Will the Kyoto Protocol Wreck U.S. Agriculture?

Published August 1, 1999

The U.S. Department of Agriculture’s long-awaited “Economic Analysis of U.S. Agriculture and the Kyoto Protocol” has attracted harsh criticism from economists and industry analysts who contend the study’s methodology is badly flawed.

“The USDA report makes estimates or assumptions that are far outside the realm of reality,” charged Terry Francl, a senior economist with the American Farm Bureau Federation and author of a report issued last year on Kyoto’s impact on agriculture.

Analysts for the American Petroleum Institute agreed. “The USDA has done the agricultural community and the nation a disservice by modeling wishful thinking rather than honestly presenting … the actual Protocol the Clinton Administration signed,” they note.

The USDA report predicts that meeting Kyoto’s greenhouse gas emission targets–7 percent below 1990 levels–would scarcely affect the income, energy costs, and international competitiveness of American farmers. Specifically, the study predicted energy price increases no greater than 3.2 to 7.7 percent. According to the report, farmers would see a 0.5 percent reduction in net cash returns.

By contrast, Francl’s analysis, conducted last year for The Heartland Institute, predicted energy price increases ranging from 25 percent to 50 percent. As a result, he estimated compliance with the Kyoto Protocol would increase U.S. farm production expenses between $10 and $20 billion per year, decreasing net farm income by 24 to 48 percent.

“By increasing the energy costs of farm production in America,” Francl wrote, “while leaving them unchanged in many countries that are emerging agricultural producers, the Kyoto Protocol would cause U.S. food exports to decline and U.S. food imports to increase.”

The USDA report summarily rejected concerns about the protocol’s impact on the international competitiveness of U.S. agriculture:

“Our study also found minimal effects on competitiveness. Because the overall costs of compliance will be low, incentives to shift production to countries having no, or less stringent, emission targets will be similarly small.”

USDA Methodology under Fire

To reach its prediction of only a modest impact on agriculture, the USDA assumed that greenhouse gas emissions could be abated far more cheaply than the $356 per metric ton forecast by the U.S. Department of Energy in an earlier report. USDA researchers “arrived at a tradable emissions permit price of $14 to $23 per metric ton in 2010, depending on the scale of international trading.”

In other words, U.S. producers of greenhouse gas emissions, already among the cleanest in the world, would reach their emission reduction quotas not in the U.S., but abroad, where older, cheaper technologies could be used to clean up dirtier industries at far less expense per ton. A universal market of emission permits would enable producers to abate their emissions tonnage at the international clearing price. The USDA study assumed that 80 to 90 percent of America’s target emission reductions would be realized outside of our national boundaries.

The problem, critics respond, is that no such market exists, or is likely to exist. Supra-national abatement would require an international bureaucracy measuring emission reductions under internationally accepted protocols in thousands of diverse industries and circumstances.

Noted the American Petroleum Institute, “governments would have to create a system more complex than the World Trade Organization, which governs international trade and took decades to reach its present form, and operate with the efficiency of the New York Stock Exchange.”

And even that assumes most nations want such a system. The major emission producers in the Third World clearly do not. “Eradication of poverty and improving the level of living among our people … is a much greater urgent necessity than the long-term aim of controlling greenhouse gas emissions,” explained Indian Ambassador Naresh Chandra. China, whose greenhouse gas emissions will surpass those of the U.S. within 15 years, has demanded a 50-year moratorium on restrictions on its emissions.

Under a permit system such as that envisioned by the USDA, Europe’s least-developed nations might attract potential carbon abatement investment from U.S. manufacturers. But opposition to supra-national permit trading in the European Union is already intense.

During the December 1997 meetings in Kyoto, American negotiators backed off a key demand that EU member-nations meet their emission reduction targets individually. Instead, the EU will reach its goal collectively. That could foster carbon permit trading within the EU, where technologically advanced nations, such as Germany and the U.K., may prefer to meet abatement quotas in nations less so, such as Portugal and Ireland. But the establishment of the EU as a “zone” under Kyoto minimizes the likelihood that Europe will initiate a system of carbon credits open to American industry.

Economist Francl also observes that any regime of permit trading established under the Kyoto Protocol would probably exclude most farm operations. “Current provisions of the Kyoto treaty,” he wrote in Farm Bureau News, “allow agricultural carbon credits in only three areas: forestry, biomass-related crops, and methane related to livestock. …The administration’s position that carbon trading credits will be available for normal cropping practices is, at best, wishful thinking and, at worst, misleading to the agricultural community.”

Absent an international market in greenhouse emissions permits–one that includes the U.S., Japan, China, India, and the European Union–U.S. producers, including farmers, will have to meet the bulk of their Kyoto targets domestically. In 1997, the Joint Program on the Science and Policy of Global Change at MIT modeled realistic ranges of carbon trading and other cost- reducing carbon abatement mechanisms. Its 1997 report suggested that permits would trade at $175 to $342 per metric ton–a far cry from the $14 to $23 range claimed by USDA spokesmen.

There is reason to doubt whether the USDA takes its own figures seriously. Deep in the body of its report, the department concedes that absent an international permit trading system, costs as high as $195 per metric ton are likely. “Whether or not the long-run competitiveness of U.S. farmers in world commodity markets would be hurt by the implementation of permit prices is, at present, speculative,” reads the report. “If, as a result of implementing the Protocol, foreign producers face lower costs from achieving their Kyoto targets relative to domestic producers, U.S. agricultural commodities could become less competitive in global markets and U.S. commodity export demands would fall.”

According to Francl, the Kyoto Protocol’s energy tax on agriculture in industrial nations will promote long-term disinvestment, and a concurrent rise in production in nations that refuse to sign the agreement. “The rising cost of U.S. food abroad,” he notes, “would encourage developing nations to produce their own, immediately in fruits and vegetables, more gradually in major grain crops.” Francl warns that the reduced efficiency in the world food system could add political impetus to a backlash against free trade both domestically and abroad.

Richard Nadler is editor of K.C. Jones magazine.