Commercial Agriculture Program
Fall 2009
Cap-and-Trade and Greenhouse Gas Markets, 101
By Michelle Proctor, Senior Information Specialist
Cap-and-Trade is a catchy phrase that most people are familiar with but few understand what it actually means to agriculture. Ray Massey, University of Missouri Extension Commercial Agriculture Program economist, will "explain it all to you" via a recently published MU Guide available by internet access.
"Most production processes create by-products as well as the intended product," says Massey. "When a by-product is found to have a negative consequence to the environment, it is considered a pollutant. Reducing the amount of pollutant is deemed necessary to improve or preserve environmental quality."
The government can use performance standards, taxes, or cap-and-trade markets to reduce the quantity of pollutant released into the environment. "Under a cap-and-trade system," Massey explains, "the government imposes a cap on the amount of pollutant that is allowed to be released and then either gives or auctions off the right to emit the pollutant through a market (i.e., the Chicago Climate Exchange, CCX) where polluters trade their allowances in the hope of reducing the cost of complying with the regulation."
The idea behind a cap-and-trade system is that pollution reductions will occur at the least possible cost because polluters can choose how to reduce their level of emissions. If it is cheaper for them to institute activities or build facilities that reduce their emissions, they will do that.
"However," notes Massey, "if it is cheaper for them to pay some other company to reduce its emissions beyond their required cap, then they can use those reductions to satisfy the government mandate for their reduced emissions. Government regulations specify the acceptable level of emissions, the market determines the most efficient way of obtaining that level."
Soil management emits an estimated four percent of Greenhouse Gases (GHG) as opposed to one percent from manure management. Each pound of fertilizer applied to cropland has the potential to be a pollutant, but not every pound actually becomes one. Release of GHGs from fertilizers is dependent on factors such as weather and growing conditions after the fertilizer is applied.
If GHG emissions from soil management were to be targeted, it would likely be by targeting reductions from fertilizer manufacturers. Of course any costs the manufacturer incurs to reduce GHG emissions would be added to the cost farmers pay for the fertilizer.
It is likely that the only cap that can be easily applied to agriculture is manure management because it is a "point source" of pollution, meaning that it is easy to locate the exact source of emissions.
In most cap-and-trade scenarios, all entities that are subject to a cap on their emissions are also allowed to sell credits-any emissions that are below their allowance. "Another, less certain, source of credits is polluting entities that are not subject to the cap. Because it is unclear which sources will be subject to the cap, it is unknown ahead of time which sources will be permitted to sell credits," Ray Massey says. "Usually, the quantity of credits supplied by uncapped entities is limited to a percentage of the total allowable emissions."
Different markets have different rules for who will be capped and who can supply credits. The Regional Greenhouse Gas Initiative (RGGI) in the eastern U.S. establishes a mandatory cap only on electric power plants. However, the RGGI allows landfills and manure storage structures that destroy methane emissions to provide credits to the capped electric power plants.
Agriculture is interested in participating in a cap- and- trade system as an offset provider. However, many environmentalists do not think that current agricultural offsets meet the standards of being additional, measurable, permanent and verifiable. The difference in opinion means that agriculture’s participation in a cap-and-trade system depends on the political process by which future GHG legislation is enacted.