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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 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

STEVE KAGEN, Wisconsin 

KURT SCHRADER, Oregon 

DEBORAH L. HALVORSON, Illinois 

KATHLEEN A. DAHLKEMPER, 

Pennsylvania 

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 

FRANK D. LUCAS, Oklahoma, Ranking 

Minority Member 

BOB GOODLATTE, Virginia 

JERRY MORAN, Kansas 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

ROBERT E. LATTA, Ohio 

DAVID P. ROE, Tennessee 

BLAINE LUETKEMEYER, Missouri 

GLENN THOMPSON, Pennsylvania 

BILL CASSIDY, Louisiana 

CYNTHIA M. LUMMIS, Wyoming 

PROFESSIONAL STAFF

ROBERT L. LAREW, Chief of Staff 

ANDREW W. BAKER, Chief Counsel 

APRIL SLAYTON, Communications Director 

NICOLE SCOTT, Minority Staff Director 

(II) 

SUBCOMMITTEE ON CONSERVATION, CREDIT, ENERGY, AND RESEARCH

TIM HOLDEN, Pennsylvania, Chairman

STEPHANIE HERSETH SANDLIN, South 

Dakota 

DEBORAH L. HALVORSON, Illinois 

KATHLEEN A. DAHLKEMPER, 

Pennsylvania 

BETSY MARKEY, Colorado 

MARK H. SCHAUER, Michigan 

LARRY KISSELL, North Carolina 

JOHN A. BOCCIERI, Ohio 

MIKE MCINTYRE, North Carolina 

JIM COSTA, California 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

ERIC J.J. MASSA, New York 

BOBBY BRIGHT, Alabama 

FRANK KRATOVIL, JR., Maryland 

SCOTT MURPHY, New York 

WALT MINNICK, Idaho 

EARL POMEROY, North Dakota 

BOB GOODLATTE, Virginia, Ranking 

Minority Member 

JERRY MORAN, Kansas 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

ROBERT E. LATTA, Ohio 

BLAINE LUETKEMEYER, Missouri 

GLENN THOMPSON, Pennsylvania 

BILL CASSIDY, Louisiana 

NONA DARRELL, Subcommittee Staff Director

(III) 

(V)

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

(1)

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. 

2

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. 

3

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.

4

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 Housepassed 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 

5

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. 

6

1The EPA analysis of H.R. 2454 can be found at http://www.epa.gov/climatechange/economics/economicanalyses.html. 2The EIA analysis of H.R. 2454 can be found at: http://www.eia.doe.gov/oiaf/servicerpt/

hr2454/index.html.

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 

7

3 Congressional Budget Office. CBO Cost Estimate: H.R. 2454 American Clean Energy and Security Act of 2009, June 5, 2009. p. 18. 

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. 

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 

8

4 In the Lewandrowski et al. study, afforestation was assumed to be zero in the North Plains, 

South Plains and Mountain regions. 5For 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 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. 

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). 

9

6To 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. 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. 8This includes soil carbon sequestration on afforested agricultural lands, in addition to carbon 

sequestered from new trees. 8FASOM regions are presented in Figure 1.

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. 

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. 

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. 

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. 

10

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. 

11

10FASOM estimates the impact on producer surplus, a measure of farm income. The annuity 

value is calculated over the period 2015–2075. 11The 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. 

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). 

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. 

12

12FASOM 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. 

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. 

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.

13

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/

utlclimatelenergylreportl25x25lnovember11.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 *

GHG Mitigation Practice Study Coverage Potential GHG mitigation 

(MMTCO2e/yr @ $ per ton CO2) 

Tillage

Conservation tillage (primarily no-till) Lewandrowski et al.

(2004) 

U.S. agriculture sector 31 @ $13.62 

101 @ $34.06

EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

194 @ $15.00 

191 @ $30.00 

In 2025: 

204 @ $15.00 

187 @ $30.00

Antle et al. (2007) Central U.S. cropland No-till corn-soy-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 CH4 and 

N2O 

EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

28 @ $15.00 

48 @ $30.00 

In 2025: 

36 @ $15.00 

76 @ $30.00

EPA (2006) Global Agriculture U.S. 

Cropland sources 

In 2020 (Base = 200 MMT 

CO2) 

21% Reduction @ $15 

26 % Reduction @ $30

U.S. Livestock sources In 2020 (Base = 171 MMT 

CO2) 

11.8% Reduction @ $15 

19.8% Reduction @ $30

14

Table 1: GHG Offset Potential for Selected Practices and CO2 Prices From Recent Studies *—Continued

GHG Mitigation Practice Study Coverage Potential GHG mitigation 

(MMTCO2e/yr @ $ per ton CO2) 

Reduced fossil fuel use EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

35 @ $15.00 

46 @ $30.00 

In 2025: 

32 @ $15.00 

49 @ $30.00 

Biofuel Offsets (primarily biomass for 

power generation) 

EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

0 @ $15.00 

16 @ $30.00 

In 2025: 

0 @ $15.00 

21 @ $30.00 

Cropland to permanent 

grass 

Antle et al. (2001) Northern U.S. Great 

Plains 

8.7 @ $24.9 

13.6 @ $49.2

Continuous cropping (reducing fallow) Antle et al. (2001) Northern U.S. Great 

Plains 

44.9 @ $14.4 

63.4 @ $28.7 

Antle et al. (2007) Central U.S. 2.23 @ $16.35 

2.85 @ $27.25

Afforestation

Afforestation Lewandrowski et al.

(2004) 

U.S. agriculture sector 265.7 @ $13.62 

74.1 from cropland 

191.6 from grassland 

488.8 @ $34.06 

147.2 from cropland 

341.7 from grassland 

EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

145 @ $15.00 

557 @ $30.00 

In 2025: 

228 @ $15.00 

806 @ $30.00 

Lubowski et al. (2006) U.S. land base 734–917 @ $13 

2,110–2,899 @ $27.2 

(range shows with & without 

harvests)

Forest Management

Forest management 

(e.g., extend rotations, 

thin, and fertilize) 

EPA (2005) U.S. agriculture and 

forestry sectors 

In 2015: 

227 @ $15.00 

271 @ $30.00 

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 

CH4

3 4 6 8 10 12 17 25

Other Ag CH4 &

N2O 

8 12 15 19 26 35 44 53

15

Table 3. Agricultural Offsets—by Source, Quantity, and Gross Offset Revenue—Continued

2015 2020 2025 2030 2035 2040 2045 2050

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 

CH4

0.0 0.1 0.1 0.2 0.3 0.5 1.0 1.8

Other Ag CH4 & 

N2O 

0.1 0.2 0.3 0.5 0.9 1.5 2.4 3.8

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 States 16.8 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 Southwest 1.9 2.1 3.4 1.3 2.1 2.2 1.6 2.4

Pacific Northwest 0.7 0.8 0.7 0.7 1.0 1.3 1.2 3.0

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 States 0.2 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 Southwest 0.0 0.0 0.1 0.0 0.1 0.1 0.1 0.2

Pacific Northwest 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2

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 States 1.7 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

16

Table 6. Regional Changes in Acres.—Continued

2015 2020 2025 2030 2035 2040 2045 2050

Pacific Southwest 0.2 0.2 0.2 0.2 0.2 0.0 0.0 0.0

Pacific Northwest 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

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 States ¥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 Southwest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pacific Northwest 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2

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 States 0.0 ¥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 Southwest ¥0.2 ¥0.2 ¥0.2 ¥0.2 ¥0.2 0.0 0.0 0.0

Pacific Northwest ¥0.2 ¥0.2 ¥0.2 ¥0.2 ¥0.2 ¥0.2 ¥0.2 ¥0.2

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

17

Table 7. Crop Production Impacts—Continued

Crop

(unit) 2015 2020 2025 2030 2035 2040 2045 2050

millions

% 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 

18

Table 9. Livestock Production Impacts—Continued

2015 2020 2025 2030 2035 2040 2045 2050

Million cwt except eggs (million dozen)

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 value % of total 

Corn Belt 6.4 29.3

Great Plains (no forestry) 2.9 13.3

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. 

19

FIGURES

Figure 1a—Regional Potential

Source: USDA, ERS, 2004. 

Figure 1b—Regional Potential

Source: EPA 2005.


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Figure 2. FASOM Regional Map


11139003
21

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-andtrade 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 

22

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:

23

■ 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-andtrade 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 perton 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 

24

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-andtrade 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.

25

1See Congressional Budget Office, The Use of Offsets to Reduce Greenhouse Gases, Issue Brief

(http://www.cbo.gov/doc.cfm?index=10497) (August 3, 2009). 

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)

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

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 


11139004
26

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 

27

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. 4The 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. 

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. 

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

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. 

28

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. 

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)

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

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 


11139005
29

6See 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 NonCO2 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. 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. 9See 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. 

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 profitmaximizing 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

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. 

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 

30

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. 

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

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 capand-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.

31

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 Subject to 

Limits 

5,031 3,555

Allowances Banked b 186 c¥128

Emissions Covered by Offsets 1,790 0

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.) cThe 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 

32

13One 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.

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. 

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 

33

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. 

34

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 carbonbased 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 

35

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 

36

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 

37

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 

38

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 beVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
39

cause 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 abVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
40

solutely 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 

41

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. 

42

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 

43

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. 

44

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 elseVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
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where. 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 disVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
46

trict, 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 prodVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00052 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
47

ucts, 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 

48

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 cornbased 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 

49

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. 

50

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. 

51

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-andtrade 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 profitmaking 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 

52

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 marketbased 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 

53

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. 

54

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.

55

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 capacitybuilding 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 

56

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 LandBased 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-andTrade 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/HR2454lAnalysis.pdf.

57

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 

58

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.).

59

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-andtrade 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. 

60

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,

61

http://unfccc.int/files/cooperationlandlsupport/financiallmechanism/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 atVerDate 0ct 09 2002 13:11 Mar 01, 2010 Jkt 041481 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 I:\DOCS\111-39\54578.TXT AGR1 PsN: BRIAN
62

mosphere. 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 

63

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] 

64

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. 

<www.fao.org>

[2] Intergovernmental Panel on Climate Change. 2007. ‘‘Mitigation of Climate 

Change.’’ Report of Working Group III. Cambridge: Cambridge University Press. 

65

[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 projectbased 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 

66

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. 

67

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 

Region Tree Cropland to Forest Pasture to 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 States White/Red Pine $146.10 $136.20

Northeast White/Red Pine $132.90 $122.70

Pacific States Douglas fir/Ponderosa $86.10–$89.70 $79.80–$96.30

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.

68

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.

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. 


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69

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. 

70

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, 

71

1The American Clean Energy and Security Act, H.R. 2454, 111th Cong. (2009). 

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. 

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 valuechain, 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 

72

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 

73

2See, 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. 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<rgen Fenhann, UNEP-Ris<

Centre, CDM–JI Pipeline Database.

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

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

The problem for the CDM has been that in practice, there is no straightforward way to determine whose behavior has been altered because of offsets and therefore who should receive them. CDM regulators have been forced 


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4 In 2008, the first year during which covered entities could use CDM offsets as alternative 

compliance in the EU ETS, just 82 million offsets were surrendered, compared to a maximum 

allowed usage of 8% of the cap or approximately 150 million offsets. Data obtained from the 

European Commission Community Independent Transaction Log. 5 ACES supra note 1, §§ 35, 736. 

to add layers of bureaucracy in an ultimately futile effort to determine which of the 

many applicants are telling a genuine story regarding emissions reductions and 

which would have installed cleaner technology even in the absence of the carbon 

market. As a result, there are lingering uncertainties as to the quality of credits 

that have been and are being issued by the CDM. 

CDM offsets are most often bought for use as alternative compliance in a cap-andtrade system. The impact of their uncertain quality translates into uncertainty as 

to the quantity of emission reductions produced by the overall program of cap, trade, 

and offset. The same fate would likely befall a U.S. system. In the EU ETS, this 

uncertainty has turned out to be less than anticipated because of the global recession. The recession has caused a fall in demand for electric power and hence for allowances and offsets. The fall in demand, combined with free allocation of allowances to emitters has resulted in relatively little use of offsets.4 Even so, approximately 1⁄3 of the reduction between the cap in 2007 and the cap in 2008 was covered 

by CDM offsets. To the extent that these offsets are of doubtful quality, we will 

never know whether a third of the reductions within covered sectors for the first 

year of the Kyoto Protocol were real or mere paper reductions. Unless ACES can 

somehow resolve the lingering uncertainty and criticism that has surrounded determination of baselines and consequent emissions reductions in offset programs, it 

will suffer the same fate. And ACES if enacted, would rely on offsets to a far greater 

extent than does the current EU ETS. 

3. The Clean Development Mechanism Struggles to Produce a Large Offset 

Supply 

Another surprise of the first 5 years of CDM operation has been the difficulty the system has had in producing large numbers of issued credits.

Reliable supply of large volumes of offsets is a necessity for a cost-containment 

mechanism. The problem for CDM offsets has been that in order to maintain environmental integrity, a complex and time consuming regulatory process is required. 

The CDM system works by first requiring that a project apply for registration, after 

which it operates, producing emission reductions. Reductions claimed by a project 

are then audited by an accredited third-party verifier. Only after this verification 

can an offset project owner apply for issuance of credits that can be used for compliance purposes. The ACES offset program is designed to operate in a similar fashion.5

In the CDM, this process has proven fraught with delay. The number of issued 

credits is far lower than had been expected or promised in offset project application 

documents or by early analyses of the market. Estimates vary depending on methodologies used to assess project and country risk, but expected deliveries of CDM 

credits were on the order of several billion tons. Over the past 5 years, the program 

has produced just over 300 million offsets (See Figure 2). Further, the rate of 

issuance, which increased through the early phases of the program, has recently stabilized at about 12 million offsets per month (See Figure 3). At this rate, the CDM 

will issue just 800 million offsets by the end of the Kyoto Protocol compliance period 

in 2012. This slow rate of issuance has been caused largely by the need to carefully 

check registration and issuance requests because of concerns about environmental 

integrity. Because each request and audit trail must be checked individually before 

approval, this is not an area where significant economies of scale have been found. 

Instead, issuance has emerged as perhaps the most significant bottleneck in the 

CDM process, followed closely by project registration.

75

6Data compiled by the author from the CDM issuance database, at http://cdm.unfccc.int/

issuance/index.html.

Figure 2: Cumulative issuance of carbon offsets, known in the CDM as 

Certified Emission Reductions (CERs) by the CDM to July 31, 2009. Total 

issuance is just over 300 million CERs over almost 5 years. 70% of issued 

CERs come from large industrial gas projects (Red). The remainder come 

from a mix of methane capture (Tan), renewable energy (Green), industrial 

energy efficiency (Blue) and natural gas power plants (Grey).6

Furthermore, the composition of the projects generating credits is strongly biased 

towards those that generate large numbers of credits. This dramatically reduces the 

number of requests for issuance that must be reviewed by the CDM. Thus the current rate of issuance is unrealistically high relative to the entire universe of offset 

projects, or a U.S. domestic offset program focused on farms and forests. Shown in 

red in Figure 2 are the industrial gas capture projects, which have generated more 

than 70% of the issued credits to date. These offset projects capture high global 

warming potential gases at industrial facilities. Because each ton of high GWP gas 

is worth between 310 and 11,700 times a ton of carbon dioxide, these projects generate enormous volumes of credits. Industrial gas projects greatly simplify the workload for the CDM, since a few large issuances from these projects make up most 

of the flow of credits. Unfortunately, these are unlikely to be representative of either 

the future of the CDM or of a U.S. domestic offset system. The remainder of projects 

in the CDM portfolio or in any other potential offset portfolio will be significantly 

smaller in scale and so require proportionately more work on the part of regulators 

to process and approve. Thus because of the project mix in the CDM, the market 

may be operating more quickly than is likely for a U.S. offset system.


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7 Ibid.

8The United States is a useful point of reference in this regard since it did not ratify the 

Kyoto Protocol and so is not trying to reduce emissions in order to comply. During 2008 and 

2009, the EIA estimates that U.S. emissions have fallen by between eight and nine percent. 9See, Environmental Protection Agency, EPA Analysis of the American Clean Energy and Security Act of 2009: H.R. 2454 in the 111th Congress (Jun. 23, 2009) 10 ACES supra note 1, §§ 751–756. 11 ACES supra note 1, §§ 501–511. 12 ACES supra note 1, §§ 731, 739, 509, 531. 

Figure 3: The 12 month running average of CDM offset issuance scaled to 

reflect the approximate monthly requirement to meet ACES demand for domestic offsets, 100 million tons per month. CDM issuance rates appear to 

have stabilized at 12 million CERs per month.7

Whatever the ultimate issuance rate achieved by the CDM, one thing the 

system has made clear is that actually producing compliance grade offsets 

is a complex and time consuming regulatory undertaking. Building the regulatory apparatus for the CDM has proven quite challenging, especially as concerns 

about quality have caused greater scrutiny to be applied to each project registration 

and request for issuance. This scrutiny takes time and leads to delays and hence 

a slower than anticipated production rate of offsets. Luckily for those nations and 

firms otherwise dependent on the CDM for cost containment, the global recession, 

by reducing economic activity, has substantially lowered emissions.8 This in turn 

has greatly reduced the need for offsets and the costs of not having them, averting 

what could have been a compliance crisis. 

4. Implications of the CDM example for ACES 

The CDM is the carbon offset system about which we know the most. But how 

relevant is experience gained under the Kyoto Protocol to the ACES offset program? 

I believe that the lessons presented above, of difficulty telling good from bad credits, 

and of the challenges of producing adequate supplies of credits, are likely to be highly relevant to an offset program of the scale contemplated by ACES. 

No offsets system, including the CDM or ACES, can avoid the problem of 

establishing emissions baselines against which actual emissions are judged.

The CDM has illustrated the difficulty of this task. By 2020, the ACES offset program would likely be approximately 20 times the size of the current CDM, if measured in terms of issuance rate (See figure 3).9 Extrapolating from the relatively 

small size of the CDM to the much larger ACES program is necessarily uncertain. 

This is especially the case because ACES contains provisions for both a large international forestry offsets program 10 as well as a large domestic agricultural and forestry offsets program.11 Also, ACES incorporates numerous provisions aimed at improving the quality of its offsets program compared to the CDM.12 Nevertheless, the 

fundamental conceptual and administrative challenges that have confronted the 

CDM are unlikely to be absent from an ACES offsets program. Such a program will 


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13 EPA supra note 9; Congressional Budget Office, Economic and Budget Issue Brief: The Use 

of Offsets to Reduce Greenhouse Gases (August 3, 2009); Energy Information Administration, Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act 

of 2009 (Aug. 4, 2009). 14 Ibid.

struggle to create offsets of undisputed high quality because of difficult baseline determination problems, both in domestic agricultural and forestry settings and in the 

international regime. It will have to confront the reality that its rulemakings are 

potentially subject to challenge in court under the Clean Air Act and/or the Administrative Procedure Act. The CDM Executive Board faces no such scrutiny of its decisions, or potential source of delay, in its implementation. 

In addition, the ACES cap-and-trade program is, far more than the EU 

ETS, dependent on offsets both for cost-controland for environmental effectiveness. Most analyses of the bill indicate that allowance prices will approximately 

double in the absence of a ready supply of offsets.13 In its analyses of the bill, EPA 

estimates that less than 50% of emission reductions that occur due to its enactment 

will be in capped sectors prior to 2030 (See Figure 4). The majority of the bill’s environmental impact hinges on the offsets program having superb environmental quality. If not, then emissions will occur under the cap and be covered by offset credits 

that due not represent real world reductions. In order to accomplish this objective, 

the ACES offset program, both international and domestic, will have to accomplish 

a far higher level of environmental oversight than has proven possible, even with 

the best intentions, within the CDM. 

Figure 4. An EPA projection of the relative proportion of emissions reductions that occur at sources covered by the ACESA cap and at offset projects 

occurring at sources that are not covered by the cap.

In order to avoid chronic shortages of credits, and consequently very 

high allowance prices for covered entities, USDA and EPA will have to accomplish more stringent environmental review of offsets at a much faster 

rate than the CDM—at least 20 times the speed of the current CDM. All economic analyses of the bill suggest that its costs will nearly double if offset supply 

is significantly constrained or delayed.14 Failure to produce the expected offset supply might both cause undue harm to the U.S. economy and undermine long-term 

support for the ACES program. In the event that offset supply proves lower than 

expected under ACES, the EPA and USDA will come under tremendous pressure 

to lower standards in order to increase the rate of supply of new offsets into the 

U.S. emissions trading market. The dependence of ACES on offsets thus exposes it 

to significant environmental and political risks. Insufficient offset supply may drive 

a reduction in standards thus undermining the basic rationale for a carbon market. 

Alternatively, if USDA and EPA are unable or unwilling to increase supply by lowering standards, political support for the program might be severely undermined. 


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6. A Conservation Incentive Program Would Provide Greater Benefits to 

the Environment and to Farmers and Forest Land Owners 

Allocation of a substantial block of the allowance pool to a Conservation 

Incentive Program could be used to accomplish many of the benefits promised by agricultural and forestry offsets. One of the key benefits of offsets is 

that they extend incentives to reduce emissions beyond the scope of sectors covered 

by the cap. Offsets create a potential financial benefit for reductions in uncapped 

sectors, such as agriculture, or uncapped jurisdictions, such as Brazil, to reduce 

GHG pollution even though they are not required to do so. This benefit need not 

be sacrificed just because offsets are not relied upon for cost-containment. The simple solution is to dedicate revenues raised by the auction of allowances towards reductions outside of the cap. 

Revenue produced by the auction of a dedicated fraction of the allowance pool could be channeled towards GHG emission projects on farms and 

forests via a Conservation Incentives Program (CIP). Such a program could 

assist the agricultural and forestry sectors in reducing their emissions. This could 

be accomplished via payment for the cost of particular activities that are known to 

result in lowered emissions or via open requests for proposal for emission reduction 

activities. 

Administration of an agricultural and forestry Conservation Incentive 

Program would be far simpler than an offsets program. The two great challenges of administering an agricultural offset program are measurement and permanence. A CIP, because it is not linked to an emissions trading market greatly simplifies both. Measurement of carbon emissions of similar accuracy and precision to 

covered sources is difficult and costly to accomplish on farms and in forests. This 

is the case both because baselines are difficult to determine in heavily regulated sectors and because site-specific quantification is expensive. At the same time, permanence looms large for sequestration based offsets because reversals threaten the integrity of the cap. In contrast, a CIP could handle these issues more flexibly and 

could more realistically shape an emissions reduction program to fit the needs and 

capabilities of both U.S. farms and forests. A CIP would enable society to capture 

greater benefits from the contributions that farms and forests have to make towards 

reducing emissions while also simplifying the process of farmers and foresters gaining credit for their actions. 

A Conservation Incentives Program could take better account of the cobenefits provided by practices that reduce GHG emissions from U.S. farms 

and forests. Linkage to a carbon market narrows the factors that can be considered 

in paying farms and forests to a single dimension—tons of carbon dioxide reduced 

or sequestered. In reality, the changes that lead to reductions in GHGs will also 

have tremendous co-benefits in terms of water and air quality as well as biodiversity. Farms and forests deserve credit for the additional benefits that a GHG oriented program will provide but will be unlikely to receive it from a carbon market. 

Furthermore, despite a desire to do so, USDA and EPA will have a hard time favoring projects that produce substantial co-benefits in addition to GHG reductions over 

those that solely produce tons of carbon. A CIP, because it is not tied directly to 

the carbon market, would allow USDA and EPA to be more flexible in taking these 

other benefits into account when determining payments to land owners. 

By paying for practices rather than allowing farms and forests to sell 

tons of carbon, a CIP might produce more stable streams of revenue for 

farmers, thus increasing participation. Pricing of carbon offsets is ultimately 

determined by the supply of offsets and allowances in the carbon market relative 

to demand from covered entities. Just as with other commodities, swings in price 

can be quite dramatic. Farmers and forest managers are familiar with the key commodity markets with which they interact and are used to managing the risks associated with price volatility. That being said, changing farm or forest practice in order 

to generate an uncertain quantity of offsets of uncertain price will in practice reduce 

participation. Managing these risks requires forward selling the offset stream at a 

substantial discount to an offset aggregator that is willing to bear both the quantity 

and price risks. While this will reduce the volatility of this novel income stream, 

it will also reduce its benefits to agriculture and forestry, since the carbon offset 

middlemen will demand (and deserve) to be compensated for holding this risk. Because a CIP would not create these risks for land managers, they would both capture more of the financial gains from the program and could participate without incurring increased risks to their operations. 

Finally and not unimportantly, a CIP, rather than requiring the creation 

from whole cloth of a new set of capabilities at USDA and EPA, can take 

advantage of preexisting programs to get moving quickly and with little 

controversy. Regulation of a large offsets market requires a unique set of skills 

79

15The computed general equilibrium and energy system models used to estimate future allowance price and program costs are likely far more reliable at estimating differences between policies than absolute costs. For example, estimates of the difference between a case with offsets 

and without offsets is likely more informative than an estimate of the absolute cost of either. 

and capacities. These take time to develop. In addition, an offset system under 

ACES would require the promulgation of numerous regulations. Many of these 

rulemakings, however carefully managed, are likely to be challenged in court because of the importance of the offsets program to the environmental integrity of 

ACES and to the economic well being of farmers. Rather than spend 8 to 10 years 

developing and then litigating a complex regulatory apparatus for offsets, it makes 

far more sense to grow the currently existing programs via enhanced revenue 

streams from the cap-and-trade system, while shifting their focus towards a new 

emphasis on GHG emission reduction and sequestration. 

7. The Advantages of a Price Collar Over Offsets for Cost-Control 

A price collar or symmetric safety valve sets a reliable and simple upper 

and lower bound on allowance prices in a cap-and-trade system. A price collar places a hard and certain limit beyond which U.S. permit prices would not fluctuate. These trigger points would increase each year at a predetermined rate in excess of inflation over the life of the program. Operating such a system would be relatively straightforward compared to the complexity of a high quality offsets system. 

If allowance prices exceeded the price ceiling, the government would sell allowances 

into the market until the price fell below the ceiling. All allowance auctions would 

be held with a reserve price such that no allowances would enter the market at a 

price below the floor. If an exogenous shock caused prices in the secondary market 

for allowances to fall below the floor, the government could respond by reducing the 

number of allowances released for auction at regularly scheduled intervals until the 

price stabilized at the desired level. 

The history of emissions trading schemes indicates that ex ante predictions of permit prices are generally inaccurate and biased toward overestimation of cost. Experience with cap-and-trade programs to date indicates that 

a lower bound on prices is as important as an upper bound. The U.S. Acid Rain 

Trading Program (ARTP), the Regional Clean Air Incentives Market (RECLAIM), 

and the EU ETS have, more often than not, exhibited prices far below marginal 

abatement costs predicted prior to their enactment. In the ARTP case, this was because abatement costs were in fact far lower than predicted. For RECLAIM, the 

problem was early over-allocation of allowances. In the EU ETS case, this was because of over-allocation in the first phase of trading (2005–2007) and due to recession in the second (2008–present). All three emissions trading markets have also experienced relatively brief periods of very high prices. The truth is that because we 

don’t know with much certainty what marginal abatement costs will be under capand-trade, what fuel prices will be, and the future trajectory of GDP, it is impossible 

to predict with any accuracy or precision what allowance prices will be. Pretending 

otherwise is a misuse of the models used to estimate differences between policy outcomes.15

A symmetric safety valve provides reliable cost-containmentfor covered 

entities planning for compliance with a cap-and-tradesystem. In theory, offsets provide a solution for firms worried about the costs of compliance with cap-andtrade. In practice as described above, the biggest carbon offset market has been unable to provide either cost-containment or the environmental integrity required to 

ensure quantity certainty. Further, there is little reason to believe that the causes 

of this failure can be avoided under ACES. In contrast, a safety valve, because it 

responds directly to the price of allowances, provides far greater certainty that costs 

will not exceed a particular level during any given compliance period. Especially 

under a program like ACES that provides emissions targets until the mid-twentyfirst century, such cost certainty allows for sound long-term investment planning on 

the part of vertically integrated utilities and merchant generators. In Europe under 

the EU ETS, it has proven very difficult for utilities to plan for new generation 

when there is tremendous uncertainty as to the carbon price. Such planning certainty is an important policy objective of any U.S. climate program and a key prerequisite to charting a secure, clean, and low-carbon U.S. energy future. 

A symmetric safety valve will also provide a reliable minimum price for 

allowances that will enable firms to confidently make investments in new 

pollution reduction technologies. The history of cap-and-trade programs is as 

much a story of prices that fell below expectation as above. This result has led the 

clean-tech start-ups that create and venture capital firms that fund new energy 

technologies to ignore carbon prices when planning and investing. A price collar that 

80

16 A lack of quantity certainty is also the major criticism of carbon taxes. 

provides long-term certainty as to the minimum price of allowances in a U.S. capand-trade would allow the innovative firms to count on a certain level of advantage 

relative to traditional fossil generation technologies. Providing this minimum certainty would allow startups to more fully capitalize on the societal benefits that 

their new low-carbon technologies will provide. As a consequence, a price floor would 

increase the provision of these technologies to the U.S. economy, 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. 

While a price collar does not provide absolute certainty of emissions limits, neither would a real-world carbon offset system. It’s important to emphasize what is not given up in the choice of cost-containment strategy. The main criticism of symmetric safety-valve proposals is that they do not provide quantity certainty for climate policy.16 That is, they do not pretend to provide certainty as to 

the level of pollution that will be allowed in any given year. As has been shown 

above, offset systems promise to provide this certainty, but in practice fail to do so. 

Thus the choice between quantity certainty under a cap, trade, and offset system 

like ACES and quantity uncertainty under cap-and-trade with a price collar is in 

reality, a false choice—neither approach can provide both cost containment and certainty as to the maximum pollution level. In fact, given the low allowance price history of emissions trading programs, it is at least likely that a price collar would provide superior environmental results due to its ability to reduce the supply of allowances when prices fall too far. 

8. Conclusions 

Experience with the CDM has shown that large compliance grade offset markets 

fail to provide either adequate environmental integrity or a sufficient supply of offsets. The former results in substantial doubt as to the reality of reductions promised 

by the cap on emissions; the latter in significant cost uncertainty for the program. 

Revenues raised from the auction of a dedicated block of allowances could be used 

to create a domestic agricultural and forest GHG pollution reduction program that 

better matches the needs and capabilities of these sectors. By doing so, farms and 

forests could dramatically reduce their GHG emissions while avoiding the costs and 

uncertainties associated with the implementation of a large offsets program. In addition, they could do so today, rather than after the administrative rulemakings necessary to implement the program have occurred. Finally, because such a program 

would not be tied to carbon markets, it could take better account of the many cobenefits provided by improved GHG management on farms and in forests. 

A symmetric safety valve creates certainty as to the range of possible allowance 

prices. This allows firms to plan for a worst-case and allows new technologies to 

fully capitalize on a minimum guaranteed return from the carbon market. It also 

insures that the political calculus of costs and benefits central to the enactment of 

the cap-and-trade program is in fact realized in practice.

The CHAIRMAN. Thank you, Dr. Wara. 

Well, I will ask the four other panelists what they think of Dr. 

Wara’s proposal to use additional incentives instead of going the 

offset route. 

Dr. MURRAY. Mr. Chairman, I think it is an intriguing proposal 

and one that has been discussed in the policy discourse in many 

circles, the idea of having an agricultural program that is supplemental to the cap-and-trade program rather than an integral part 

of it. I think some of the challenges associated with that would be 

whether or not the volume of financing could come to the scale necessary to address the problem. The scale of the carbon market in 

the United States to address the problem could be on the order of 

tens of billions of dollars, and whether or not the Federal appropriations process would bring that much money to the table is, I 

suppose it is a question for you and your colleagues. 

So I think that is important. I also think it is important to point 

out that regardless of whether it is the government paying for it 

through supplemental program or the market paying for it through 

81

an offset system, quality is still important. We want the government to get what they are paying for as well, and so some of the 

issues associated with ensuring the integrity of the program I 

would submit apply to a public supplemental program as well as 

a market program. 

Dr. MCCARL. We have been running a program that looks an 

awful lot like what he describes since the 1920s in the form of erosion programs. I do remember that in 1985 or so when I was at 

Oregon State, someone indicated that 90 percent of the money to 

control erosion was spent on land that didn’t have an erosion problem. There is a huge targeting issue here and it is not unique to 

cap-and-trade. It is just unique to how we do this and how get this 

thing working. 

Dr. SOHNGEN. I would just reiterate for the most part what the 

two previous folks have said and add that in my experience, part 

of my experience is working as an extension economist and working 

with some farmers on implementing some of the farm bill programs. I just want to reiterate what Brian said earlier, it is, in 

fact, the measuring, monitoring, verifying function of the government with respect to some of the programs that are in place for environmental pollution improvement are quite limited and they 

would appear to be just as difficult to achieve as what we would 

have in a private market. I would actually think that the private 

market might actually be better at doing some of those things, at 

getting around some of the measuring, monitoring and verifying 

issues. The incentives are, perhaps, better for the private market 

because they have an incentive to figure out contracts, to figure out 

measuring and monitoring schemes that work effectively, efficiently 

and cheaply. Actually doing it through a market has some great 

benefits as opposed to doing it through the government. 

The CHAIRMAN. Dr. Hayes, any comment? 

Dr. HAYES. I did have some concerns when I read the ACES Act 

about the viability of international offsets, especially for the reasons that he mentioned. I do see a lot of money leaving the United 

States and the potential for scandal if those programs are not run 

effectively. However, if you look at the ACES Act itself, it has enormous reliance on international offsets, and I am not sure that 

worldwide agriculture can come up with the needed carbon savings 

unless you use some kind of offset program. 

One thought that I had is that it might be possible to pay farmers to sink char, which is really a form of coal that comes from 

burning wood and cellulose in the absence of oxygen and pay them 

to sink that rather than to participate in a domestic offset program. 

That may have potential. Otherwise I would see a problem with 

the approach because they can’t come up with the kind of numbers 

we need in the absence of a large afforestation effort. 

The CHAIRMAN. Thank you. 

Dr. McCarl, it is my understanding that EPA utilized your model 

in doing their analysis of H.R. 2454. Is that correct? 

Dr. MCCARL. My model was one part of their total analysis. They 

used quite a few others. 

The CHAIRMAN. Okay, but can you walk us through how you arrived at the conclusion that millions of acres could shift from crop 

production to trees? 

82

Dr. MCCARL. Well, one way that it does happen is that a ton of 

wood is about 50 percent carbon, which means when you convert 

to carbon dioxide, it is roughly 4 tons. If you take wood now and 

sell it for a pulp price, you get somewhere $60 a ton or something 

maybe a little more than that. If you have a $50 a ton carbon dioxide price, then that is $200, meaning it is three to four times as 

valuable as the current use of much of our forested lands, and this 

would yield a much greater conversion of land into forestry. So the 

model looks at basic economic forces. It looks at the opportunity 

cost of the land and its existing use. It looks at the new return 

streams and it moves land to the point the economic value is equalized across all the possible uses. 

The CHAIRMAN. Thank you. 

Mr. Goodlatte. 

Mr. GOODLATTE. Well, thank you, Mr. Chairman. This is fascinating. I have way more questions than I can ask in 5 minutes. 

I hope you will consider doing a second round here. 

I think the Chairman asked a very important question that 

opens the door to an appropriate discussion about this legislation, 

and that is asking the rest of you your opinion of Dr. Wara’s alternative solution, because I find that alternative solution intriguing 

as well. I think that Dr. Murray hit the nail on the head when he 

criticized it by saying it would cost tens of billions of dollars. In 

fact, it would cost tens of billions of dollars per year for the rest 

of this century to substitute that alternative to the cap-and-trade 

proposal that is in this legislation. To suspect that the Congress 

would vote for legislation that would provide tens of billions of dollars to accomplish that and then to either offset reductions in other 

government spending or raise revenues to pay for it is exactly why 

that approach is not likely to happen. 

But that also exposes the problem with this legislation itself because the fact of the matter is, this costs our society tens of billions 

of dollars and the cap-and-trade legislation simply does an excellent job of masking that cost. It is in the form of increased costs 

ultimately to consumers, not only in food prices, as we see reflected 

here, but also in terms of increased costs of electricity, of other 

sources of energy that are directly used by consumers, increased 

costs of manufactured goods, even increased costs of services are all 

masked in this cap-and-trade proposal that will indeed cost tens of 

billions of dollars per year to our society. It will end up costing us 

millions of jobs, and a much bleaker future which leads back to a 

question that I am not sure any of you came here to answer because you are all economists. Is that correct? You are not an economist? Okay, well, what is your——

Dr. WARA. I am a lawyer and I used to be a geochemist. 

Mr. GOODLATTE. All right. Well, the chemist might get a little 

closer, but the real question here is, what kind of cost-benefit analysis of this entire process is being done relative to whatever environmental benefits are derived from doing this relative to this 

enormous cost that we are putting through this system? So my 

question to each of you is, are you familiar with another alternative 

that has been proposed by another, I think he is also an economist 

but I am not sure, a fellow some of you are probably familiar with 

named Bj<rn Lomborg, who has a written book called Cool It. He 

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has written some other books in this area. Are any of you familiar 

with Mr. Lomborg’s work? Basically he says global warming exists, 

global warming is at least in part and perhaps significantly caused 

by human activity but that cap-and-trade, the Kyoto protocols and 

even the kind of undertaking that Dr. Wara would propose. It is 

an enormous waste of resources that redirects huge sums of money, 

trillions of dollars over the course of this century for a very limited 

marginal benefit in terms of the climate change that will be affected. That it would make much more sense to devote multiple 

times the amount of money we put into research today into developing with government resources but still a fraction, 1⁄20 of the cost 

of this legislation, developing more efficient alternative sources of 

energy that are carbon emission-free whether it is wind energy or 

solar or geothermal or hydrogen, or things we haven’t even thought 

of. All of which are today far more expensive than our traditional 

sources of coal, oil, and natural gas. Even nuclear power, which 

somehow this legislation gives very short shrift to and it is totally 

carbon emission-free, and by far the most efficient way to generate 

energy that we have available to us right now today. This would 

be the better alternative to pursue and that we are also by this expensive cap-and-trade process foregoing the opportunity to spend 

those resources on cleaner water, fighting diseases, eliminating 

hunger around the world. Instead, we see from Dr. Glauber’s testimony earlier, and from some of your testimony as well, confirming 

that this is going to add to the cost of food fairly significantly. One 

of you, I think it was Dr. Hayes, said that corn prices will be 28 

percent greater than they otherwise would be than the baseline 

and soybeans 20 percent by 2023. Dr. Glauber said hog production 

will be 23 percent lower and beef slaughter ten percent lower, 

which would yield higher prices again in the 20 to 30 percent range 

for several of these commodities as well. Why are we doing that? 

Do any of you want to take on that basic question that each one 

of us had to do when we voted for or against this legislation, and 

say is there a better alternative to this whether it is Dr. Wara’s 

or something else that would address this problem without going 

to this enormous diversion of very scarce resources? Dr. Murray? 

Dr. MURRAY. Thank you, Congressman. In response to the first 

part of the question——

Mr. GOODLATTE. You could call it a diatribe if you want. I 

wouldn’t be offended. 

Dr. MURRAY. That is fine. It was a fine one at that. You may be 

aware of a study that was done by Lord Nicholas Stern, former 

Chief Economist of the World Bank and is now in the United Kingdom. 

Mr. GOODLATTE. I am familiar with it and of the criticism of it. 

Dr. MURRAY. And of the criticism, and it is not without criticism. 

But it is in my view the most comprehensive study that has actually tried to look at the evidence from the bottom up looking at a 

different range of empirical evidence and projections that are out 

there from the damage from climate change, and so you are aware 

of the conclusion that the benefits of taking action exceed the costs. 

Another set of studies or some other work that was really more 

commenting no that is by an economist at Harvard, Martin 

Weitzman, that looked at it. He concluded somewhat glibly and 

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rather famously that the Stern review is right but maybe for the 

wrong reasons, and his point of view is that this is better characterized as a risk problem and so we don’t really—there is a distribution of possible climate outcomes and towards the middle of 

that distribution——

Mr. GOODLATTE. I am going to interrupt for a second. Mr. 

Lomborg says that when you take a look at a wide array of studies 

that have been done in this area, the outcome is that you lower the 

temperature if you take the mean average of those studies by less 

than a 1⁄2° centigrade, I think he says 2⁄10° centigrade by 2080. So 

I don’t——

Dr. MURRAY. Well, I will have to look at Dr. Lomborg’s——

Mr. GOODLATTE. I commend it to you. I think he is very pragmatic about this and does not shy away from the problem, but 

takes the solution in a very different direction. He is part of the 

so-called Danish school or Copenhagen school, which seems a little 

ironic that they are going to Copenhagen in a couple of weeks. He 

would very much disagree with the conclusions that most of the 

people going there are headed to draw. Thank you. If you want to 

finish, I will be happy to——

Dr. MURRAY. Just to say that there is the notion that there is 

a small probability of high what economists and other analysts call 

fat tail risk. At the very upper end of the distribution, there is a 

small probability of truly catastrophic costs that if you look at it 

from an insurance perspective that that provides a strong economic 

incentive for action. But I don’t want to take more time than I have 

available to me. 

Mr. GOODLATTE. Well, the Chairman is giving me leave to let 

others jump in even though I am way beyond my time. 

Dr. MCCARL. I happen to be the ag economist much to the chagrin of some people I work with that said climate change is beneficial for agriculture on a national basis, and the same thing in forestry. So I do believe we need to look at cost-benefit of this stuff. 

Risk is a pretty big issue. Galveston got wiped out by a hurricane 

a couple years ago and there are 62 meters of potential sea-level 

rise between Greenland and Antarctica, so there are some areas 

that are pretty vulnerable and at pretty big risk in this particular 

arena. I don’t think there is——

Mr. GOODLATTE. So what do we say to those people who say that 

there is a huge risk of various types of diseases that are on the rise 

around the world and we don’t have the resources to address those. 

If you are in a developing country you won’t have the resources to 

develop clean water and better other land management techniques 

because we are going to divert these costs into an artificially high 

price of energy. This is really what cap-and-trade is all about, creating a higher price for energy in order to encourage and allow the 

development of other competing sources of energy that are cleaner 

to be able to compete in that environment. That is really the net 

effect of cap-and-trade, is it not? 

Dr. MCCARL. I think we have an—you have an extraordinarily 

difficult job to balance the competing uses for funds. I do think if 

we don’t act on the climate change issue that we are seen as a 

world leader and the rest of the world won’t act on the climate 

change——

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Mr. GOODLATTE. Sure, but we are a world follower on this issue. 

I mean, Europe has been dealing with cap-and-trade for a long 

time with limited success, if at all. Quite frankly, they only addressed this with regard to fixed sources of energy production like 

power plants and so on. Their cap-and-trade doesn’t include transportation and so on. And Lomborg doesn’t say do address this. He 

says you are better off doing things to prepare for sea-level rises, 

you are better off doing pragmatic things like developing a trend 

where roofs are white instead of dark colors and other things that 

would help to deflect the impact of the rising temperatures. We 

should develop alternative sources, which if you put more money 

into doing that you could come up with non-carbon sources of energy at a faster rate than cap-and-trade will bring, without as 

much cost. 

Dr. MCCARL. Well, let me make two real quick points. I am on 

the National Academy panel on limiting climate change and our report is written, and I can’t really say what is in it yet but something that—I mean, a portfolio solution is obviously going to be 

something we have to pursue with R&D subsidies as well as other 

actions to limit emissions. I will just give a couple of words of caution, one of which is, in 1977 I was asked by the Office of Technology Assessment to look at making corn into ethanol including 

making corn stalks into ethanol which we would be able to do in 

2 or 3 years. Today that is known as cellulosic ethanol, and today 

we still say it is about 5 years off. I mean, picking the winners——

Mr. GOODLATTE. My livestock farmers are praying for cellulosic 

ethanol but they have been praying for it for a very long time. 

Dr. MCCARL. Since at least 1977, I would suggest, and in the energy bill we have requirements we are going to have to meet in 3 

or 4 years, but I am not sure we know if we really will get there. 

I think the portfolio solution is it. I think that he is right in that 

we do need big R&D subsidies for some of these sorts of things. On 

the other hand, I think that is something that is going to be substantially in the future before it completely pays off and we may 

need some other actions like cap-and-trade to get things going. The 

real question is one of what is the long-term damages and are the 

costs worth the damages. Actually, from a very strict accounting 

standpoint, it is difficult to justify some of the actions that have 

been talked about in terms of the damages that we are seeing if 

you really do it on a financial cost-benefit analysis basis. 

Mr. GOODLATTE. Anyone else? Dr. Sohngen. 

Dr. SOHNGEN. If I could just comment here, I actually appreciate 

that you brought up Bj<rn Lomborg’s work. Our forestry study was 

part of his most recent set of estimates where he looked at 16 different climate options, and forestry ended up pretty well. It scored 

at number eight, so the forestry offsets look pretty good relative to 

other options that were substantially lower than that. 

Mr. GOODLATTE. Great. Our problem, however, is that it takes an 

awful lot of land out of agricultural production to accomplish it. 

Dr. SOHNGEN. Sure, sure. 

Mr. GOODLATTE. And here is another question I have about that. 

I understand the short-term benefit of that, but ultimately you 

have to do something with those trees. You have huge forests of 

trees containing a lot of carbon in them, but as trees get older they 

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take in less carbon and at some point they start dying and they are 

going to either give that carbon back off or you have to do something else with it. What is the long-term solution there? We won’t 

be around when this happens, but I would still like to know. 

Dr. SOHNGEN. I hope we are around when some of it happens, 

but most of our models actually assume that forests, at least productively managed forests, which is roughly 600 million hectares to 

1 billion hectares, are managed. Those forests will continue to be 

managed so that the harvested products from those, they will be 

removed and replanted to forests. So for the most part——

Mr. GOODLATTE. But what are you going to do with the carbon 

when you remove it from those forests? 

Dr. SOHNGEN. It works its way into products. About 30 percent 

of it works its way permanently into forest products. The other 60, 

70 percent goes up in the atmosphere and then is within the next 

10 to 15 reentered into the forest through the regrowth of the forest. So the cycle actually can continue on and you can allow the 

harvesting. It has a large, about a 30 to 40 percent reduction in 

timber prices by 2030 or so. 

Mr. GOODLATTE. You referred in your testimony to $500 per hectare or basically $200 an acre in remuneration. What is that? Over 

what period of time is that? 

Dr. SOHNGEN. That is an asset value so the present value today. 

That is for every——

Mr. GOODLATTE. So once you make the decision to do this, that is the offset value you will get forever, it is not $200 per year? 

Dr. SOHNGEN. Right, and that is allocated across every hectare 

in the world. We don’t anticipate that every hectare in the world 

would get that. 

Mr. GOODLATTE. How is a farmer going to make a living converting his farm into trees if he is only going to get $200 per hectare plus what he can sell his wood for? 

Dr. SOHNGEN. Well, that includes a lot of places like Boreal forest, which are pretty low value trees, so if you actually looked at 

the distribution of it around the world, a farmer in Ohio for that 

same allocation would get something like $70 to $80 per acre per 

year rising over time. So, by 2030 they conceivably are getting $120 

per acre per year. So that asset value is a very rough estimate aggregated across lots of different hectares in the world, but when 

you look at individual places, the numbers are pretty astounding. 

Mr. GOODLATTE. So if we could eat trees, we would really be in 

good shape. 

Dr. SOHNGEN. We might make fuel out of them some day. 

Mr. GOODLATTE. Well, I agree, but then you are going to put that 

carbon back in the atmosphere. 

Dr. Hayes? 

Dr. HAYES. I am not brave enough to be able to do cost-benefit 

analysis of this Act but I have——

Mr. GOODLATTE. I wish somebody had, though. Is anybody aware 

of a really——

Dr. HAYES. There is a ranking of different worldwide policies and 

this kind of climate change comes up poorly. I was surprised how 

poorly it does come up. I believe there were three Nobel Prize winners on that committee so——

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Mr. GOODLATTE. Would you send to the Committee information 

on how we can find that? 

Dr. HAYES. I will do that. 

Mr. GOODLATTE. Thank you. 

Back to you now. 

Dr. WARA. One small point I would make is that I agree with the 

sense of your comment, and the broadest sense of what Lomborg 

said in that innovation is the solution. It is the way out of this 

problem. We need to create a climate of innovation in the energy 

sector to help us find ways to make energy that is cost-effective relative to fossil energy, but does not create the environmental harms 

that fossil energy appears to create in this context. Cap-and-trade 

is one of the ways to get there in the sense that it produces a price 

signal from which forms of energy that don’t produce carbon dioxide can benefit. I will tell you, when I talk to clean tech companies 

in Silicon Valley and the venture firms that fund them, one of the 

most significant components to their mind of the proposal in ACES 

is the reserve price in the allowance auctions. That there would be 

a floor on prices so that firms would be guaranteed at least $10 per 

ton carbon and that allows these clean tech firms to plan, to say 

if we can compete with coal at a $10 carbon price, then we have 

a viable product. It is that price signal that spurs a lot of investment and, potentially, innovation and more cost-effective innovation than really large government programs can necessarily provide. 

Mr. GOODLATTE. Well, thank you for that very generous allocation of time. 

The CHAIRMAN. The chair thanks the gentleman. 

The gentleman from Minnesota. 

Mr. WALZ. Thank you, Mr. Chairman, and I very much value the 

Ranking Member. He is a very valuable asset to this Committee 

and to me personally, challenging me to look at things differently. 

I think that line of questioning was very intriguing, one that I am 

interested in because I would have to agree with the Ranking 

Member on this. I am more than willing to look at other alternatives. I want to thank each of you for bringing that. That is what 

we are supposed to be doing as we are trying to work this out and 

trying to get there, what is going to happen. So I thank the Ranking Member for that. He does challenge me to look at those. 

And there are some things that came up. One of the things I 

have been looking at, I was using the Other Side of the Coin study, 

the New York University Institute, the Policy Institute there, talking about the cost-benefit analysis, and what we are doing when 

we look at agricultural sectors, which is the farm—the Agriculture 

Committee’s responsibility is disaggregating that data—but losing 

out of everything else that was happening in the economy. Do you 

think that is a weakness of what we are doing here in trying to 

question you on this without looking at the macro level of the entire program, whether it be cap-and-trade or some other type of 

ability to look at carbon, if that makes any sense? What we are 

doing as I see us pinpointing on this and we may see a little offset, 

we may see a few changes, but according to them, the cost-benefit 

analysis is 9:1, 9 positive. One of the best investments we could 

make is to get this country going. I think it is where the Ranking 

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Member was going, and I agree wholeheartedly with him. If we 

don’t couple this with an energy policy that starts to move us away 

from carbon-based fuel, it is going to be very difficult. 

So the Ranking Member will be glad to know that I put together 

a coalition with my Republican colleague from the 3rd district, 

labor, chamber of commerce and groups to ask for the overturning 

of the nuclear moratorium in Minnesota. I don’t believe I could 

support this legislation without simultaneously working in that regard. 

So what I am asking you is that as we come here today and we 

are looking at the impact on agriculture, we can’t do that, can we, 

without looking at the whole sector that this impacts? 

Dr. MCCARL. Eighty-four percent of the emissions are from coal 

and fossil fuels. About six percent are directly from agriculture and 

then there is some reduction due to forests. Now, on a global basis, 

agriculture is a little bigger than that, but no, it doesn’t make 

sense to look at the impacts of this on an agriculture-only basis. 

Mr. WALZ. Does anybody else have anything on that one? 

Dr. SOHNGEN. Just one note. We did—as part of our analysis for 

the Copenhagen consensus, we analyzed offsets in forestry alone as 

a policy to combat climate change versus forestry as a synergistic 

policy that was a complement with energy policies, and when it 

was a complement the benefit-cost ratio was 1.6:1. When it was 

alone, it was less than 1:1, so it was not—you shouldn’t do offsets 

if you are not going to do other things. 

Mr. WALZ. Right. Very good. 

Just as all of you are experts in this, I have been quoting and 

using a little bit of the study out of the University of Tennessee. 

They are using POLYSYS for modeling. My concern is getting 

broad-based modeling. I think many of you in here, Dr. McCarl especially, have put together some really good studies, very helpful 

to me. My one big concern, the Chairman of the whole Committee 

mentioned the different baselines, an EPA baseline, ag baseline. 

What about the baseline of doing nothing? And I heard Dr. Murray 

talk about this as insurance risk. I think that is very intriguing, 

meaning if we just sat and don’t do anything, what is that going 

to do? Do we have that data in your mind? 

Dr. MURRAY. I will just speak maybe in an attempt to clarify or 

maybe to understand when you refer to the different baselines, I 

want to make sure——

Mr. WALZ. Yes. If EPA regulates, here is what is going to happen 

to agricultural costs and the input costs; and here is what USDA 

has according to today; here is if we use RFS standards; here is we 

have multifaceted offsets that are well crafted in my mind; and 

then one of those being, what is this going to look like if we do absolutely nothing and the climate continues to change on what is the 

perceived trajectory. 

Dr. MURRAY. Sir, the multiple baselines that you are referring to 

tend to refer to different policy options so there is really one baseline, which would be what happens in the future under business 

as usual in terms of on the cost side, and all these analyses have, 

as your question suggests, really focused on just the cost side. So, 

the reason that EPA and USDA maybe look at different baselines 

is, they want to say well, here is what happened by putting in the 

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renewable fuel standard in the energy bill, how did that actually 

affect the baseline. But, you have to say since that is now part of 

law that that is part of the baseline and so they kind of look at 

different variations to see how each of those things contributed to 

emission reductions goals, and how each of those things impacted 

economic goal. 

Mr. WALZ. And if we look at, like you said, there is a wide spectrum here. I know that Natural Resources Defense Council says 

within 90 years this is going to cost us nearly $2 trillion a year to 

sit and do nothing—disease increases, water use, natural disasters. 

So does that factor in? 

Dr. MURRAY. I would say in any of the studies that you have alluded to, the government studies do not generally look at the environmental damages associated with no action. So to answer your 

question, no, those are not factored into the baseline in these studies. Do they need to be? I think the suggestion of the last 15 minutes of conversation has been yes. 

Mr. WALZ. I think I am looking at this as Pascal’s wager. I don’t 

want to find out on that end. And my question is, is that the best 

way to go. I think what the Ranking Member is saying is, I am 

searching for those things. I am very intrigued by this idea of us 

investing in new buildings, those types of things. We tried to do a 

green schools build type of thing. But I was under the impression, 

and the way I saw it with sulfur dioxide and everything, that capand-trade is the more free-market way to do that than having government dictate what your buildings are going to look like. Would 

you respond to that? 

Dr. MCCARL. Well, I wanted to say two things. The energy modeling forum has been doing a bunch of studies under different stabilization scenarios, they call them, and one is: what happens if 

you don’t do anything; what happens if you try to bring it so we 

never get above 700 parts per million; what happens if you try to 

get it to 500 parts per million of carbon dioxide in the air, and so 

they have a whole history of those and what the costs are and what 

the benefits are and the GDP costs and those kinds of things. The 

big hope with cap-and-trade is that there have been some judgments made that there is excess carbon dioxide being put into the 

atmosphere and we call it an economic externality. I mean, if you 

drive a great big car, you don’t care about how much carbon dioxide 

is coming out. If we put a price on those emissions, that will stimulate private industry to make investments and it is better than everybody trying to pick winners. We let the private market pick the 

winners. And so that is what the cap-and-trade is all about, and 

in fact, if the best technology option is to have white roofs and develop nuclear energy, et cetera, it is something we think the private 

market will discover in reacting to these things through the capand-trade. 

Mr. WALZ. And I think that is interesting because the biggest—

Mr. GOODLATTE. Would the gentleman yield? 

Mr. WALZ. Absolutely. 

Mr. GOODLATTE. Well, thank you. I think the gentleman’s question is a very good one, and in fact the trade part of cap-and-trade 

is very much the free-market approach. When you are talking 

about a poison like sulfur dioxide that is directly harmful to human 

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consumption whereas carbon dioxide, which we are putting out a 

lot here today as we talk about this issue, is not. I think that was 

a very good use of cap-and-trade because it did use the free market 

to eliminate something that very definitely and directly and as 

quickly as possible——

Mr. WALZ. So the gentleman’s point is, it is the carbon itself——

Mr. GOODLATTE. Is it the cap, which is a government decision 

about what is appropriate here, and the cost-benefit analysis, comparing it to other alternatives. 

Mr. WALZ. Which I have to be honest is one of the biggest challenges for me as I am very—if we do this, and I believe we need 

to get it done, if it doesn’t have as big a impact as it needs to have 

to reverse these trends, that is the fear. I don’t want to pull the 

car halfway out of the ditch, I want to pull it all the way out of 

the ditch, and that is why I am searching for these, and I am more 

than open to the other alternatives. I know this gets clear to the 

extreme of geo-engineering if that is where you want to go, and 

there are some intriguing things there, 2,000 ships blowing water 

into the air in the middle of the ocean to cool the temperature. I 

appreciate that, and as I said, I appreciate all of you for your research and the Ranking Member for always challenging assumptions for me. I appreciate that. I yield back. 

The CHAIRMAN. I had a follow-up question but Dr. McCarl just 

answered it, so the gentleman from Virginia, if you have questions? 

Mr. GOODLATTE. I have one additional question. Dr. Hayes’ testimony discusses a presentation of his model to agriculture producers. As many of us might have expected, farmers and ranchers 

have grave concerns about changes in commodity prices and land 

conversion. In each of your opinions, can an offset program be created that does not change the structure of the agriculture sector in 

pretty dramatic ways, and how do we accomplish that if you think 

that can be done? Dr. Murray, I will start with you. 

Dr. MURRAY. I guess I will go first. You know, I will give you a 

typical economist answer: what do you mean by dramatic? I think 

that in some ways it doesn’t work unless change is substantial, unless the change on the landscape is done in such a way to reduce 

greenhouse gas impacts. So 30 million acres going from agricultural lands to forest, that is about one percent of the total landscape of the United States. It is about two or three percent of the 

agricultural landscape. Certainly it is a big number, but it needs 

to be looked at in the context of the entire landscape. I think of 

that as delivering benefits in terms of achieving the climate goal 

more cost effectively, then that is probably a transformation worth 

making. I don’t think transformations should be done just for the 

purposes of transformation. It needs to be the end goal, which is 

to reduce greenhouse gases. 

Mr. GOODLATTE. Is your answer no, an offset can’t be done without changing the structure of the agricultural sector? 

Dr. MURRAY. If I had to answer yes or no, I would say no. 

Mr. GOODLATTE. Dr. McCarl? 

Dr. MCCARL. When I look at this thing, I see that without the offset program by mid-century, corn prices will be down to $1.50. 

With the offset program, it will be about $3. I think there is very 

substantial change in the structure of the agricultural sector that 

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is going to happen whether or not we do offsets. I think the offsets 

might make for a bit wealthier agricultural sector, and perhaps 

keep more people and resources in rural areas and agriculture than 

would happen otherwise. But, in terms of are we going to produce 

exactly the same goods in the same places, the offsets would dramatically change that around; so will climate change. 

Mr. GOODLATTE. Dr. Sohngen? 

Dr. SOHNGEN. Yes, sir. That was a great question. Just real 

quickly, I agree with the previous speakers and the answer is no, 

from my perspective, there will be massive structural change. But, 

Dr. Bruce McCarl said it right, that it will involve the net transfer 

of wealth into the landholding sector in this country. So that would 

be the effect of a cap-and-trade system. It would probably be a benefit, a large benefit, whether it comes through some renewable fuel 

standards that push biofuels, or whether it comes through a capand-trade system that pushes carbon sequestration in the landscape. Land becomes more valuable so people who own land gain 

quite substantially from the cap-and-trade system. 

Mr. GOODLATTE. Dr. Hayes, you heard the direct brunt of the 

criticism from the farmers. What do you think? 

Dr. HAYES. My research agreed with Dr. McCarl’s and Dr. Glauber’s and that is that taking those millions of acres of crop acres, 

that is where the big costs occur in terms of food price increases. 

And if you are looking for 50 million acres of crop acres to avoid 

deforestation, the CRP program has about 30 million that potentially could be afforested, and we have about 90 million acres of 

pasture that has enough rainfall to grow trees, and then surely 

there is another 20 million acres you can find there. So I would differentiate between crop acres, pasture, and CRP and you can get 

almost as much good out of CRP and pasture and let the crop acres 

remain in crop production. 

The CHAIRMAN. Thank you. 

Dr. Wara? 

Dr. WARA. I think a large-scale offset program can’t work unless 

practices are changed. The point that Dr. McCarl made is the key 

one. Whether it is climate change or change in demand for meat 

in developing countries, the agricultural economy of the United 

States and globally is going to change over the next several decades 

in dramatic ways. This could be a part of it or it might not be, but 

there is no—the reality is that because of the growing wealth of developing nations especially, agriculture will be changing, and the 

question is how. 

Mr. GOODLATTE. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The chair thanks the gentleman and the chair 

thanks our witnesses for a very interesting discussion today. 

Under the rules of the Committee, the record of today’s hearing 

will remain open for 10 calendar days to receive additional material and supplementary written responses from the witnesses to 

any questions posed by a Member. 

This hearing of the Subcommittee on Conservation, Credit, Energy, and Research is adjourned. Thank you very much. 

[Whereupon, at 1:30 p.m., the Subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

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11139018
100


11139019
101


11139020
102


11139021
103


11139022
104


11139023
105


11139024
106


11139025
107


11139026
108


11139027
109


11139028
110


11139029
111


11139030
112


11139031
113


11139032
114


11139033
115


11139034
116


11139035
117


11139036
118


11139037
119

Æ


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