U.S. Environmental Protection Agency
Office of Atmospheric Programs
EPA Analysis of Waxman-Markey
Discussion Draft: Modeling U.S. Forestry
and Agriculture Offsets
Adam Daigneault
U.S. Environmental Protection Agency
Climate Change Division
RFF/EPA Workshop
Modeling the Costs and Volumes of GHG Offsets
May 12, 2009
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Introduction
• Forestry and agriculture recognized for potential low-cost GHG
mitigation by enhancing sinks, reducing emissions, or growing
feedstocks that can be substituted for fossil fuels
• Some policies have proposed to limit offsets:
– MMV, leakage, and additionality uncertainty
– Concern over „flooding‟ the market
• There have been policy suggestions to address this:
– Discount or exclude practices
– Cap number of offsets
– Provide allowance set-asides
• Here, we use an updated dynamic partial equilibrium model of U.S.
forest and agriculture sectors (FASOM-GHG) to estimate land-use
offset portfolio under the provisions of the Waxman-Markey
Discussion Draft
– Limit of 1,000 MtCO2e/yr from domestic offset sources
– Offsets not available from coal mine or landfill CH4 because proposed to
be covered under NSPS.
1
Quick FASOMGHG Overview
U.S. Forest and Agricultural Sector Optimization Model
with GHGs (FASOMGHG)
– Economic Objective: Maximize total welfare
– Two Sectors, Four Land Types
•Private timberland, cropland, pasture, developed land
– Dynamic
•70-100 year time horizon in 5-year time steps
– Spatial
•63 US regions and trade with 37 international partners
– 3 GHG Markets
•CO2, N2O, CH4
– Detailed Bioenergy Market
•Corn/sugar ethanol, cellulosic, biodiesel, and bioelectricity
2
Key FASOM Updates
• FASOM has been updated to reflect several changes in policies, as well
as structural improvements:
– New policies that impact land use, such as Energy Independence and
Security Act of 2007 (EISA) / Renewable Fuels Standard (RFS2) and new
Conservation Reserve Program (CRP) provisions in the 2008 Farm Bill.
• Renewable fuels volumes follow prescribed pathway in EISA up to 30 billion gallons
per year from 2022 through 2050.
• Maximum CRP enrollment reduced to 32 million acres.
– Increased spatial (63 ag regions) and temporal (5 year time steps) resolution.
– Energy prices and assumptions follow AEO2008.
– Agriculture sector has updated commodity prices, quantities and acres.
– Forest sector updated using projections from 2007 update of Resources
Planning Act (RPA) and most recent Forest Inventory and Analysis (FIA)
inventories.
– Bioenergy sector now includes starch- and sugar-based ethanol, cellulosic
ethanol, biodiesel, and bioelectricity.
– Stocks and flows of GHGs for more than 50 sources and sinks.
– Projections for land use change for development follow USDA Forest Service
2010 RPA land base assessment.
3
RFS2 Baseline Volumes
Billion Gallons/Yr
35.0
Agriculture-Based Cellulosic
Forest-Based Cellulosic
30.0
Sugar-Based Ethanol
Starch-Based Ethanol
Biodiesel
Billion Gallons Renewable Fuel
25.0
20.0
15.0
10.0
5.0
0.0
2005
2010
2015
2020
2025
2030
Year
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FASOM Sources and Sinks
Sector/Strategy
Forestry
Afforestation
Reforestation
Harvested Wood Products
Basic Nature
CO2
Sequestration
Sequestration
Sequestration
X
X
X
CH4
N2O
Major categories of
source/sinks:
Agriculture
Manure Management
Crop Mix Alteration
Crop Fertilization Alteration
Crop Input Alteration
Crop Tillage Alteration
Grassland Conversion
Irrigated /Dry land Mix
Rice Acreage
Enteric fermentation
Livestock Herd Size
Livestock System Change
Emission
Emiss, Seq
Emiss, Seq
Emission
Emiss, Seq
Sequestration
Emission
Emission
Emission
Emission
Emission
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
1. Forest Management
2. Afforestation
3. Ag Soil C Seq.
4. Other Ag CH4 & N2O
5. Biofuels „Offsets‟
6. Fuel for Production
7. Developed Land C Seq.
Total of 50 GHG
sources and sinks
Biofuels
Conventional' Ethanol
Cellulosic Ethanol
Biodiesel
Bioelectricity
Fossil Fuel Sub
Fossil Fuel Sub
Fossil Fuel Sub
Fossil Fuel Sub
X
X
X
X
Sequestration
X
X
X
X
X
X
X
X
X
Full eligibility assumes
all categories eligible
for carbon payments
Development
Carbon on Developed Land
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FASOM Baseline
MtCO2e/yr
Baseline GHG
1200
1000
800
600
Development
Bioelectricity
MtCO2e/yr
400
Liquid Biofuels
Agriculture CH4
Agriculture N2O
200
Crop Mgmt Fossil Fuels
Crop Soil C Sequest.
0
Forest Products
Afforestation
-200
Forest Management
Total
-400
-600
-800
2010
2020
2030
2040
2050
6
Baseline Land Use
Million Acres
1000
Million Acres
800
125
275
138
274
150
275
162
275
174
277
258
253
249
243
156
175
193
156
128
103
2030
2040
2050
400
85
126
200
245
194
0
2010
Existing Forest
Cropland
Development
2020
Reforested
CRP
• Developed land grows less
than 2%/yr, converting land
from all 3 sources.
• Private timberland gradually
decreases over time
600
257
• Land use is for private land on
conterminous U.S.
Afforested
Pasture
• Cropland also gradually
decreases
– Technological innovation
can meet this demand for
agricultural commodities
with cropland expansion
after 2010
• Increased livestock demand
shifts land to pasture
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GHG Mitigation Potential
in Forestry and Agriculture
• Estimates indicate a reduction in overall potential of forest
and agriculture sector compared to previous results (EPA,
2005).
– Attributed to changes in demand for agricultural commodities,
RFS2 requirements, income and population growth, etc.
– Total mitigation potential assumes that all offsets are available
from start of policy and that no offset categories are discounted.
– Model tracks biomass feedstock and crop management fossil fuel
GHGs, but these are not included as offsets in WM Draft analysis.
• Biomass feedstocks tracked because potential substitute for fossil
fuels in capped sectors.
– Results could be considered an upper bound of mitigation
potential because key assumption is total welfare maximization
with perfect foresight.
• Model accounts for costs of land conversion, but no other „transaction‟
costs as a result of a carbon policy.
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FASOM-GHG Mitigation Potential
Rising Price Scenarios
• Mitigation potential still
quite large and increasing
with price
1800
Crop Management FF
1600
Bioelectricity
–Highest mitigation potential
generally from forestry
practices.
–Abatement from feedstocks for
bioelectricity increases over
time.
Other CH4&N2O
1400
Animal Waste CH4
Soil Sequestration
1200
Afforestation
800
• Relatively small potential from
other agriculture categories:
600
400
200
2010
.
2020
.
2030
.
2040
.
2050
$30 @ 5%
$15 @ 5%
$5 @ 5%
$1 @ 5%
.
$30 @ 5%
$15 @ 5%
$5 @ 5%
$1 @ 5%
.
$30 @ 5%
$15 @ 5%
$5 @ 5%
$1 @ 5%
.
$30 @ 5%
$15 @ 5%
$5 @ 5%
$1 @ 5%
.
$30 @ 5%
$15 @ 5%
$5 @ 5%
0
$1 @ 5%
MtCO2e
Forest Management
1000
–Landowners converting
cropland to forests.
–Use of conventional cropping
methods to produce additional
biofuel feedstocks are netting
out mitigation by farmers that
are implementing agriculture
best management practices.
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Carbon Price Policy Land Use
Million Acres
1200
1000
Cropland
Pasture
Developed Land
125 138 150
162 174
125 138 150
162 174
125 138 150
162 174
125 138 150
162 174
274 274
275 275
277
270 268
266 259
254
263 262
258 253
251
254 253
249 247
247
600
283 267 250 236 224
288 277 263 244 230
296 286 272 256 245
291 290
285 281
275
400
Baseline
.
$5 @5%
.
.
• Up to 45 million
new acres in 2050
over 2010 baseline
(+13%)
• Cropland in 2050
reduced by 23%
2050
2040
2030
2020
2010
2050
2040
2030
2020
$15 @ 5%
• Carbon payments
significantly limit
deforestation and
shift land from
crops and pasture
to forests
• Pasture in 2050
reduced by 10%
0
2010
2050
2040
2030
2020
2010
.
2050
2040
2030
2020
0
.
0
369 375 382 386 386
354 357 361 372 377
342 340 344 354 359
341 330 322 313
305
.
200
2010
Million Acres
800
Private Timberland
$30 @ 5%
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Where is the Ag Mitigation?
• Soil C Sequestration:
– There is already a lot of no-till and reduced- till in the baseline (40+
% and rising over time)
– Rising carbon prices actually results in reduction of no-till acres as
farmers switch into forestry
• Exception is after 2040 for $30 @ 5% scenario.
• Agriculture Non-CO2
– Mitigation spread across several categories (approx 5-20
MtCO2e/yr per practice)
• CH4: manure management, rice, enteric fermentation
• N2O: fertilizer application, pasture conversion, N-fixing crops
– Previous analysis did not show significant mitigation potential
either
• Less than 100 MtCO2e/yr for all prices
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Estimating WM-Draft Offsets
• Marginal abatement cost (MAC) curves for
forest and agriculture sector constructed
using rising price runs.
– With a limit of 1 billion tons per year, offsets
from this sector will likely be non-binding.
– Offsets not discounted in FASOM estimates,
but rather at the time they are traded in for
allowances.
– The feedstocks that are used as substitutes for
fossil fuels in the capped sector always face an
allowance price that is rising at 5%
• Liquid biofuels not a mitigation option
because model was constrained to
prescribed RFS2 volumes for all scenarios.
– Still, important to model all feedstocks and
mitigation options that could impact
competition for land use.
Offset Categories
Afforestation C Sequestration
Forest Management C Sequest.
Soil Carbon Sequestration
Animal Waste CH4
Other Agriculture CH4 & N2O
Capped-Sector Categories
Bioelectricity
Crop Fossil Fuel Mgmt
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Total US GHG Emissions & Sources of Abatement
Scenario 1 - Reference & Scenario 2 – WM-Draft (ADAGE)
12,000
CO2 - Electricity
Million Metric tons CO2 Equivalent (MtCO2e)
AEO 2009
Reference Case
CO2 - Transportation
CO2 - Energy Int. Manufacturing
10,000
AEO 2006
Reference Case
8,000
CO2 - Other
NonCO2 - Covered
Offsets - Domestic
Historical
Emissions
Offsets - International
Int'l Forest Set-Asides
Discounted Offsets
6,000
• The updated reference case for this analysis is
based on AEO 2009. Previous EPA analyses used
AEO 2006.
4,000
• Cumulative 2012-2050 GHG emissions are 14%
(51 bmt) lower in the AEO 09 baseline compared to
the AEO 06 baseline in ADAGE due to the inclusion
of EISA, lower initial (2010) GDP, and a lower
projected GDP growth rate (2.5% in AEO 09 vs
3.0% in AEO 06).
Covered GHG Emissions
(Net of Offsets)
2,000
WM-Draft Cap
0
1990
2000
2010
2020
2030
2040
2050
• WM-Draft allows a quantity of 2 billion metric tons
CO2e of offsets each year split evenly between
domestic and international. The domestic limit is
non-binding in this analysis.
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Offsets by Source
WM-Draft Scenario Comparison (IGEM)
Domestic Offsets - Forest Management
800
Domestic Offsets - CH4 & N2O - Other Ag
Domestic Offsets - Afforestation
700
Domestic Offsets - CH4 from Animal Waste
600
400
300
200
100
Scn 2 - WM-Draft
.
2050
2040
2030
2020
2015
2050
2040
2030
2020
0
2015
MtCO2e
500
Scn 5 - WM Draft No
Int'l Offsets
• The 1,000 MtCO2e annual limit on the usage of
domestic offsets is non-binding.
• Offsets discounting provisions in WM-Draft require
that 5 tons of offsets be turned in for every 4 offsets
used.
• Eliminating this requirement would decrease
allowance prices by 7%, increase the price
received by offsets suppliers by 16%.*
• Domestic offsets supply would increase by 11%
and domestic offsets usage would increase by
39%.*
• In our analysis we assume that landfill and coal
mine CH4 are covered under new source
performance standards (NSPS), they are thus not
available for offsets.
• Allowing landfill and coal mine CH4 as offset
projects instead of covering them under NSPS
would increase cumulative domestic offsets
usage by 45%, and decrease allowance prices
by 9%.*
• Restricting the use of international offsets, as in
“scenario 5 – WM Draft No Int’l Offsets” has a large
impact on allowance prices (96% increase).
• Without the use of international offsets, covered
sectors are forced to find an additional 39 billion
metric tons of abatement.
* Allowance price and offsets usage impacts for these cases were
determined in sensitivities run using a reduced form version of IGEM.
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Conclusions
• Mitigation potential still quite large for sector and
increasing with price.
– Highest mitigation potential generally from forestry practices.
– Abatement from feedstocks for bioelectricity increases over time.
– Relatively small potential from other agriculture categories a result of:
• Landowners converting cropland to forests
• Use of conventional cropping methods to produce additional biofuel feedstocks
are netting out mitigation by farmers that are implementing agriculture best
management practices.
• The 1,000 MtCO2e annual limit on the usage of domestic
offsets is non-binding.
• Limiting, discounting or not allowing offsets has significant
impact on cost of the policy.
– Eliminating 80% discounting requirement would decrease allowance
prices by 7%, increase the price received by offsets suppliers by 16%.
– Eliminating international offsets would increase allowance prices by 96%.
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U.S. Environmental Protection Agency
Office of Atmospheric Programs
Contact Information
Adam J. Daigneault, Ph.D.
U.S. Environmental Protection Agency
Climate Change Division
http://epa.gov/climatechange/economics/
US Environmental Protection Agency
1200 Pennsylvania Avenue, NW (6207J)
Washington, DC 20460
+1 202.343.9109
daigneault.adam@epa.gov
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