets. Agriculture accounts for 12 to 
14 percent of global greenhouse gas emissions and deforestation 
alone accounts for about 15 percent. Reducing emissions from 
these sources is even less expensive than reducing them in the 
United States, but several factors must be overcome and 
capacity must be built to bring these reductions to the market.
    A well-functioning offset system needs to rise above some 
notable challenges. A critical concern is if offset credits are 
granted for reductions that do not occur, in which case the 
integrity of the transaction and the cap is undermined. Three 
basic issues of concern are: additionality, or whether these 
reductions produce incremental emission reductions rather than 
take credit for an emissions profile that would occur anyway 
under business as usual; leakage, which occurs when emission 
reductions generated by a project simply lead to emissions 
being shifted to some other ungoverned source; and permanence, 
which occurs when carbon that is stored in soils and biomass 
one period is released in a subsequent period, thus undermining 
the initial benefit. These problems are tricky but they are 
real and they must be dealt with to maintain the environmental 
and economic integrity of an offset program.
    There are options to address these challenges. Offset 
policy has focused on these types of problems in two ways: 
first, the use of quality standards to account for or adjust 
for additionality, leakage or permanence, as well as 
measurement monitoring and verifying transactions. 
Congressional proposals all recognize the need for quality 
standards and have processes in place to develop them, drawing 
on examples from preexisting programs, and quantitative 
restrictions. Policymakers have tended to couple quality 
standards with quantitative restrictions on the use of offsets 
for compliance. For example, the European Union limits the 
share of compliance commitments that can be met with offset 
credits to approximately ten percent. The U.S. House bill would 
have similarly placed compliance limits on offsets of roughly 2 
billion tons equally split between domestic and international 
sources.
    In summary, agriculture and forests have a large potential 
impact on the balance of greenhouse gases. The climate problem 
would be much harder to solve without involving these sectors. 
These sectors are not included in the cap. Using them as an 
offset is a viable option.
    [The prepared statement of Dr. Murray follows:]

  Prepared Statement of Brian C. Murray, Ph.D., Director for Economic
 Analysis, Nicholas Institute for Environmental Policy Solutions, Duke 
                         University, Durham, NC
The Role of Agricultural and Forest Offsets in a Cap-and-Trade Policy
    Thank you, Mr. Chairman, for inviting me to address the 
Subcommittee today. I have worked on the economics of land use and 
environmental policy for more than twenty years, and on various aspects 
of offsets policy for the last 10 years with colleagues on this panel 
and others. During that time, offsets have received much attention both 
positive and negative, as a policy option to address greenhouse gases 
and climate change. The agricultural community understandably wants to 
learn more about offsets, how such a system could work, what it could 
mean for producers, and how concerns about system integrity can be 
addressed. I will touch on each of those points briefly.
Defining Offsets
    An offset is an agreement where one party agrees to reduce its 
emissions (or increase carbon storage in agricultural soils or forests) 
in exchange for a payment from another party. The paying party may be 
an electric power plant or other source obligated to reduce emissions 
either by law or as part of a voluntary program. For our discussion, 
the selling party is a farmer or forest owner who has no such 
obligation. Any action the farmer/forest owner takes to reduce 
emissions or increase sequestration can be viewed as a potentially 
creditable offset. The power plant can use the generated offset credits 
to help meet its compliance obligation rather than rely solely on 
cutting its own emissions. The underlying premise is that the farmer 
can cut emissions cheaper than the power plant can and will do so if 
paid more than the action costs.
    All recent cap-and-trade proposals in the U.S. Congress have 
included offset provisions, drawing from examples elsewhere in the 
world, including the Clean Development Mechanism (CDM) of the Kyoto 
Protocol, the Regional Greenhouse Gas Initiative regulatory market in 
the Northeast U.S. states, and the Chicago Climate Exchange voluntary 
market. There have also been offset provisions in other environmental 
policies, such as wetlands mitigation.
The Rationale for Offsets
    A unique characteristic of greenhouse gases (GHGs) is that they 
disperse uniformly about the Earth's atmosphere, in contrast to other 
pollutants that are found in higher concentrations near their sources. 
As a result, an emission reduction delivers the same benefit no matter 
where it takes place, whether it is from an electric power plant in the 
Ohio Valley, a cement plant in India, a soybean farm in Mississippi, or 
a forest in the Amazon. This uniformity enables emission trading as an 
approach to control greenhouse gases.
    The argument in favor of emissions trading in general and offsets 
in particular is an economic one. Rather than designate which parties 
must undertake which reductions to achieve a collective target, it is 
more efficient to allow parties to contract among themselves to find 
who can achieve these reductions at the lowest cost, even if those less 
expensive reductions occur at sources (sectors, countries) not directly 
capped and thereby participate as offsets. Economic evidence supports 
this view. A recently published study by EPA of the Waxman-Markey cap-
and-trade bill that passed in the House of Representatives this summer 
found that allowing offsets even subject to quantitative limits on 
their use reduces marginal compliance costs by about half. Other 
studies of different cap-and-trade proposals conducted by government 
agencies and other organizations consistently find large cost reduction 
from allowing offsets.
    In addition to cost containment, offsets are seen as a potential 
source of economic stimulus for sectors such as agriculture not subject 
to a cap. Offsets can also produce environmental co-benefits through 
the deployment of less-polluting technologies and protecting soils, 
forests and grasslands, though care should be taken to ensure that 
offsets do not inadvertently damage other ecosystem values. An offset 
program can also put institutions in place to more effectively include 
all emission sources into a comprehensive economy-wide reduction 
program.
Agriculture and Forest Offsets
    Agriculture currently accounts for about six percent of all 
greenhouse gas emissions in the United States. However, none of the 
cap-and-trade proposals now under consideration include placing a cap 
on those emissions. This means that any reductions in those sectors 
can, in principle, be included as offsets. Prominent offset 
opportunities in agriculture include:

   Soil carbon management (e.g., tillage change to sequester 
        carbon dioxide (CO2))

   Nutrient management (to reduce nitrous oxide 
        (N2O) emissions)

   Manure management (to reduce methane (CH4) 
        emissions)

   Grazing/herd management (sequester carbon, reduce 
        CH4)

    Our nation's forests are a net carbon sink, meaning they absorb 
more CO2 from the atmosphere through forest growth than they 
emit to the atmosphere through forest clearing and other disturbances. 
Today this sink offsets about 14-15 percent of our country's greenhouse 
gas emissions, but this situation could be further improved through 
offset projects in such forestry activities as

   Afforestation.

   Forest management.

   Reduced deforestation.

    There is also tremendous potential for agriculture and forestry as 
a source of biofuels induced by existing energy policies and climate 
proposals.
    Research studies I have been involved in with colleagues at 
universities and government agencies show that a properly designed 
agricultural and forestry offsets program could produce emission 
reductions that counter as much as 1 billion tons of U.S. emissions 
(about 15% of today's totals) and thereby provide significant revenue 
potential for producers in those sectors. I believe Dr. McCarl will 
speak more about this work in his testimony.
    Internationally, the potential is even larger for agriculture and 
forest offsets. Agriculture accounts for 14% of global greenhouse gas 
emissions and is the main emissions source in many developing 
countries. Deforestation alone accounts for about 15% of global 
emissions, or about the same as the global transport sector, and occurs 
mostly in the developing country tropics. Reducing emissions from 
agriculture and forests in developing countries is even less expensive 
than reducing them in the United States, but there are several factors 
that must be overcome and capacity-building to bring these reductions 
to market. I believe Dr. Sohngen will have more to say about these 
international opportunities in his testimony.
Potential Challenges
    One common criticism of offsets is that they deflect effort from 
abatement in the capped sectors. In my view, this criticism is 
misdirected. Deflecting abatement from the capped sectors is exactly 
how offsets work to reduce costs. It should be the overall reductions 
we are interested in, not where they occur.
    However, if offset credits are being given for reductions that do 
not actually occur, the transaction and the cap are illusory, which 
would be a very real problem. The validity of offset reductions is 
sometimes called into question because they are generated from sources 
that do not face an emissions mandate. This makes it difficult to 
determine how to give credits for emissions reductions--reductions 
compared to what? The answer typically comes in the form of a baseline 
that captures what the emissions level would be under a ``business as 
usual'' scenario. Reducing emissions below this baseline can be 
considered additional to reductions that would have occurred anyway.
    ``Additionality'' is a necessary condition for the reductions to be 
real. Additionality may be more apparent in some cases such as methane 
capture from livestock manure management or afforestation of cropland 
because these are not prevalent practices for farmers under business as 
usual. But in practice it can be difficult to determine additionality 
because once a project starts, the baseline itself is unobservable. 
This can become a matter of guesswork that varies in sophistication--
from complex data analysis to simply asking the party to provide 
evidence the project is additional. If a party has too much freedom to 
set its own baseline, there is legitimate concern about its validity 
and whether the reductions are therefore truly additional. This is why 
rules are important to ensure offset validity as I will discuss more 
below.
    Another potential problem with offset transactions is ``leakage,'' 
which occurs when emissions reductions generated by a project in one 
location simply lead to emissions being shifted to some ungoverned 
source elsewhere. An example might be if cropland in one location were 
retired into permanent grassland or forests, but this simply causes 
other grassland or forests to be cleared to help fill the supply gap.
     A third problem, ``permanence,'' comes specifically from offsets 
generated by biological sequestration of carbon in forests and 
agricultural soils. These projects create value by removing 
CO2 from the atmosphere and storing it in biomass and soils. 
The stored carbon, however, can be re-emitted by natural disturbances, 
such as fire, or intentional management actions. If this occurs, the 
original benefits of the project have been negated and the offset 
accounting shortfall needs to be addressed. This so-called reversal 
risk can be addressed with monitoring and clear, enforceable rules 
designating liability, but this comes with a cost. Another way to deal 
with liability is through private insurance or a public insurance pool 
or ``buffer'' requirement.
Possible Solutions
    Offset policy has focused on addressing additionality, leakage, and 
permanence in two ways.
(1) Quality Standards
    Each of the problems identified here can be dealt with by imposing 
offset quality standards. The Kyoto Protocol's Clean Development 
Mechanism follows this approach by restricting the activities eligible 
for offsets and requiring an Executive Board to approve all projects. 
All CDM projects must meet standards for additionality, address 
leakage, and address impermanence. This was deemed necessary to get 
political buy-in from parties who were skeptical of offset integrity. 
The results have been mixed. Indeed, it has been challenging to get 
many CDM projects approved, thereby restricting supply. But the logjam 
is loosening and some projects that have been approved have been 
criticized for generating questionable reductions despite quality 
standards being in place. Refinement of standards is an ongoing 
process.
    In the current legislative proposals in Congress, the need for 
offset quality standards is well-recognized. The lead agency, whether 
it is USDA or EPA will be responsible for establishing offset rules 
that address additionality, leakage and permanence and the use of any 
early offset credits will rely on pre-existing protocols from the 
voluntary markets that address these issues as well.
(2) Quantitative Restrictions
    Policymakers have tended to couple quality standards with 
quantitative restrictions on the use of offsets for compliance. For 
example, the EU limits the share of compliance commitments that can be 
met with offset credits to approximately ten percent (with some 
variation across countries within the EU). The U.S. House bill would 
have similarly placed compliance limits on offsets, 2 billion tons per 
year, which is much larger than ten percent of U.S. compliance. These 
restrictions implicitly suggest that policymakers are lured by the 
appeal of offsets, but they only trust them so far.
Summary
    Offsets are neither a panacea nor a pox. Agriculture and forests 
together have a large impact on the global balance of greenhouse gases; 
solving the climate problem would be much more difficult without 
involving these sectors. Absent including these sectors under a cap, 
using them as offsets is an alternate solution. Done well, offsets 
expand emissions reduction opportunities and lower the cost of 
achieving reduction targets, and provide income opportunities for 
farmers, forest owners and other uncapped entities. But offsets can 
create a number of accounting problems for a cap-and-trade program. 
Rigorous standards for their inclusion are essential if the system is 
to have environmental and economic integrity. Nonetheless, some 
flexibility is necessary to ensure that high-quality offsets are not 
left out of the system because of overly burdensome requirements. This 
tradeoff is as much art as science. Quantitatively limiting offsets for 
compliance is not an ideal solution, but it may be necessary, at least 
at first when offset quality is highly uncertain. The CDM, warts and 
all, has shown that offsets can be generated at scale of hundreds of 
millions of tons globally, but more would be needed if offsets are to 
remain a critical element of a post-Kyoto global agreement and U.S. 
climate and energy legislation.
Further Readings:
    Kim, M, B.A. McCarl, and B.C. Murray. 2008. ``Permanence 
Discounting for Land-Based Carbon Sequestration.'' Ecological 
Economics. 64:763-769.
    Murray, B.C. ``Offsets Improve Flexibility.'' Invited article 
(``Another View''), Environmental Forum, November/December 2008, P. 39. 
    Murray, B.C., W.A. Jenkins. 2009. ``The Economics of Offsets in a 
Greenhouse Gas Compliance Market.'' Policy Brief NI PB 09-11, Nicholas 
Institute for Environmental Policy Solutions, Duke University. http://
www.nicholas.duke.edu/institute/offsetseries5.pdf.
    Murray, B.C., R. Lubowski, B. Sohngen. 2009. ``Including Reduced 
Emissions from International Forest Carbon in Climate Policy: 
Understanding the Economics.'' Report NI-R-09-03, Nicholas Institute 
for Environmental Policy Solutions, Duke University http://
www.nicholas.duke.edu/institute/carbon.economy.06.09.pdf. 
    Murray, B.C., B.L. Sohngen, and M.T. Ross. 2007. ``Economic 
Consequences of Consideration of Permanence, Leakage and Additionality 
for Soil Carbon Sequestration Projects.'' Climatic Change 80:127-143.
    Murray, B.C., B.L. Sohngen, A.J. Sommer, B.M. Depro, K.M. Jones, 
B.A. McCarl, D. Gillig, B. DeAngelo, and K. Andrasko. 2005. EPA-R-05-
006. ``Greenhouse Gas Mitigation Potential in U.S. Forestry and 
Agriculture.'' Washington, D.C.: U.S. Environmental Protection Agency, 
Office of Atmospheric Programs.
    Olander, L. and C. Galik. 2009. ``Greenhouse Gas Offsets for a 
Federal Cap-and-Trade Policy: Frequently Asked Questions'' http://
www.nicholas.duke.edu/institute/offsetfaq.html.
    Trexler, M.C., D.J. Broekhoff, and L. Kosloff. 2006. ``A 
Statistically-Driven Approach to Offset-Based GHG Additionality 
Determinations: What Can We Learn?'' Sustainable Development Law and 
Policy. Winter 2006:30-40.
    U.S. EPA. 2009. ``EPA Analysis of the American Clean Energy and 
Security Act of 2009: H.R. 2454 in the 111'th Congress.'' June 23, 
2009. http://www.epa.gov/climatechange/economics/pdfs/
HR2454_Analysis.pdf.

    The Chairman. Thank you.
    Dr. McCarl.

STATEMENT OF BRUCE A. McCARL, Ph.D., DISTINGUISHED PROFESSOR OF 
AGRICULTURAL ECONOMICS, TEXAS A&M UNIVERSITY, COLLEGE STATION, 
                               TX

    Dr. McCarl. I am not as good as reading as Brian so I am 
just going to over a few things, plus my testimony was a little 
long as written.
    Thank you for having me here. I want to talk through a few 
major issues. The first I want to talk about is that regardless 
of what we do in offsets, agriculture is fairly vulnerable to 
climate change. This vulnerability comes about in three 
different ways. There are some productivity effects of shifts 
in climate where, for example, we have seen lowered crop yields 
in some areas, increases in variability, diminished range 
carrying capacity and slowing in rates of technological 
progress where rates are returned to our research. We are also 
going to need to adapt to this altered climate. Today we see 
shifts in crops happening throughout the world with alterations 
in crop mixes, land management practices. We will probably also 
have to increase research and extension investments in some 
places, and some of these changes seem to be inevitable. We 
have passed the point that the European community thought that 
we should be in terms of atmospheric concentrations to avoid 
dangerous climate change. And then finally we will have 
diversion of resources to the extent that agriculture and 
forestry move to limit climate change.
    Now, there are a number of opportunities. I have a note 
here saying I am leaving them to Brian, but Brian didn't talk 
about too many of them, but I will still skip that. One thing 
that is worth mentioning is that agriculture and forestry do 
provide some attractive alternatives. They are currently 
implementable as opposed to 80 percent of the emissions coming 
from the energy sector and things like carbon capture and 
storage being considerably further in the future. They can also 
lead to roughly 50 percent reductions in the overall U.S. cost 
and the contribution can be large.
    There are a number of complex implementation issues, some 
of which Brian mentioned, others of which could be mentioned. 
Today in my mind, it is difficult to overcome most of these 
issues and figure out what is going to be a winner or a loser. 
In general, we need to allow fairly broad participation, 
establish a careful way of setting the cap and then let the 
market work to pick out what the winners and the losers are.
    If I turn to cap-and-trade effects on agriculture, the 
principal effect of cap-and-trade is, it offers new markets. If 
we do not have offsets approved, we would still have a new 
market in a much bigger bioenergy potential market. If we do 
have offsets approved, then we have all the participation in 
the carbon markets. Now, we see that this is competitive with 
existing markets in that this diverts agricultural resources--
land, water, et cetera--and that tends to raise prices for 
existing commodities. It also tends to diminish our ability to 
export and world food prices go up. This in turn leads to 
higher agricultural incomes, both with and without the offsets. 
It also leads to higher consumer and international food costs. 
In general, I think that the gains exceed the losses. This 
though, naturally, would have to be balanced off with the 
environmental benefits of cap-and-trade and the costs of 
running the program. Finally, the agricultural income effects 
are not uniformly distributed. Crop producers gain more than 
livestock and forests don't quite gain as much, and there are 
regional distributions.
    This is an environmentally complex issue in that actions 
like tillage reductions generate co-benefits, but to the extent 
we allow the power plants to generate with more coal, we get 
increased air pollution. So there is a complex set of tradeoffs 
there.
    The final thing, since I noted that research was in the 
title of this Committee is, one of the biggest strategies is 
going to be extremely important in this area is, what happens 
to future technical change. We have been blessed with a rate of 
corn yield improvements of about 1.7 percent for the last 100 
years, but that has been diminishing a little bit in the last 
20 years, climate change being one of the factors and a number 
of others. If we don't have continued investment and continued 
technological progress, agriculture is going to have to limit 
its role in these arenas. It won't be able to produce food and 
fiber plus fuel plus carbon offsets, so that technology is 
really an important part of this whole story.
    With that, this has stopped so I will.
    [The prepared statement of Dr. McCarl follows:]

 Prepared Statement of Bruce A. McCarl, Ph.D., Distinguished Professor 
  of Agricultural Economics, Texas A&M University, College Station, TX
Agriculture, Forestry Climate Change and Offsets
    Thank you for inviting me to address the Subcommittee on climate 
change related issues. I have worked in teams addressing climate change 
effects, adaptation and emissions limitation for nearly 25 years. This 
could not have been possible without the U.S. Government funding 
support that I have received. This arose particularly from EPA but also 
from USDA, DOE, NOAA and the Congress. I am grateful for the support.
    Now let me touch on a few points that have arisen from that work 
focusing primarily on agriculture and forestry.
1  Climate Change Vulnerability
    Agriculture, broadly defined to include forests and fisheries, is 
highly vulnerable to climate change related developments. Specifically 
agriculture is vulnerable in three fundamental ways.

   Productivity effects of shifts in climate will impact the 
        sector though changes in temperature, precipitation, and 
        extreme climatic events along with other climate attributes. 
        Atmospheric carbon dioxide also will have implications. Here is 
        just a sampling of some findings: work has shown crop yields 
        worsened in the South and Southwest but bettered in the North, 
        pest populations and costs increased, yield variability 
        increasing, range carrying capacity diminished, livestock 
        appetite altered, subtropical developing agriculture negatively 
        affected, tree growth altered and technical progress slowed 
        (Reilly et al., Chen and McCarl, Paustian et al., McCarl et 
        al., Irland et al.).

   Need to adapt to an altered climate and a carbon dioxide 
        enriched atmosphere will affect the sector. Climate change 
        adaptation will involve alterations in crop and livestock mixes 
        along with land management practices. It will also require 
        added investment capital for facilities, altered production 
        practices, research and extension (McCarl, 2007). Furthermore 
        such actions today appear to be inevitable (Rose and McCarl).

   Diversion of resources to limit the extent of climate change 
        plus effects of higher energy prices. Agriculture may face 
        altered energy costs and face pressures/opportunities to limit 
        emissions, produce substitute, lower emitting products 
        (bioenergy) and enhance sequestration (Murray et al.).

    Collectively these forces mean agriculture will be substantially 
affected.
2  Limiting Climate Change
    Now let me turn to the topic of the day and that is agriculture's 
role in limiting the future magnitude of climate change by 
participating in an offsets market.
2.1  Opportunities
    As argued by Dr. Murray there are a number of ways agriculture 
might participate in or be affected by a cap-and-trade market 
including:

   agriculture generates about 6% of fossil fuel related 
        emissions and would face increased fuel costs and needs to 
        reduce usage (EPA).

   agriculture provides the bulk of the feedstocks for 
        renewable and, in many cases, emissions reducing forms of 
        energy (McCarl, 2008).

   Agriculture may be able to reduce a number of other 
        emissions including those from livestock and manure, and 
        fertilizer (McCarl and Schneider, 2001).

   Agriculture may be able to increase the rate of 
        sequestration by changing tillage, afforesting, forest 
        management, grassland conversion and others (Murray et al.).

   Agriculture may be able to preserve existing carbon stocks 
        by avoiding land use change and deforestation as discussed by 
        Dr. Sohngen.
2.2  Attractive Alternatives?
    There are a number of reasons why the above opportunities may be 
attractive meriting current attention including:

   The practices needed to implement the offsets, fossil fuel 
        emissions reductions and renewable fuel feedstocks are 
        generally known, existing technology (excepting cellulosic 
        liquid fuels) not needing extended time until deployment (as is 
        the case with for example carbon capture and storage)--Marland 
        et al.

   Many of the technologies are currently implementable with 
        low capital costs bridging us to a future with a decarbonized 
        energy.

   The use of agricultural activities has been shown in 
        modeling studies to lead to substantial reductions in the 
        domestic and international costs of limiting atmospheric 
        greenhouse gas content (de la Chesnaye, and Weyant).

   The agricultural contribution can be large. For example, 
        when we were analyzing possible Kyoto Protocol participation 10 
        years ago we found at higher prices that agriculture and 
        forestry could offset the entire U.S. obligation which was 
        about 6% below 1990 levels plus 24% projected growth by 2012 or 
        a total of 30% below today's levels.

   There are a number of large potential or readily exploitable 
        alternatives including bioelectricity, liquid fuels from 
        cellulose and wastes, feedstocks, afforestation, manure lagoon 
        management, agricultural soils, forest management, and avoided 
        deforestation (Murray et al.).
2.3  Implementation Complexity
    As Dr. Murray argued there are a number of complex implementation 
issues including the points he highlighted and more (additionality, 
uncertainty, permanence, saturation, leakage, transactions costs, 
measurement/monitoring, climate change interactions and aggregation/
brokerage--Smith et al., Morgan et al.). Some alternatives will turn 
out to be impractical in the face of these considerations. Today it is 
difficult to pick winners and losers. I feel it is desirable in setting 
up cap-and-trade to allow broad participation and establish a careful 
way of setting the cap then let the private market evolve to handle the 
complexity.
3  Cap and Trade Effects on Agriculture
    Now let me turn attention to the implications that a cap-and-trade 
program would have on agriculture addressing the case both with and 
without the approval of offsets.
3.1  New Markets
    Fundamentally, the cap-and-trade program would provide agriculture 
with new markets and opportunities. If offsets are not broadly approved 
the market would likely be restricted to an increased demand for 
biofuel and bioelectricity feedstocks. If offsets are approved then 
agriculture could enter the carbon (broadly defined to encompass 
multiple greenhouse gasses) market selling the results of sequestration 
and emission reduction activities.
3.2  Competitive With Existing Markets
    Producing offsets and bioenergy feedstocks on a large scale diverts 
agriculture from things it is now doing and ultimately is competitive 
with existing production. As such several things are expected.

   Market prices are likely to go up--with or without offsets 
        (Schneider and McCarl, Murray et al., Baker et al.). More with 
        than without.

   Exports are likely to fall and world prices go up.
3.3  Producer Income and Consumer Cost
    The higher prices and added markets inevitably lead to higher 
agricultural incomes along with higher consumer and international food 
costs. This means reduced consumer and rest of world welfare with the 
losses therein being greater than the producer income gains. This would 
naturally have to be balanced off with the environmental benefits of 
cap-and-trade plus the savings in the rest of the economy of meeting 
the cap.
    Furthermore, the agricultural income effects (Baker et al.) are not 
uniformly distributed with crop producers gaining the most and 
livestock and forest somewhat less (although one can alter this by 
allocating afforestation incomes in different ways). There is also 
substantial gain in rural America from enhanced land based incomes plus 
distributed energy production under biofeedstock transformation to 
energy.
3.4  Environmentally Complex
    Collectively the use of offsets, fossil fuel use and bioenergy 
feedstock production generates a complex set of environmental impacts. 
Actions reducing tillage intensity, afforesting, converting grasslands 
etc. lead to water quality and erosion benefits while higher market 
prices and increased land demand lead to more land development and 
intensification possibly increasing chemical use, erosion sequestration 
releases and water use. In addition, increases in agricultural 
participation in the cap allows less energy sector reduction and 
diminishes air quality gains that would occur with less fossil fuel 
usage (Elbakidze and McCarl). Finally, the international market 
consequences would stimulate production increase in other areas 
including the possibility of added deforestation.
4  Key Role of technology
    It merits mention that the pressures of an agriculture contributing 
to expanding demands for energy, limiting greenhouse gasses and food/
fiber can only happen if technological progress remains high. Certainly 
technology investment is a complementary policy and is in fact a 
substantial way of limiting future greenhouse gas emissions (Schneider 
et al.).
5  Summary
    Agriculture will be affected by climate change and will need to 
adjust. It may be a big player in cap-and-trade if offsets are approved 
but would benefit from just increased energy prices in the absence of 
offsets. A complex market will need to evolve to handle agricultural 
offset characteristics and it appears desirable to allow wide 
participation.
6  References and Readings
    Baker, J.S., B.A. McCarl, B.C. Murray, S.K. Rose, R.J. Alig, D.M. 
Adams, G. Latta, R.H. Beach, and A. Daigneault, ``How might greenhouse 
gas policies affect U.S. agriculture?'', working paper, Nicholas 
Institute and Texas AM University, 2009.
    Chen, C.C., and B.A. McCarl, ``Pesticide Usage as Influenced by 
Climate: A Statistical Investigation'', Climatic Change, 50, 475-487, 
2001.
    De La Chesnaye, F.C. and John P. Weyant, EMF 21 Multi-Greenhouse 
Gas Mitigation and Climate Policy, Energy Journal, Special Issue, 2006.
    Elbakidze, L., and B.A. McCarl, ``Should We Consider the Co-
Benefits of Agricultural GHG Offsets'', Choices, Volume 19(3), Fall, 
25-26, 2004.
    Irland, L.C., D.M. Adams, R.J. Alig, C.J. Betz, C.C. Chen, M. 
Hutchins, B.A. McCarl, K. Skog, and B.L. Sohngen, ``Assessing 
Socioeconomic Impacts of Climate Change on U.S. Forests, Wood-Product 
Markets and Forest Recreation'', Bioscience, 51(9) September, 753-764, 
2001.
    Marland, G., B.A. McCarl, and U.A. Schneider, ``Soil Carbon: Policy 
and Economics'', Climatic Change, 51(1), 101-117, 2001.
    McCarl, B.A., Adaptation Options for Agriculture, Forestry and 
Fisheries, A Report to the UNFCCC Secretariat Financial and Technical 
Support Division,
http://unfccc.int/files/cooperation_and_support/financial_mechanism/
application/pdf/mccarl.pdf, 2007.
    McCarl, B.A., ``Bioenergy in a greenhouse mitigating world'', 
Choices, 23(1), 31-33, 2008.
    McCarl, B.A., and U.A. Schneider, ``U.S. Agriculture's Role in a 
Greenhouse Gas Emission Mitigation World: An Economic Perspective'', 
Review of Agricultural Economics, 22(1), 134-159, 2000.
    McCarl, B.A., X. Villavicencio, and X.M. Wu, ``Returns to Research 
under Climate Change and Consequent Adaptation'', Presented at AAEA 
Annual Meetings, Milwaukee, July 2009.
    Morgan, J.A., R.F. Follett, L.H. Allen Jr., S.J. Del Grosso, J. 
Derner, F. Dijkstra, A. Franzluebbers, R. Fry, B.A. McCarl, S. Mooney, 
K. Paustian, and M.M. Schoeneberger, C Sequestration in the 
Agricultural Lands of the U.S., A draft white paper for USDA ARS, 2009.
    Murray, B.C., B.L. Sohngen, A.J. Sommer, B.M. Depro, K.M. Jones, 
B.A. McCarl, D. Gillig, B. DeAngelo, and K. Andrasko. 2005. EPA-R-05-
006. ``Greenhouse Gas Mitigation Potential in U.S. Forestry and 
Agriculture.'' Washington, D.C.: U.S. Environmental Protection Agency, 
Office of Atmospheric Programs.
    Paustian, K., B.A. Babcock, J. Hatfield, R. Lal, B.A. McCarl, S. 
McLaughlin, A. Mosier, C. Rice, G.P. Roberton, N.J. Rosenberg, C. 
Rosenzweig, W.H. Schlesinger, and D. Zilberman, Climate Change and 
Greenhouse Gas Mitigation: Challenges and Opportunities for 
Agriculture, R141 2004, ISBN 1-887383-26-3, 120 pp., Council on 
Agricultural Science and Technology (CAST) Report, May 2004.
    Post, W.M., R.C. Izaurralde, J. Jastrow, B.A. McCarl, J.E. 
Amonette, V.L. Bailey, P.M. Jardine, T.O. West, and J. Zhou, 
``Enhancement of Carbon Sequestration in U.S. Soils'', Bioscience, 
54(10), 895-908, 2004.
    Reilly, J.M., J. Hrubovcak, J. Graham, D.G. Abler, R. Darwin, S.E. 
Hollinger, R.C. Izaurralde, S. Jagtap, J.W. Jones, J. Kimble, B.A. 
McCarl, L.O. Mearns, D.S. Ojima, E.A. Paul, K. Paustian, S.J. Riha, 
N.J. Rosenberg, C. Rosenzweig, and F. Tubiello, Changing Climate and 
Changing Agriculture: Report of the Agricultural Sector Assessment 
Team, U.S. National Assessment, prepared as part of USGCRP National 
Assessment of Climate Variability, Cambridge University Press, 2002.
    Rose, S.K., and B.A. McCarl, ``Greenhouse gas emissions, 
stabilization and the inevitability of adaptation: challenges for 
agriculture'', Choices, 23(1), 15-18, 2008.
    Schneider, U.A., and B.A. McCarl, ``Implications of a Carbon Based 
Energy Tax for U.S. Agriculture'', Agricultural and Resource Economics 
Review, volume 34(2). October, 265-279, 2005.
    Schneider, U.A., M. Obersteiner, E. Schmid and B.A. McCarl, 
``Agricultural adaptation to climate policies under technical change'', 
Working Papers from Research unit Sustainability and Global Change, No 
FNU-133, Hamburg University, 2007.
    Smith, G.A., B.A. McCarl, C.S. Li, J.H. Reynolds, R. Hammerschlag, 
R.L. Sass, W.J. Parton, S.M. Ogle, K. Paustian, J.A. Holtkamp, and W. 
Barbour, Harnessing farms and forests in the low-carbon economy: how to 
create, measure, and verify greenhouse gas offsets, Edited by Zach 
Willey and Bill Chameides, Durham, NC: Duke University Press, 229 p., 
2007.
    USEPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-
2007, http://www.epa.gov/climatechange/emissions/
usinventoryreport.html, April 2009.

    The Chairman. Thank you.
    Dr. Sohngen.

        STATEMENT OF BRENT L. SOHNGEN, D.F., PROFESSOR,
             ENVIRONMENTAL ECONOMICS, DEPARTMENT OF
          AGRICULTURAL, ENVIRONMENTAL, AND DEVELOPMENT
         ECONOMICS, OHIO STATE UNIVERSITY, COLUMBUS, OH

    Dr. Sohngen. Mr. Chairman, Members of the Subcommittee, 
thank you for the opportunity to testify today.
    While forests have always been recognized for the benefits 
they provide to humans including wood for consumption, habitat 
for wildlife, stores of biodiversity, water regulation services 
and stream stabilization, society has increasingly recognized 
the role forests play in mitigating the potential damages from 
climate change. My research along with that of my colleagues 
has shown that forests are a low-cost option for reducing net 
carbon emissions to the atmosphere. In particular, research has 
shown that the international supply of carbon credits from 
forestland could be as large as 6 billion tons of carbon 
dioxide abatement per year by 2030, and carbon prices of $10 to 
$20 per ton carbon dioxide.
    By far, the largest share of credits that could be 
generated globally arise from reductions in deforestation, 
followed by improvements in forest management, and finally by 
afforestation. The carbon credits generated by forestry actions 
both within the United States and outside of it could provide 
immense benefits to consumers. Our estimates indicate that if 
international offsets from forestry are used within a U.S. 
compliance market, we could reduce the carbon prices in the 
United States by 20 to 50 percent, depending on the size of the 
cap implemented and how many offsets are allowed to be imported 
into the United States. In the context of a cap-and-trade 
system with fixed target for emissions, this represents a 
substantial cost reduction function for consumers.
    An international carbon sequestration program will also 
make a U.S. carbon sequestration program more effective. If the 
United States only allows domestic offsets, commodity price 
increases will cause carbon emissions or leakage elsewhere. An 
international offsets program, however, can help limit these 
losses in other countries. By helping to stabilize land use in 
other countries, an international offsets program will also 
limit agricultural commodity supply responses in our competitor 
countries.
    The economic evidence is clearly in favor of international 
offsets. They reduce cost and they ensure the integrity of a 
U.S.-based offsets system. But are they also feasible? Many 
questions and concerns have been raised academically, and in 
the public discourse, about land-based offsets. In particular, 
questions have been raised about international offsets, and I 
would like to address several of those issues now.
    First, many parties are worried that there is no way to 
measure, monitor and verify large expanses of forestland in 
other countries. Actually, there is little doubt from a 
physical and scientific standpoint that we can measure, monitor 
and verify carbon in forests. We already do this in lots of 
places around the globe. The more important question is, what 
are the costs? The research on costs suggests that these costs 
would be $1 to $2 per ton carbon dioxide to measure and monitor 
carbon in forests. If carbon prices are in the range of $15 to 
$20 per ton CO2 and rising, measuring and monitoring 
and verifying will turn out to be a small proportion of the 
total transaction cost. Of course, we don't yet have precise 
measurement and monitoring of forests around the world. The 
reasons for this are clear. Society has simply never valued the 
carbon in its forests as a marketable commodity, so no one put 
time in measuring and monitoring. However, with global carbon 
reductions in the order suggested by Waxman-Markey, the world's 
forests could be worth as much as $2 trillion in asset value in 
carbon abatement services, or $500 per hectare for every forest 
in the world. Commodities worth this much are simply worth 
measuring and monitoring and we should put the resources into 
doing that.
    Second, there are vast concerns that forest carbon is 
volatile and impermanent, i.e., that it will be sold off to the 
highest bidder or burnt up when lightning strikes. Permanence 
is a legitimate issue but it can be handled by markets. The 
fact is, carbon markets do not need carbon to be permanent at 
all. Temporary storage is valuable, it could be priced and it 
should be traded on the market. To handle permanence, either 
the buyers or the sellers need to be contractually liable for 
the carbon. Then the risks associated with a particular 
location, for example, the fire and logging characteristics, 
could be considered and permanence could be worked into the 
price. Shorter-term storage would be worth less. Risky storage 
would be worth less. Longer-term storage, less risky storage 
worth more.
    Third, can we handle the land ownership and tenure issues 
that often plague developing countries? Clearly, carbon 
purchases from developing regions and individual places where 
land tenure is under question should be devalued. The United 
States should limit forest carbon contracts to those countries 
that have clearly established tenure rights regardless of 
whether the land is privately, publicly or communally managed. 
Countries that do not satisfy these criteria should be 
encouraged to develop equitable tenure arrangements so that 
they can enter into carbon contracts in the future.
    In conclusion, international carbon credits generated from 
forestry are a cost-effective means of reducing carbon 
emissions. Further, they enhance the efficiency of the domestic 
offset program. Some of the concerns that have been raised are 
important and should not be diminished, but they probably 
shouldn't be oversold, either. Thank you.
    [The prepared statement of Dr. Sohngen follows:]

Prepared Statement of Brent L. Sohngen, D.F., Professor, Environmental 
 Economics, Department of Agricultural, Environmental, and Development 
             Economics, Ohio State University, Columbus, OH
    Mr Chairman, Members of the Subcommittee, thank you for the 
opportunity to testify before you on the benefits and costs forest 
carbon sequestration as a climate mitigation tool.
    The global forest estate currently stands at 3.9 billion hectares, 
with 1 trillion tons of CO2. [1] More than half of this 
total forest area is located in temperate regions, including the United 
States, Canada, Europe, Russia, and China. For the most part, the 
carbon in these forests is increasing or is relatively stable.
    Well more than half of the total carbon in forests is located in 
tropical countries. Due to human activity, this carbon is not as stable 
as that in temperate regions. Annually, 10-14 million hectares of 
forestland are lost as deforestation occurs, causing an estimated 4 
billion tons of CO2 emissions per year. This emission 
amounts to about 17% of total carbon dioxide emissions into our 
atmosphere. [2]
    Forests have always been recognized for the benefits they provide 
to humans, including wood for consumption, habitat for wildlife, stores 
of biodiversity, water regulation services, and stream stabilization. 
More recently, society has recognized the role forests play in 
mitigating the potential damages from climate change. My research along 
with that of my colleagues has shown that forests are a low cost option 
for reducing net carbon emissions to the atmosphere.
    In particular, our research has shown that the international supply 
of carbon credits from forestland could be as large as 6 billion tons 
of CO2 abatement per year by 2030 at carbon prices of $10-
$20 per ton CO2. [3] By far the largest share of credits 
that could be generated globally arise from reductions in emissions 
from avoided deforestation, followed by improvements in forest 
management practices, and finally by planting of forests on old 
agricultural land.
    The carbon credits generated by forestry actions, both within the 
United States and outside of it, could provide immense benefits to U.S. 
consumers. Our estimates indicate that international offsets from 
forestry in particular, could reduce carbon prices in U.S. compliance 
markets by 25-50%, depending on the size of the cap implemented, and 
how many offsets are allowed to be imported. [4]
    In the context of a cap-and-trade system with a fixed target for 
emissions, this cost reduction function would leave literally billions 
of dollars each year in the hands of small businesses, who will have 
more resources to invest in productive capital, and consumers, who will 
pay lower energy prices as a consequence.
    Beyond these cost savings, an international carbon sequestration 
program will also make a U.S. carbon sequestration program more 
effective. If the U.S. only allows domestic offsets, commodity price 
increases will cause carbon emissions, or leakage, elsewhere. An 
international offsets program, however, can help to limit these losses 
in other countries. By helping to stabilize land use in other 
countries, an international offsets program will also limit 
agricultural commodity supply responses in competitor countries.
    The economic evidence is clearly in favor of international offsets. 
They reduce costs, and they ensure the integrity of a U.S.-based offset 
system. But are they also feasible? Many questions and concerns have 
been raised academically and in the public discourse about land-based 
offsets. In particular, questions have been raised about international 
offsets. I would like to address several of those concerns here.
    First, many parties are worried that there is no way to measure, 
monitor, and verify large expanses of forest carbon in other countries. 
There is little doubt from a physical and scientific standpoint that we 
can measure, monitor and verify carbon in forests. We already do this 
in many locations around the globe. The more important question is 
``what are the costs?'' Current studies place costs at $1-$2 per ton 
CO2 to measure and monitor carbon in forests. [5] If carbon 
prices are in the range of $15-$20 per ton CO2, and rising, 
measuring, monitoring and verifying will turn out to be a relatively 
small part of the transaction.
    Of course we do not yet have precise and accurate measurements of 
forest carbon in most tropical countries to date. The reasons are 
clear: Society has never valued forest carbon as a marketable 
commodity. The European Trading System declined to fully integrate 
forests, and voluntary systems that do include forests systematically 
under-value carbon. However, with global carbon reductions on the order 
suggested by the current Waxman-Markey bill, the world's forests could 
be worth as much as $2 trillion in carbon abatement services, or $500 
per hectare. [3] Commodities worth this much are worth measuring and 
monitoring.
    Second, there are vast concerns that forest carbon is volatile and 
impermanent--i.e., that it will be sold off to the highest bidder or 
burnt up when lightening strikes. Permanence is a legitimate issue, but 
it can be handled by markets. The fact is that carbon markets do not 
need forest carbon to be permanent at all. Temporary storage would be 
valuable, could be priced, and should be traded on a market.
    The best way to think about permanence is to begin by asking 
whether we hold any assets to the same standard in the modern economy. 
The answer is no. Economic actors recognize that all assets depreciate 
and that there are risks associated with holding them. Automobiles are 
not meant to be driven forever. Few of us end up living in the same 
house or apartment forever, and many of us rent.
    To handle permanence, either the buyers or the sellers need to be 
contractually liable for the carbon. Then the risks associated with the 
particular location (e.g., fire, illegal logging) can be considered, 
and permanence is worked into the price: Shorter term storage of 
carbon, or more risky storage of carbon will be worth less than longer 
term or less risky storage.
    Third, can we handle the land ownership and tenure issues that 
often plague the developing countries? Clearly, carbon purchased from 
individuals in regions where land tenure is under question should be 
devalued. The U.S. should limit forest carbon contracts to those 
countries that have clearly established tenure rights, regardless of 
whether the land is publicly, privately, or communally managed. 
Countries that do not satisfy these criteria should be encouraged to 
develop equitable tenure arrangements so they can enter into carbon 
contracts in the future.
    In conclusion, international carbon credits generated from forestry 
are a cost-effective means of reducing carbon emissions. Further, they 
enhance the efficiency of a domestic offset program. Some of the 
concerns that have been raised with international carbon offsets are 
important and should not be diminished, but they also should not be 
oversold.
Endnotes
    [1] UN Food and Agricultural Organization. 2006. Global Forest 
Resources Assessment 2005: Progress towards sustainable forest 
management. FAO Forestry Paper 147. United Nations Food and 
Agricultural Organization. Rome, Italy. 
    [2]  Intergovernmental Panel on Climate Change. 2007. ``Mitigation 
of Climate Change.'' Report of Working Group III. Cambridge: Cambridge 
University Press.
    [3] Sohngen, Brent. 2009. An Analysis of Forestry Carbon 
Sequestration as a Response to Climate Change. Assessment Report. 
Copenhagen Consensus on Climate. (http://fixtheclimate.com/)
    [4] Murray, B., R. Lubowski, and B. Sohngen. 2009. Including 
International Forest Carbon Incentives in Climate Policy: Understanding 
the Economics. Nicholas Institute Report 09-03. Nicholas Institute for 
Environmental Policy Solutions. Duke University. (http://
www.nicholas.duke.edu/institute/)
    [5] Antle, J.M. and Capalbo, S.M., Mooney, S., Elliot E.T., and 
Paustian, K.H., 2003 ``Spatial heterogeneity, contract design, and the 
efficiency of carbon sequestration policies for agriculture,'' Journal 
of Environmental Economics and Management 46:231-250 Antinori C., 
Sathaye, J. (2007) Assessing transaction costs of project-based 
greenhouse gas emissions trading. Lawrence Berkeley National Laboratory 
Report. LBNL-57315.

    The Chairman. Thank you.
    Dr. Hayes.

     STATEMENT OF DERMOT J. HAYES, Ph.D., PIONEER HI-BRED 
INTERNATIONAL CHAIR IN AGRIBUSINESS, PROFESSOR OF FINANCE, AND 
 PROFESSOR OF ECONOMICS, DEPARTMENTS OF ECONOMICS AND FINANCE, 
                IOWA STATE UNIVERSITY, AMES, IA

    Dr. Hayes. Thank you. I would like to describe some of our 
recent research on the impact of domestic offsets on 
agricultural land use and on crop prices, and then finish with 
the results of an informal survey of farmers on the subject.
    I read reports by the Environmental Protection Agency and 
the team from Duke and Texas A&M that suggested that with a 
carbon price of $30 per ton, as many as 50 million crop acres 
would be converted from crops to trees with commensurate price 
increases for agricultural commodities. I decided to try and 
replicate these results, especially as they pertain to the Corn 
Belt.
    I am a Co-Director of FAPRI at Iowa State and I have access 
to the FAPRI modeling system. I believe that Pat Westhoff 
described this system yesterday in his remarks to this 
Committee, so I will not describe the model in detail expect to 
say that the model is well suited to this type of analysis.
    First, we decided to examine the EPA estimate of crop 
conversion in the Corn Belt. To do this, we compared the offset 
value of trees grown for purposes of carbon sequestration 
against the current value of this land in agriculture. To 
estimate the carbon value of cropland in the Corn Belt, we used 
data from Lewandrowski on the sequestration rates and metric 
tons of CO2 equivalent per acre for different tree 
types in different regions of the country. We converted these 
rates to an annual cash rent equivalent by multiplying the 
average annual sequestration amount in tons by $30. Our results 
suggest that the Corn Belt land would have an annual offset 
value in the range of $102 to $132 per acre, and that land in 
the Lake States would have a value of about $146 per acre. 
These cropland conversion values are about 50 percent greater 
than for pasture in the same region because pastureland has 
more stored carbon to begin with.
    Next, we decided to compare the current cash rents in 
agriculture against the value of this land in an agricultural 
offset program. We were able to obtain survey data for cash 
rents on 3,000 Iowa farms for 2009 from Dr. William Edwards at 
Iowa State, and we used this as the basis for comparison. We 
also found 2009 cash rental data by county from the USDA 
National Agricultural Statistics Service. This work suggested 
that in an offset value of $110 per acre, about 20 percent of 
Corn Belt land would be converted to trees. At $118 per acre, 
the number of acres would be about 25 percent of the total. 
These results are remarkably consistent with the EPA results 
for cropland conversion in the Corn Belt. We do not have 
adequate rental data for other regions of the country and we 
were, therefore, unable to verify the EPA estimates for those 
regions.
    We then took the EPA estimates of regional cropland 
conversion and ran them through the FAPRI model to estimate the 
impact on crop prices. The results suggest that by 2023 the 
price of corn would be about 28 percent higher than in our 
baseline, and that the price of soybeans would be 20 percent 
higher. Our corn price results are slightly lower than in the 
bigger McCarl study and our soybean results are slightly 
higher, but given the enormous difference in our approach, the 
results are remarkably consistent. The FAPRI model did suggest 
that with higher crop prices, about 10 million acres of pasture 
and CRP would be converted into cropland so that the net price 
impact described here is for 40 million acres of conversion.
    Finally, I would like to describe the reaction that I have 
had from about 250 farmers that have listened to audio versions 
of this presentation. About half the participants were 
livestock producers, and that, as I had expected, they were 
against the concept because of the increase in feed costs. The 
other half were specialized crop growers, and to my surprise, 
they were also against the concept. After some consideration, I 
was able to come up with a reason for the opposition from crop 
growers. The key is that the particular individuals I asked 
were actively involved in growing crops and, as such, they did 
not wish to reduce the size of their own operation by 
converting land. Almost all the participants also rent land 
from investors. These farm operators would see increases in the 
cost of renting land and this explains their opposition. Crop 
growers see a big difference between policies that increase 
crop prices because of demand pull, as was the case for 
ethanol, and policies that increase crop prices due to cost 
push, as would be the case here.
    I do see a way to make this program beneficial for almost 
all involved. The answer is to limit conversion of cropland for 
domestic offsets and combine this activity to pasture, CRP and 
publicly owned lands. Alternatively, the United States could 
explore other opportunities to sequester carbon such as that 
provided by using crop residues and other forms of cellulose to 
produce biochar and then burying the biochar in the soil. Thank 
you.
    [The prepared statement of Dr. Hayes follows:]

     Prepared Statement of Dermot J., Hayes, Ph.D., Pioneer Hi-Bred
    International Chair in Agribusiness, Professor of Finance, and 
  Professor of Economics, Departments of Economics and Finance, Iowa 
                                 State
                          University, Ames, IA
    Thank you, Mr. Chairman, for the opportunity to participate in 
today's hearing. I would like to describe some of our recent research 
on the impact of domestic offsets on agricultural land use and on crop 
prices and then finish with results of an informal survey on the 
subject where I have attempted to capture the opinions of farmers with 
whom I have recently interacted.
    I first became interested in this subject of domestic offsets when 
I read a report produced by the Environmental Protection Agency 
suggesting that with a carbon price of $30 per ton, as many as fifty 
million crop acres would be converted from crop to woodland nationwide. 
This early EPA report was followed by a report by a team from Duke and 
Texas A&M, led by Professors Baker and McCarl, that suggested this 
amount of acreage conversion would lead to significant price increases 
for agricultural commodities such as corn. This work caught my 
attention because a 50 million acre conversion of crop land is greater 
than that associated with the Conservation Reserve Program or with the 
recent conversion of corn land used for feed into corn land used for 
biofuel production. Therefore, I decided to try to replicate these 
results especially as they pertain to the Corn Belt.
    I am a Co-Director of FAPRI at Iowa State and I have access to the 
FAPRI modeling system. I believe that Pat Westhoff described this 
system yesterday in his remarks to this Committee, so I will not 
describe the model in detail except to say that the model is well 
suited to this type of analysis. In addition, the group of individuals 
that I work with at the Center for Agricultural and Rural Development 
and in the Department of Economics at Iowa State University have an 
excellent understanding of how agricultural markets and agricultural 
polices interact. I was able to draw on the expertise of a large group 
of experts as I prepared these remarks.
    First, we decided to examine the EPA estimate of cropland 
conversion in the Corn Belt. To do this, we compared the offset value 
of trees grown for purposes of carbon sequestration against the current 
value of this land in agriculture. To estimate the carbon value of 
cropland in the Corn Belt, we used data from Lewandrowski on the 
sequestration rates in metric tons of CO2-equivalent per 
acre for different tree types in different regions of the country. We 
converted these rates to an annual cash rent equivalent by multiplying 
the average annual sequestration amount in tons by $30. I realize that 
there are other ways of examining this issue and we do plan to pursue 
other more sophisticated methods, but for now this method is as 
accurate as we can be. Our results suggest that Corn Belt land would 
have an annual offset value in the range of $102 to $132 per acre and 
that land in the Lake States would have a value of about $146 per year. 
These cropland conversion values are about 50% greater than for pasture 
in the same region because pasture land has more stored carbon to begin 
with.

    Offset Values in U.S.$ per Acre at Carbon Price of $30/metric ton
------------------------------------------------------------------------
                                         Cropland to       Pasture to
      Region              Tree             Forest            Forest
------------------------------------------------------------------------
    Appalachia      Southern Pine     $172.80-$189.30   $102.90-$112.80
     Corn Belt     White/Red Pine     $102.90-$132.90   $93.00-$122.70
  Delta States      Southern Pine            $189.00           $112.80
              Lake White/Red Pine            $146.10           $136.20
     Northeast     White/Red Pine            $132.90           $122.70
Pacific States       Douglas fir/      $86.10-$89.70     $79.80-$96.30
                        Ponderosa
     Southeast      Southern Pine            $172.50           $102.90
------------------------------------------------------------------------

    Next, we decided to compare the current cash rents in agriculture 
against the value of this land in an agricultural offset program. For 
purposes of this comparison, it is important to realize that cash rents 
vary widely in the Corn Belt because the suitability of the ground for 
corn and soybean production varies so much from farm to farm and from 
county to county. This is an important distinction because it seems 
likely that land owners will enroll the lowest quality ground in an 
offset program, much as was the case for the CRP program.
    We were able to obtain survey data for cash rents on 3,000 Iowa 
farms for 2009 from Dr. William Edwards at Iowa State University and we 
used this as the basis for comparison. We also found 2009 cash rental 
data by county from the USDA National Agricultural Statistics Service. 
We used the coefficient of variation from the Iowa State University 
data as a measure of the dispersion of cash rents across farms, and we 
used the $145 per acre mean of the Corn Belt county data as a measure 
of the current average farm rent. This distribution suggested that at 
an offset value of $110 per acre, 20% or 22.5 million acres of Corn 
Belt land would be converted to trees. At $118 per acre, the number of 
acres converted would be 25% of the total. These results are remarkably 
consistent with the EPA results for crop land conversion in the Corn 
Belt. We did not have adequate rental data for other regions of the 
country and we were therefore unable to verify the EPA results for 
those regions, however these other results also make intuitive sense. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Next, we took the EPA estimates of regional cropland conversion and 
ran them through the FAPRI model to estimate the impact on crop prices. 
The FAPRI model is an annual model and it can be used for projections 
as far out as 2023. Therefore, we assumed that the $30 per ton carbon 
price would be reached by that date and that the rate of increase in 
carbon process prior to that date is linear.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The results suggest that by 2023, the price of corn would be about 
28% higher than in our baseline and that the price of soybeans would be 
20% higher. Our corn price results are slightly lower than in the 
Baker-McCarl study and our soybean results are slightly higher, but 
given the enormous difference in our approach, the results are 
remarkably consistent.
    The FAPRI model did suggest that with higher crop prices, about 10 
million acres of pasture and CRP would be converted into cropland so 
that the net price impact described here is for 40 million acres of 
conversion.

------------------------------------------------------------------------
        Commodity             McCarl ($30/mt)      Our results ($30/mt)
------------------------------------------------------------------------
           Cotton                    +9.77%                 +10.10%
             Corn                   +40.76%                 +27.60%
         Soybeans                    +9.40%                  +20.5%
            Wheat                   +14.23%                 +14.60%
          Sorghum                    +5.50%                 +23.40%
             Rice                    +1.25%                 +28.40%
------------------------------------------------------------------------

    Finally, I would like to describe the reaction that I have had from 
about 250 farmers that have listened to earlier versions of this 
presentation. I conducted this survey by presenting the results and 
then asked the group if they were for or against the concept as 
described. About half the participants were livestock producers, and as 
I had expected, they were against the concept because of the increase 
in feed costs. The other half were specialized crop growers and, to my 
surprise, they were also against the concept. I had expected that this 
group would be in favor.
    After some consideration, I was able to come up with a reason for 
the opposition from crop growers. The key is that the particular 
individuals I asked are actively involved in growing crops and, as 
such, they did not wish to reduce the size of their own operation by 
converting land. Almost all participants also rent land from investors, 
or from landowners who have retired and/or who live out of state. 
Approximately 60% of the land farmed in Iowa is operated by someone 
other than the owner and about 80% of the land in Illinois is in this 
category. Because I conducted my survey among actively involved farmers 
in Iowa, I simply missed the group of people who own land but do not 
farm it themselves. I am sure that this second group would be more 
favorable towards the domestic offsets, because the program would offer 
them leverage when negotiating cash rents. I should acknowledge here 
that my wife and I own several hundred acres of crop land in Iowa.
    However, the farm operators would see increases in the cost of 
renting land and this explains their opposition. Crop growers see a big 
difference between policies that increase crop prices because of demand 
pull (as was the case for ethanol) and policies that increase crop 
prices due to cost push as would be the case here.
    I have not had a chance to present these results to agribusiness 
companies, but I would assume that those who provide machinery and seed 
genetics would prefer to see cropland remain in production, while those 
who provide equipment for conversion of land into trees would be 
supportive of the policy. People and businesses involved in the food 
industry and food security programs are also likely to be opposed to 
the domestic offsets because of the impact the program would have on 
food prices.
    One last group worth considering is those who live in rural towns 
but who are not directly involved in production agriculture or land 
ownership. My sense is that this group would prefer to retain the 
economic activity associated with crop production, in part because of 
the negative impact that the CRP program had on some small towns.
    I do see a way to make this program beneficial for almost all 
involved. The answer is to limit the conversion of crop land for 
domestic offsets and confine this activity to pasture, CRP, and 
publicly owned lands. Alternatively, the U.S. could explore other 
opportunities to sequester carbon, such as that provided by using crop 
residues and other forms of cellulose to produce biochar and burying 
the biochar in the soil. Such a program might sequester similar amounts 
of carbon, while creating much smaller discontinuities for agriculture, 
industry, and rural communities.
    Thank you for the opportunity to present this research and these 
remarks.
References
    Lewandrowski, Jan et al. (2004) Economics of Sequestering Carbon in 
the U.S. Agricultural Sector, U.S. Department of Agriculture, April. 
Available on the web at: http://www.ers.usda.gov/publications/tb1909/
tb1909.pdf (accessed October 6, 2009).
    EPA (2005) Greenhouse Gas Mitigation Potential in U.S. Forestry and 
Agriculture, Environmental Protection Agency, November. Available on 
the web at: http://www.epa.gov/sequestration/pdf/greenhousegas2005.pdf 
(accessed September 17, 2009).
    EPA (2009) Analysis of H.R. 2454 in the 111th Congress, the 
American Clean Energy and Security Act of 2009, U.S. Environmental 
Protection Agency, June. Available on the web at: http://www.epa.gov/
climatechange/economics/economicanalyses.html#hr2452 (accessed October 
7, 2009).
    Baker, Justin S. et al. (2009) The Effects of Low-Carbon Policies 
on Net Farm Income, September. Working Paper 09-04. Durham, NC: 
Nicholas Institute for Environmental Policy Solutions. Available on the 
web at: http://nicholas.duke.edu/institute/ni.wp.09.04.pdf (accessed 
November 3, 2009).

    The Chairman. Thank you.
    Dr. Wara.

 STATEMENT OF MICHAEL WARA, Ph.D., ASSISTANT PROFESSOR OF LAW, 
               STANFORD LAW SCHOOL, STANFORD, CA

    Dr. Wara. Mr. Chairman and Members of the Committee, thank 
you for inviting me to appear. I am honored to talk to you and 
share my perspective on offsets today.
    My research focuses on the Clean Development Mechanism, 
which is the world's largest offset market. It is the only so-
called compliance-grade offset market currently in existence in 
the world. However, it has little or no ag or forestry in it 
because of restrictions made in the Kyoto Protocol and the 
Marrakesh Accords to follow an agreement. Nevertheless, the 
experience gained in this market, and in particular the 
implementation of rules to govern offset creation, are very 
relevant to thinking about how a U.S. agricultural and forestry 
offsets program might function under ACES or some other cap-
and-trade legislation. I take it as a goal for such a program 
to create a system in which uncapped sources of emissions 
change their behavior and also captures much of the financial 
benefit of doing so as possible.
    Some lessons from the Clean Development Mechanism that I 
think are very relevant to this discussion are that there is a 
fundamental tension between high environmental integrity and 
transaction costs and risks associated with offset production. 
Even with excellent resources and intentions, the regulatory 
problem of creating, managing, and overseeing a large offset 
market is incredibly difficult. The CDM is a much smaller 
market than is envisioned for either a United States ag and 
forestry program, or more broadly, the ACES offset market both 
when considered domestically and internationally.
    Another important consideration that has emerged from the 
CDM is that carbon markets really value one thing and one thing 
only, and that is tons of carbon. That being said, agricultural 
and forestry offsets have the potential to provide important, 
and in many contexts, valuable contributions in terms of air, 
water and ecosystem quality. These would be very difficult to 
value in a strictly carbon offset context. The net of the CDM 
experience has been that the regulator and the market have 
struggled to produce very many offsets at all, that is, that 
the compliance-grade offset market has not served terribly well 
as a cost-containment mechanism. In addition and at the same 
time, there have been deep suspicions regarding the quality of 
the offsets produced. So not only has the market not produced 
very many credits, but the credits it has been produced have 
been subject to numerous criticisms.
    Because of this result, I would suggest that the United 
States consider alternatives to offsets for both reducing 
emissions from uncapped sectors such as agriculture and 
forestry, and for providing cost containment to the cap-and-
trade market to limit the impacts on businesses and consumers. 
In particular, I believe that rather than putting farmers and 
forest landowners through the complicated, expensive and risky 
process necessary to make a compliance-grade offset, it makes 
far more sense to simply pay them to change their practices in 
ways that we know will benefit both U.S. greenhouse gas 
emissions and improve air and water quality.
    Rather than financing these changes through the creation of 
offsets, assuming that we were to have a cap-and-trade program, 
I believe that it would make far more sense to fund such a 
conservation incentive program by a large, permanent allocation 
of allowances from the cap-and-trade. The effects of this would 
be to lower transaction costs for farmers and forest 
landowners; simplify the application process, simplify the 
implementation for USDA and/or EPA of running such a program, 
and I wouldn't minimize that; to allow farmers and forest 
landowners to capture a far greater share of the revenue 
generated by the program; and also to significantly reduce the 
uncertainty as to the environmental performance of the cap. It 
is important to emphasize as was mentioned in the earlier 
panel, and also by members of my panel, that we are talking 
about a very large number of tons in offsets relative to the 
total volume of emissions under the cap. To the extent that 
those offsets are of dubious or uncertain quality, the 
performance of the program as a whole is called into question.
    So in addition, it is worth pointing out that such a 
program could take advantage of existing USDA programs, be less 
likely to be subject to legal challenge because they are not 
linked to the cap, and I will tell you that in interactions 
with numerous environmental NGOs, that is a major concern, and 
it does require the development of complicated mechanisms for 
project-level implementation of offset reductions.
    I will conclude with that. Thank you very much.
    [The prepared statement of Dr. Wara follows:]

Prepared Statement of Michael Wara, Ph.D., Assistant Professor of Law, 
                   Stanford Law School, Stanford, CA
1. Introduction and Summary
    Mr. Chairman and Members of the Committee, I am honored to appear 
before you to testify on the potential role of agricultural and 
forestry carbon offsets in a U.S. greenhouse gas emissions trading 
market. Overall, I believe that offsets hold limited promise, both as a 
cost control mechanism and as a method for reducing emissions beyond 
the sectors covered by a cap-and-trade scheme. For U.S. farmers, this 
may translate into higher than anticipated costs for agricultural 
inputs and lower than anticipated benefits from the sale of offsets.
    A superior alternative to the approach taken by the American Clean 
Energy and Security Act of 2009 (ACES) \1\ would be to separate the 
cost containment function under a U.S. cap-and-trade program from 
policies aimed at reducing emissions from uncapped sources such as 
agriculture and forests. In essence, rather than trying to kill two 
birds with one stone, using two stones. The first would be a price 
collar for the cap-and-trade program. The second would be a 
conservation incentives program focused on GHG reductions and funded 
via allowance allocations and safety valve revenues. Such an approach 
would provide much greater certainty regarding minimum and maximum 
costs to be born by firms and consumers affected by the cap on fossil 
fuel emissions. It would also greatly simplify the implementation and 
operation of a program aimed at reducing emissions from U.S. farms and 
forests, thus insuring that farmers and forest land owners receive the 
expected benefits from reducing and sequestering carbon.
---------------------------------------------------------------------------
    \1\ The American Clean Energy and Security Act, H.R. 2454, 111th 
Cong. (2009).
---------------------------------------------------------------------------
    The changes necessary to reduce GHG emissions from U.S. farms and 
forests will almost certainly also provide substantial co-benefits in 
the form of reduced impacts to air, water, and ecosystem quality. A 
carbon offsets-based program for producing reductions has no 
straightforward way of taking these added benefits into account. In 
contrast, a more familiar conservation incentives program could easily 
factor in the extent to which certain practices provide benefits beyond 
GHG reductions.
    A conservation incentives program would also accomplish another 
important objective--insuring that as much of the revenue devoted to 
reducing emissions from U.S. farms and forests actually reaches the 
individuals who change farm and forest practices. Current compliance 
grade offset programs, such as the Clean Development Mechanism of the 
Kyoto Protocol, have struggled mightily to produce offsets of high 
environmental integrity. This struggle has necessarily created high 
transaction costs and substantial risks for offset developers. In 
practice, these risks reduce the fraction of offset revenue captured by 
the owner of a factory or landfill actually producing the GHG 
reductions. Instead, other elements of the offset value-chain, such as 
offset development companies, lawyers, consultants, and hedge funds, 
have captured much of the revenue. The same would likely be true of a 
U.S. carbon offset market under ACES. In contrast, a conservation 
incentives program, because of its simplicity, would insure a greater 
share of benefits for farm and forest owners.
    In this testimony, I will address several key lessons learned from 
the experience to date under the Kyoto Protocol with compliance grade 
carbon offsets. I will then describe the relevance of these lessons to 
the agricultural and forestry offsets program contemplated by Title V 
of ACES. Finally, I will describe an alternative policy for reducing 
GHG emissions from U.S. farms and forests--a conservation incentive 
program. Last, I will describe an alternative cost-containment 
mechanism for a U.S. cap-and-trade system, a symmetric safety valve or 
price collar. I conclude the following:

    (1) There has been and will continue to be substantial crediting of 
        business-as-usual behavior within the CDM and other large 
        offset programs. This is particularly true for sectors such as 
        electricity generation that are highly regulated or benefit 
        from substantial public subsidy. This crediting of counterfeit 
        emissions reductions is likely to be a hallmark of any real 
        offset program. The crux of the problem is the inability in 
        practice to tell which of the many applicants for carbon 
        offsets are telling a genuine story regarding emissions 
        reductions and which would have changed practices even in the 
        absence of the carbon market.

    (2) The CDM has yet to perform as a reliable cost-containment 
        strategy. Actual issuance of offsets has been far lower than 
        predicted because of concerns about environmental integrity. 
        These concerns have led of necessity to an elaborate and time 
        consuming regulatory process. The impact of this failure to 
        produce offsets has been largely hidden by the reduction in 
        demand for permits due to the global recession. A U.S. program 
        that sought to have higher standards than the CDM while 
        producing more credits would almost certainly face similar 
        supply problems.

    (3) Real-world implementation of an offset market of the scale 
        contemplated by ACES could not avoid the CDM's pitfalls. ACES 
        as passed requires an offset market and regulatory structure of 
        between 10 and 50 times the size of the current CDM. While 
        there are process efficiencies that a U.S. system could 
        realize, the potential for crediting business-as-usual 
        behavior, for uncertain offset supply, or both, is substantial. 
        In practice, both effective cost control and certainty as to 
        emissions levels are impossible to achieve under such a system.

    (4) Dedication of a significant fraction of allowances to 
        permanently fund a Conservation Incentive Program for farms and 
        forests is a superior policy for reducing uncapped emissions. A 
        Conservation Incentive Program could accomplish many of the 
        emission reduction objectives of an offset program and do so 
        more cost-effectively. By allowing for increased flexibility 
        and by reducing and risks of creating GHG emission reductions a 
        Conservation Incentive Program would likely produce greater 
        reductions from uncapped sources than would be possible under a 
        carbon offset system.

    (5) A symmetric safety valve or price collar that includes both a 
        price floor and a price ceiling for emissions allowances is 
        preferable to offsets as a cost-control option. A price collar 
        would be simple to administer, would not require an elaborate 
        regulatory system, and would produce certainty expost as to the 
        actual level of emissions under the cap. Offsets will deliver 
        none of these benefits. A price-collar would keep costs within 
        the ACES emissions trading market commensurate with 
        expectations. By doing so it would help to ensure the ongoing 
        support of constituencies essential for an enduring and stable 
        climate policy. Finally and most importantly, a price collar 
        would provide a guaranteed minimum return for clean-tech 
        innovators seeking to displace older fossil generation. This 
        guaranteed return would increase the provision of new and 
        innovative technologies to the U.S. economy. By doing so, it 
        would also increase the number of green jobs created by a U.S. 
        climate program, and help to position the U.S. as a leader in 
        the global energy revolution.
2. Crediting of Business-as-Usual Activities in the Clean Development 
        Mechanism
    The environmental integrity and cost-effectivenessof a carbon 
offset system depend on the ability to rapidly, reliably, and cheaply 
determine how entities seeking carbon offsets would have behaved in the 
absence of emissions trading. This ``business-as-usual'' or baseline 
scenario can then be compared to the proposed offset activity. Any 
reduction in emissions from the baseline can then be credited with 
offsets. Offsets must, if they are to be effective, must result in 
changed behavior. If not, then the result is that emissions do not fall 
either under the cap (where the offset is used as an alternative 
compliance tool) or outside the cap (where emissions remain unchanged 
relative to the baseline scenario). If an offset system performs 
perfectly, the net of uncapped and capped emissions remain unchanged. 
For every ton reduced outside the cap, 1 ton is emitted by a covered 
entity inside the cap. Of course, no offsets market is likely to work 
perfectly; in practice, a balance must be struck between the over-
crediting of business-as-usual behavior and the under-crediting of real 
reductions. But even evaluating this type-1 versus type-2 error 
requires some ability to objectively determine the counterfactual 
baseline scenario. In practice, this has proven impossible to do for 
real offset systems.
    The Clean Development Mechanism of the Kyoto Protocol (CDM) is the 
largest carbon offset market in the world, both in terms of volume of 
credits and value transacted. The CDM is also the world's first 
compliance grade carbon offset market. Firms covered by cap-and-trade 
regimes, most notably the European Union Emissions Trading Scheme (EU 
ETS), can use CDM offsets in lieu of allowances for compliance. The CDM 
was conceived with the twin goals of lowering compliance costs for 
parties to the Kyoto Protocol and assisting in the financing of 
sustainable development. The performance of the CDM holds important 
lessons for an analogous compliance grade carbon offset system proposed 
for the U.S. agriculture and forestry.
    The CDM has evolved through time as it has both grown in size, from 
just a few emission reduction projects to more than four thousand, and 
in complexity, from just a few project types to over one hundred. 
During this growth process, the regulators of the CDM have learned by 
doing and have improved practices. These improvements have been made 
mainly with the intention of insuring greater environmental integrity. 
Nevertheless, both anecdotal and systematic evidence suggests that 
substantial crediting of business-as-usual projects continues to occur. 
The root cause of the problem appears to be an inability to reliably 
determine the baseline scenario for a particular project or class of 
projects.
    The problems in the CDM have been greatest in sectors and countries 
where government regulation or subsidy plays an important role in 
economic activity. In China where more than half of all CDM credits 
originate, this is most evident in the energy sector. The Chinese 
energy sector, because of its strategic importance, remains largely 
state controlled and in many cases, state owned. The basic problem for 
the CDM is that state mandates and subsidy programs, along with a 
complicated and non-transparent interaction between state owned banks, 
state owned utilities, and financial and energy regulators, already 
strongly favor the construction of renewable and natural gas fired 
energy production. Some small fraction of the new capacity added is no 
doubt caused by the additional finance provided by CDM. However, in 
practice, almost all new plants in the wind, hydro, and natural gas 
sectors apply for and receive credit under the CDM for emissions 
reductions (see Figure 1).\2\
---------------------------------------------------------------------------
    \2\ See, Michael Wara and David Victor, A Realistic Policy on 
International Carbon Offsets, Stanford Program on Energy and 
Sustainable Development Working Paper #74 (2008), at
http://pesd.stanford.edu/people/michaelwara.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Figure 1: Hydro, wind, and natural gas fired power plants built 
        or under construction in China compared to applications for CDM 
        crediting for these projects. Essentially all new capacity 
        (blue bars) is applying for CDM offset credit (red bars). 
        Issued credits are based on the difference between these new 
        energy sources and the Chinese grid GHG emission intensity. 
        Shown are new capacity and CDM applications for Chinese hydro 
        and wind power in 2007, and for natural gas-fired power in 
        2005-2008.\3\
---------------------------------------------------------------------------
    \3\ Hydro and wind CDM applications exceed new capacity additions 
in part because some plants applying for credit in 2007 were built 
earlier and in part because some plants that applying for credit 
experienced construction delays. Data Sources: National Development and 
Reform Council; International Gas Union; International Energy Agency; 
J
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