Academic journal article Agricultural and Resource Economics Review

Implications of a Carbon-Based Energy Tax for U.S. Agriculture

Academic journal article Agricultural and Resource Economics Review

Implications of a Carbon-Based Energy Tax for U.S. Agriculture

Article excerpt

Policies to mitigate greenhouse gas emissions are likely to increase energy prices. Higher energy prices raise farmer costs for diesel and other fuels, irrigation water, farm chemicals, and grain drying. Simultaneously, renewable energy options become more attractive to agricultural producers. We consider both of these impacts, estimating the economic and environmental consequences of higher energy prices on U.S. agriculture. To do this we employ a price-endogenous agricultural sector model and solve that model for a range of carbon-tax-based energy price changes. Our results show mostly positive impacts on net farm income in the intermediate run. Through market price adjustments, fossil fuel costs are largely passed on to consumers. Additional farm revenue arises from the production of biofuels when carbon taxes reach $30 per ton of carbon or more. Positive environmental benefits include not only greenhouse gas emission offsets but also reduced levels of nitrogen leaching.

Key Words: energy tax, greenhouse gas policy, U.S. agricultural sector, bioenergy, mathematical programming

Demand for climate change mitigation and greenhouse gas emission reduction policies has increased over the last decade. Such policies if implemented will generally lead to increased prices of fossil fuels since in the United States fossil fuel use accounts for approximately 84 percent of greenhouse gas emissions (U.S. Environmental Protection Agency 2004). While the pursuit of greenhouse gas mitigation may lead to income opportunities for agriculture in the form of sequestration and emission management contracts (McCarl and Schneider 2000), such opportunities have been controversial in international negotiations, and it is uncertain how these opportunities will play a role when all details have been worked out. Thus, we chose to examine the effects of carbon prices on energy prices only where agriculture is largely a passive party, as discussed in McCarl and Schneider (2000). This assumption was also employed by Peters et al. (2001) in their economic analysis of U.S. agriculture and the Kyoto Protocol.

Higher fuel prices will have consequences for many sectors of the economy through increased production costs and associated commodity price changes. Previous studies have estimated the impacts of carbon-tax-induced increases on energy prices in U.S. agricultural production costs and farm income. Particularly, some have predicted severe negative effects on farm income. For example, the study by Francl. Nadler, and Bast (1998) addressed the implications of a 25 cents per gallon fuel tax using a budgeting-based analysis. Therein they found that farmer's net income would fall substantially. Smaller impacts were found by Antle et al. (1999), who simulated economic effects of energy prices on Northern Plains grain producers using an econometric model that allowed for acreage substitution but held prices constant. Two additional studies were undertaken that used price-endogenous agricultural sector models. The above-mentioned study by Peters et al. (2001) estimated that net cash returns for U.S. crop and livestock producers would decline by 0.3, 2.1, and 4.1 percent at carbon taxes of $14, $100, and $200 per ton of carbon equivalents (tce), respectively. Konyar and Howitt (2000) estimate a 2.3 percent increase in farmers' net revenue at a carbon equivalent price of $348 per ton. In all of the above studies the effect of fuel prices on the possibilities to produce biofuels was neglected.

This study extends the previous work by

* integrating biofuel feedstock production possibilities,

* linking agricultural adjustments to environmental impacts, and

* employing a price-endogenous U.S. agricultural sector model, which differs methodologically from the tools used in some of the previous analyses.

Methodological differences include (a) the use of non-linear constant elasticity demand curves as opposed to the assumptions of infinitely elastic demand in Francl, Nadler, and Bast (1998) and Antle et al. …

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