Policy Documents

No. 87 The Kyoto Protocol and U.S. Agriculture

Terry Francl, Richard Nadler, and Joseph L. Bast –
October 1, 1998

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Implementation of the Kyoto Protocol on global warming would require taxes on fossil fuel equivalent to between 25 cents and 68 cents per gallon. A 50 cents-per-gallon tax would increase the average farmer's operating costs between 7.5 percent and 32 percent, depending on the commodity produced. Net profits for farmers would decline between 20 percent and 84 percent, again depending on which commodity is produced. The agricultural sector as a whole would see annual operating expenses increase by $20 billion, an amount equal to 48 percent of net farm income. Hundreds of thousands of family-owned farms are likely to go out of business, with negative effects on rural communities and financial institutions.

1. Farmers have a major stake in the debate over global warming.

Farming generates approximately one-fifth of greenhouse gas emissions in the U.S. Approximately half of man-made nitrous oxide emissions are thought to come from the application of nitrogen-based fertilizers to farmlands, and approximately one-third of methane emissions are traced to bovine flatulence and manure management. According to the Intergovernmental Panel on Climate Change, stabilizing current atmospheric concentrations of nitrous oxide and methane would require global emission reductions of 8 percent and more than 50 percent, respectively.

Agricultural production in the U.S. is an energy-intensive process. Fuel and oil costs account for about 30 percent of a typical farm's total energy bill, while the remaining 70 percent lies hidden in the prices of manufactured inputs, such as fertilizer and pesticides. For example, natural gas typically accounts for 75 percent of the cash cost of manufacturing anhydrous ammonia, a basic feedstock for all nitrogen fertilizer products. Energy accounts for half or more of the underlying cash production costs for nearly all of a farm's manufactured inputs.

For that reason, proposals to tax fossil fuels or cap carbon dioxide emissions would raise the cost of many farm inputs, from fertilizer and other chemicals to fuel and motor oil.

2. The Kyoto Protocol would have dramatic, negative effects on U.S. farmers.

The Clinton Administration contends the requirements of the Kyoto Protocol could be met by imposing the equivalent of a 25 cents-per-gallon tax on gasoline. Independent sources place the true cost at between 60 and 68 cents per gallon. To make their analysis as conservative as possible, the authors chose two scenarios: a low estimate of 25 cents and a high estimate of 50 cents.

Table 1 shows the impact of higher energy prices on the average variable cash expense and net profits of producing six commodities. The average farmer would see his or her operating expenses increase by between 3.8 percent (for milk) and 15.5 percent (for corn) if gasoline taxes are raised by 25 cents per gallon. A 50-cents-per-gallon price increase would increase expenses by between 7.5 percent (again for milk) and 31.7 percent (again for corn).

The 25 cents-per-gallon tax would reduce net profits by at least 10 percent (for soybeans) or as much as 40 percent (for hogs). A 50 cents-per-gallon tax reduces net profits on soybean production by 20.5 percent and net profits on hogs by a dramatic 84.5 percent. Milk producers would see net profits fall by over half.

Table 1
Impact of Higher Energy Costs on Agriculture

(dollars per acre or hundredweight)
  Base Low High Base Low High
 
Corn
Cotton
Variable cash expenses $147.08 $169.92 $193.65 $276.95 $312.17 $347.38
Change   15.5% 31.7%   12.7% 25.4%
Net profit $99.11 $76.70 $52.50 $143.36 $108.14 $72.93
Change   -23.0% -47.0%   -24.6% -49.1%
 
Soybeans
Wheat
Variable cash expenses $75.76 $86.11 $96.45 $54.58 $61.87 $69.15
Change   13.7% 27.3%   13.4% 26.7%
Net profit $100.91 $90.56 $80.22 $25.48 $18.19 $10.91
Change   -10.0% -20.5%   -28.6% -57.2%
 
Hogs
Milk
Variable cash expenses $38.44 $40.32 $42.41 $11.35 $11.78 $12.20
Change   4.9% 10.3%   3.8% 7.5%
Net profit $4.70 $2.82 $0.73 $1.60 $1.17 $0.75
Change   -40.0% -84.5%   -26.9% -53.1%

 

The average farmer could see net profits fall by about one-fourth if gasoline taxes were raised by 25 cents a gallon, the minimum amount of increase needed, according to the Clinton Administration, to meet the requirements of the Kyoto Protocol. If taxes were raised by 50 cents a gallon, as is more likely to be the case, then the average farmer loses half his net profits.


 

Table 2 presents the results of a "macro" analysis of the effects of higher energy taxes on the U.S. agricultural sector. Total U.S. farm production expenses would rise by over $10 billion if gasoline taxes were raised 25 cents a gallon, and by more than $20 billion if taxes were raised 50 cents a gallon. Those figures are 5.8 percent and 11.7 percent, respectively, of total 1995 production expenses of $175.5 billion.

Table 2
Total U.S. Farm Production Expenses

(millions of dollars)
  Base Year
1995
Estimated expenses with
higher energy prices
Difference between base year
and adjusted expenses
    25¢ per
gallon tax
50¢ per
gallon tax
25¢ per
gallon tax
50¢ per
gallon tax
Feed purchased $24,528 $26,000 $27,471 $1,472 $2,943
Livestock & poultry purchased $12,557 $11,929 $11,301 ($628) ($1,256)
Seed purchased $5,463 $5,791 $6,119 $328 $656
Total farm-origin inputs $42,548 $43,720 $44,891 $1,172 $2,343
Fertilizer & lime $10,034 $11,790 $13,545 $1,756 $3,511
Fuels & oils $5,687 $7,109 $8,531 $1,422 $2,844
Pesticides $7,719 $9,263 $10,807 $1,544 $3,088
Total manufactured inputs $23,440 $28,162 $32,883 $4,722 $9,443
Total interest charges $12,757 $13,395 $14,033 $638 $1,276
Other operating expenses $59,964 $62,962 $65,960 $2,998 $5,996
Capital consumption $19,107 $20,062 $21,018 $955 $1,911
Taxes $6,891 $7,236 $7,580 $345 $689
Net rent to nonoperator landlords $10,873 $10,295 $9,753 ($578) ($1,120)
Other overhead expenses $36,871 $37,593 $38,351 $722 $1,480
Total production expenses $175,580 $185,832 $196,118 $10,252 $20,538
Percent change   5.8% 11.7%    

 

Annual U.S. net farm income averaged $42.7 billion over the period 1991 to 1995. The increased expense of a 25 cents-per-gallon gasoline tax would equal 24 percent of net farm income, while a 50 cents-per-gallon tax would equal 48 percent of net farm income.

The significant decline in farm income would force hundreds of thousands of small farmers, who typically have a higher average cost of production, to sell to large farmers. Young farmers just starting could find themselves in an unprofitable situation that might force them to abandon agriculture. Not only would this hurt lenders, but it would also have an adverse economic impact on small towns and rural America in general.

4. Farmers can, and should, participate in the global warming debate.

Farmers can play a unique role in the national debate over global warming by describing the benefits of higher levels of carbon dioxide (CO2) in the atmosphere. By boosting photosynthesis and the efficiency with which plants use water, a doubling of CO2 levels increases plant growth by about one-third. Farmers witness this effect every day, and can encourage debate over the benefits as well as the challenge posed by rising CO2 concentrations in the atmosphere.

Farmers can also voluntarily participate in projects that reduce agricultural emissions and sequester CO2 from other sources. "The simplest way to remove carbon dioxide," says Dr. Gregory Benford, a physics professor at the University of California in Irvine, ". . . is to grow plants--preferably trees, since they tie up more of the gas in cellulose." Land plants contain roughly three times as much CO2 as the atmosphere. The agricultural techniques and technologies that would reduce emissions include practices many farmers already use routinely:

  • Minimize soil erosion
  • Preserve and restore natural wetlands
  • Plant tree plantations
  • Use conservation tillage
  • Retain forest slash on site
  • Use mulching to increase carbon fixing
  • Leave crop residue in fields after harvests
  • Maintain and improve soil fertility

U.S. farmers lead the world in the use of progressive agricultural practices that minimize erosion, enhance soil fertility, and in other ways sequester carbon while minimizing emissions. If left unhampered by energy taxes or burdensome regulations, they will make further progress in limiting unnecessary emissions, as it is in their long-term self-interest to do so.


Based on Heartland Policy Study #87, "The Kyoto Protocol and U.S. Agriculture," by Terry Francl, Richard Nadler, and Joseph Bast. Printed copies are available from The Heartland Institute for $10 each. You can also download the full text, free of charge, in Adobe's PDF format; click here.

Copyright 1998 The Heartland Institute. Nothing in this Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of any legislation. Permission is hereby given to reprint or quote from this Executive Summary; please send tearsheets to The Heartland Institute, 19 South LaSalle Street #903, Chicago, Illinois 60603.

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3. Hundreds of thousands of farms would be bankrupted or forced to consolidate.