Thursday, January 31, 2008

Offsets Versus Allowances:

What do these provisions mean for the Agricultural Sector?


OFFSETS

  • Allows free-market participation for agriculture

  • Income opportunities for agriculture are only limited by the amount of offsets allowed by the policy: a cap on offsets limits income potential for agriculture

  • Agriculture receives market value for each ton of carbon sequestered or reduced: buyers will pay whatever price the market will bear


ALLOWANCES

  • Not a free market opportunity for agriculture

  • This is a government-administered (USDA) program

  • The value and payment for tons sequestered or reduced by agriculture will not be determined by market value, but will be determined by the government (USDA)

  • Consider this language from NRDC and WRI1, regarding what they consider the function of the allowances provision to be:

If biological sequestration and emissions reductions from programs supported by the USDA are less expensive than the market price of allowances, the USDA could be expected to require more than one ton of emissions benefits for every allowance allocated.”


In other words, if it costs a producer $25 to sequester a ton of carbon, but the market price for carbon is $100, the producer will have to sequester 4 tons of C to receive an allowance from USDA that is equivalent to one ton.

  • This would prevent agricultural producers from getting market price for their emissions reductions.

  • This treatment is not being considered for any other sector.


A comparison of payments received by agricultural producers under the offset system, and under the allowances system, as proposed by the NRDC/WRI analysis:

Assumptions:

Costs to agricultural producer to sequester 1 ton C = $25.00

Market price of carbon allowances per ton of C = $100.00

Offsets Provision: Allowance Provision

Ag payment received for 1 ton C = $1002 Ag payment received for 1 ton C = $25.00


1 Greenhouse Gas Emission Reductions under the Lieberman-Warner Bill (S.2191): Full Committee Chairman’s Mark with Boxer 1st Degree Amendment, by Daniel Lashof, Climate Center Science Director, NRDC, John Larson, Associate (WRI), and Robert Heilmayr, Research Assistant, Climate and Energy Program, World Resources Institute. December 4, 2007.

2 Note that this does not include discounts that may be applied for measurement uncertainty or leakage, which are being considered as part of both offsets and allowance provisions in cap-and-trade policies.

1 comment:

  1. Sara,
    I'd point out that the allowance program could be structured to give ag producers one allowance per ton of sequestration. L-W, however, requires the USDA achieve the maximum amount of mitigation possible with its share of allocations. As a result, you are correct to state that the USDA may require a producer to supply 4 tons of mitigation for every allowance given by the USDA.

    From an environmental perspective, however, the current language is the most effective. While under a normal market, the high price of allowances would encourage ag to supply large amounts of emissions reductions, the value of the program administered by the USDA is capped (a percent of all allowances). As a result, if we spend more per reduction, we get fewer reductions.

    If the USDA has to provide one allowance per ton sequestered by ag, it is very likely that this program would be greatly oversubscribed. In order to avoid the rent-seeking that would result, L-W requires the USDA to seek the maximum amount of reductions possible. Thus, more innovative, competitive and less expensive ag programs will be funded, while others will not. On the whole, more mitigation will be supported.

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