Carbon Offsets: The Next Cash Crop for Farmers?

Last Updated Jul 24, 2009 12:31 AM EDT

Climate legislation could pad --not punish -- the bottom line of farmers who embrace the potential cash crop of the carbon offsets market, according to a report released this week by the Department of Agriculture.

The USDA analysis examines the possible impact of climate legislation that reduces greenhouse gases on the agricultural and forestry industries. For proponents of the legislation it aims to quiet some of the concern and criticism circulating around the bill.

Whether or not the study has taken any wind out of the sails of critics and wary senators, remains to be seen.

Here's what the analysis says:

The study measured the short, medium and long-term effects of the climate bill passed by the House in June. It found that efforts to reduce greenhouse gases through a cap-and-trade system -- the centerpiece of the bill --would increase energy costs for farmers.

Agriculture is energy intensive. Just consider the gas, diesel fuel, natural gas and electricity used in producing crops such as corn. Then there are the indirect costs like nitrogen and other fertilizers.

In those first years -- through 2018 in the study -- farmer's income would drop 1 percent. Net incomes would fall 3.5 percent by 2027 and 7.2 percent by 2048, all thanks to rising energy costs. Fertilizer costs would likely be unaffected until 2025 because of provisions in the House-passed climate bill, the study noted.

So, where do all the bennies come in? When farmers plant trees, reduce methane and nitrous oxide emissions and change their tillage practices they will be reducing carbon dioxide emissions. Farmers could sell those carbon offsets and generate $1 billion to $2 billion a year in income from 2012 to 2018, the study says. By 2050, U.S. farmers could have annual net returns of $20 billion.

USDA chief Tom Vilsack spoke at a Senate Agriculture Committee hearing Wednesday and came armed with the analysis. After mentioning the implications of climate change including forest fires, more intense weather and insect outbreaks, he emphasized the potential revenue opportunities for farmers, ranchers and forest landowners.

"In the long term, the economic benefits from offsets markets easily trump increased input costs from cap-and-trade legislation," according to Vilsack's prepared testimony before the committee.

Here is one item to ponder. The study says its estimates of net incomes for farmers does not consider the potential effects of the offsets markets on commodity prices, a likely outcome as renewable energy markets grow and cropland is planted with trees -- a term called afforestation.

This is great news if you're a producer of livestock feed. But not so much if you're the guy buying the feed for your livestock or dairy cows.

As Grist notes, there already is a divide amongst agricultural groups and farm-state legislators over the House bill, even with the concessions added thanks to Agriculture Committee Chair Colin Peterson.

The USDA is the first to note that it doesn't tackle every issue or factor. For example, the analysis does not assess the change in farm income due to the Renewable Electricity Standard that could increase the demand for biomass and provide additional sources of income, the study says.

But the feedstock cost issue could create a divide -- or widen it -- amongst folks within the ag sector.

Image from Flickr user Jenny Downing