Market Forces

How can the U.S. gas pipeline system support a path to net-zero GHG emissions by 2050?

By / Bio / Published: September 27, 2021

An economist’s guide to filling in the research gaps.

Natural gas currently accounts for more than a third of U.S. energy-related CO2 emissions, but efforts to decarbonize the economy – in particular by replacing gas with electricity in a wide variety of critical applications – imply decreasing future gas demand and CO2 emissions from the industrial and building sectors as well as the power sector.

Resolving the economic and regulatory challenges that follow from this will require filling in crucial knowledge gaps about the U.S. gas transportation system – and how that market could be designed to support the energy transition.

An energy system already in transition

Transitioning the U.S. to a clean energy system is a critical step toward the long-term goal of reaching net-zero greenhouse gas emissions by 2050. The U.S. power system has already taken steps in the right direction. More electricity is coming from variable renewable energy sources (VREs) like solar and wind, while coal plants are being retired.

But even when we factor in options like energy storage, demand response and build out of electric transmission capacity, gas-fired generators will likely continue to have a role in the next decades by providing peak and ramping capacity at times when electricity production from wind and solar is low or electricity demand is high.

This, in turn, means that the country’s vast network of interstate gas pipelines has its own role to play in the US energy transition.

The problem is that the pipeline transportation market was built to support predictable, relatively constant demand (e.g. industry and buildings). It is not currently designed to accommodate the variability of demand from gas-fired power plants which can fluctuate significantly by the hour – or even more frequently. Nor is the pipeline system designed to be compatible with other low-carbon fuel options or phased down as electrification increases.

More economics research needed

To reconcile this disconnect, we need a much better understanding of how the pipeline market works, and how it could work. Compared to U.S. power markets, the interstate gas pipeline transportation market is characterized by opaque operations and practices and has not been studied much by economists. This has limited the economic analysis available to support decision-making by policy makers and stakeholders looking to address this problem.

More research and analysis is needed to inform how design, regulation and operation of the US gas transportation market can be improved, and the stranded asset risk and associated distributional impacts managed.

To stimulate and facilitate new research in this area important to the US energy transition, I recently published an introductory guide to the U.S. gas pipeline transportation market for researchers and energy market analysts. It outlines the main market features and regulations important for understanding the U.S. gas transportation market.

The objective is to facilitate further research that will help answer questions like:

  • Who is, or should be, shouldering the costs of gas transportation infrastructure and bearing the risk of some of these assets becoming stranded in a low-carbon-energy future? How should such long-term stranded asset risk be managed in the face of electrification and decarbonization?
  • What changes are needed in the gas transportation markets to provide more flexible gas delivery services to gas-fired generators that provide valuable balancing in the power markets?
  • What role can hydrogen play in U.S. decarbonization efforts? How could a potential hydrogen market be created and which parts of the gas pipeline network would be beneficial to make compatible with hydrogen transportation, given potential centers of hydrogen supply and demand.

By publishing this paper, we hope to inspire PhD students, researchers, consultancies and market analysts to conduct analyses on this topic crucially important to the U.S. energy transition. Such new research would ideally generate policy-relevant conclusions on how to reform the U.S. gas pipeline transportation market – and next be communicated to  energy market regulators and policy makers to support decision-making that will facilitate the US transition to net zero greenhouse gas emissions by 2050.

Posted in Economics, Energy Transition / Leave a comment

Solar power can have positive health impacts for Chile’s most vulnerable. Here’s how.

By / Bio / Published: May 17, 2021

We know that solar power helps replace fossil fuel generation, getting the world closer to the international goal of keeping global warming to 1.5°C. But does it have other benefits? What happens to people’s health if we replace coal generation with solar power?

The Atacama Desert in northern Chile is one of the world’s most extreme landscapes. It is often used by NASA and film companies to stand in for Mars and is the sunniest place on Earth. It is also the best place in the world for solar power.

Since 2012, Chile has installed over 3300MW of solar power throughout the country, with a large percentage built in the regions in and surrounding the Atacama Desert. This rapid introduction of large-scale solar capacity makes the Atacama region a perfect case study for us to look at the health benefits of solar power replacing fossil fuel generation.

Due to Chile’s heavy reliance on fossil fuels, the country’s power sector releases large amounts of local air pollutants, including sulfur dioxide (SO2), nitrogen oxides (NOX), mercury (Hg) and particulate matter (PM). All of these pollutants are associated with adverse health effects, along with increased hospital admissions, mortality risks and threats to life expectancy. Annual air pollution in Chile generally exceeds life-threatening levels with daily average fine PM concentrations well above World Health Organization guidelines. Thus, Chile’s growing reliance on renewables is extremely important from a health perspective.

To that end, my co-authors and I have spent the past two years investigating the health benefits that solar generation produced in northern Chile due to this massive solar expansion. Our research found that the investments in solar capacity led to a displacement of daily coal- and gas-fired power generation. We estimated a direct, causal link between greater installed solar capacity and fewer cardiovascular and respiratory admissions due to reduced pollution from fossil fuel generation. Importantly, reductions were largest among the most vulnerable age groups: infants, children (ages 6–14), and seniors.

To estimate the effect, we relied upon wind direction to identify which cities were downwind of and close to the fossil fuel plants we found to be displaced by solar. For the populations living within 10km of displaced plants, we estimate that 1GWh of solar generation reduced annual respiratory hospital admissions by 13% on average. Similar findings, with decreasing magnitudes, occur in cities 50km and 100km downwind of displaced coal and gas-fired generation.

Our conclusions remained unchanged after several robustness checks, including the use of cities upwind of displaced facilities and those downwind of non-displaced units, as well as the use of hospital admissions of patients with diseases presumably not related to air pollution.

This research quantifies some of the benefits that solar power can provide in terms of reducing health impacts of air pollution in developing nations, yet our findings are likely an underestimate of the total health benefits that can emerge from solar generation. This is because:

  • Chile’s northern region has limited healthcare infrastructure. This means any reduction in hospitalizations increases the number of hospital beds available, which helps reduce the number of untreated unrelated injuries and illnesses.
  • Reductions in air pollution exposure for young children and infants has a lifelong benefit in terms of reduced illnesses and improved economic outcomes.
  • As demonstrated in both the US and India, disadvantaged populations often live closer to large air polluters. If this is the case, improvements in air quality may also help to reduce inequality.
  • Though the area we studied has relatively low population density, we were able to estimate a significant benefit on health outcomes- thus, solar’s contribution to cleaner air will produce even larger benefits in more populated regions or countries.     

Our research is a working paper published in the Environmental Defense Fund Economics Discussion Paper Series. You can download the paper for free here. This blog was co-authored with Nathaly M. Rivera, Research Fellow at the University of São Paulo.

Posted in air pollution, Economics / Leave a comment

Farmers’ bottom lines at risk as growing conditions change

By / Published: April 26, 2021

This blog was originally posted on EDF’s Growing Returns.

Iowa currently finds itself in a “Goldilocks climate,” with just the right measure and timing of humidity, rainfall and heat that help make the state a national leader in corn and soybean production. However, new research shows that climate change threatens to upset this balance.

Small shifts in rainfall and temperature can have considerable impacts on crops and farmer livelihoods. To better understand how these shifts could impact farmers, Environmental Defense Fund partnered with K·Coe Isom, an agricultural accounting and business advisory firm, to produce an in-depth report that quantifies the potential localized economic impacts from these shifts that Iowa corn and soy farmers could face as soon as the next 10 to 20 years.



Millions of dollars at stake in Iowa alone

Researchers found that farmers could see statewide gross farm revenues reduced by as much as $4.9 billion over the course of a decade — a loss of 3.6% of Iowa farm revenue from sales of corn, silage and soy.

Because with climate change agricultural prices are likely to rise, relative to without climate change, the impact to gross farm revenues from yield impacts will be offset to some degree by higher prices. Additional research is needed to understand how much agricultural regions like Iowa stand to offset yield losses through climate change-induced price increases.

With this caveat on unknown price increases, nearly every county in Iowa could experience decreases in gross farm revenues with losses of more than $50 million in almost half of the state’s counties in that same timeframe, and losses of more than $100 million in some western counties that are projected to experience higher yield reductions than the rest of the state.

Reductions in revenue would likely imply reductions in capital investment and off-farm spending. As a result, Iowa’s annual economic output could be reduced by between $367 million and $733 million, causing a statewide loss of 1,270 to 2,530 jobs, and reduce annual state revenue collections by $4 million to $8.3 million.

“A less desirable choice for the next generation”

The analysis drills down further by modeling how these crop yield impacts might affect a real representative family corn and soybean operation in central Iowa. The researchers obtained financial data for the farm, including harvest, sales and capital expenditure data, and modeled the impact of projected yield reductions on farm revenue over a five-year period (2014-2019).

When the anticipated crop yield declines from climate change were retroactively applied to the past five years, researchers found that the family farm would have lost between $50,000 and $90,000 in revenue per year, equaling a total potential loss of $360,000 over the five-year period.

As the farm owner observed, this reduction in revenue would have also made “returning to the farm a less desirable choice for the next generation,” and would have been “especially hard on those families newest to farming.”

Near-term solutions to avert economic loss

Much can be done to address climate change and minimize the financial impacts on farmers, and this report identifies a few ways federal, state and local governments can help mitigate emissions and help farmers further adapt to climate change.

Public funding and private sector programs can incentivize management practices that limit greenhouse gas emissions, improve soil health and build resilience in agriculture. For example, the federal crop insurance program could incorporate incentives for farmers that adopt practices that reduce crop yield risk.

Additionally, public funding could support the development of climate-resilient seed varieties, improvements to nutrient management and other climate adaptation strategies. Investing additional funding in Iowa’s public university systems to assist with the creation of practical, publicly available research could also help farmers put these strategies into practice.

Iowa’s farmers have adapted to changing farming conditions in the past, but climate change poses a more significant shift that requires a proactive response. Policymakers can help ensure farmers have the resources they need to withstand the growing risks posed by climate change and to protect the livelihoods and revenues that make Iowa a global agricultural leader.

For more information, download the full report.

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Building North-South cooperation to fight the ‘tragedies’ of climate change

By / Published: March 29, 2021

This post draws from a chapter for a book I wrote in 2020: “Overcoming the tragedy of distance – cooperating with our friends’ friends” in Living with the Climate Crisis ed. Tom Doig. Bridget Williams Books, Wellington, New Zealand 

I believe that finding ways to work more intensively and effectively with people with very different resources, cultures and life experiences is critical to rapid global decarbonization.

For me, the unprecedented challenge from climate change is that most mitigation has to occur in countries with fewer resources. Key high-emitting countries such as India, China, Indonesia and Brazil, as well as smaller countries such as Laos, Ethiopia, and Peru are all projected, in business as usual forecasts, to have rising emissions as they develop.

These countries have strongly competing priorities, as they also need to address poverty or resolve internal conflict. They are unlikely to mitigate greenhouse-gases fast enough without help. Yet, to stabilize the climate, those countries and all others must reduce their emissions to net zero and the faster the better.

Models by EDF(2019, pp. 200-232) and IETA(2019) suggest that we could double the amount of global carbon dioxide mitigation to 2035 with no extra cost if richer countries can support emerging and developing countries effectively, but that’s hard. ‘International trading’ of mitigation, where richer countries, or their companies, support developing countries to reduce their greenhouse gas emissions, has long been a goal, but it has not yet lived up to its promise.

We will all benefit if we can resolve this together. I also think those of us with more resources owe it to poorer countries to help; they are the most vulnerable to climate change, to which they have contributed little. It seems deeply unfair to also expect them to bear the full burden of their transition to net-zero.

Tragedies of climate change

Humans however often struggle with cooperating and sharing with people who are far away from them, in either a physical or social sense. I struggle to empathize with people in India whom I will never meet, but who will need support when they replace coal-fired power plants with renewables as India moves toward net-zero emissions. I don’t think I’m alone in this and I imagine they feel the same about people like me who are not taking rapid action on climate change even when we can afford it.

Is our fundamental problem in mobilizing resources to support developing country decarbonization this “tragedy of distance?”

“Tragedies” are situations where we humans are brought down by our own flaws. These tragedies make climate change particularly challenging to address.

The “tragedy of the commons” suggests that if we can’t exclude people from use of a common resource, we are doomed to destroy it through overuse. For example, the fish stock in a particular area isn’t destroyed because people can’t see what is happening, but because if others are going to over-fish, whatever one individual does, it is in each individual’s personal interest to go fishing while the fish are still there. They feel they can’t protect it. That’s a self-fulfilling prophecy.

The “tragedy of the horizon” suggests that individual and collective myopia and selfishness lead us to take actions now although they will cause our future selves and future generations to suffer. The phrase was coined by Mark Carney (Former Governor, Bank of England) for climate change, but another classic example is most countries’ inability to invest enough of the wealth that they extract from non-renewable minerals, like oil, to sustain their citizens’ well-being in the future. Again, we can see this coming but struggle to avoid it.

These tragedies are not inevitable. Some communities solve them impressively (e.g., the many examples from the work of Nobel Prize winner Elinor Ostrom and her colleagues, or Norway’s Sovereign Wealth Fund). Others find partial solutions. New Zealand avoids the worst problems of overfishing by limiting catches through the Quota Management System, a system which, though imperfect, has now lasted for more than thirty years. Humans also have relatively good ‘institutions’ for making intergenerational decisions. Families tend to have strong bonds for at least a couple of generations. We may not make “efficient” decisions for our own future selves and our descendants, but we do, generally, care.

Climate change is an issue where all tragedies—of distance, of the commons, and of the horizon—are fully engaged. Climate change is global and cumulative, with extremely long-term, long-lived impacts. Although it is now clear that people alive today are already experiencing the impacts, the major benefits from our mitigation actions today will be experienced not by older people like me, but by our children and grandchildren.

We have worked hard for nearly thirty years to build institutions at the international, national and local level to coordinate mitigation efforts. We need to keep doing this. Despite our lack of obvious success so far, we have made considerable progress. However, these approaches depend very much on a hierarchical approach. That approach is appealingly elegant and logical in responding to a global problem, and is a critical part of the solution, but it’s not working fast enough. And having only one coherent institutional approach is inherently fragile.

We need both coordination and cooperation

United Nations climate agreements try to replicate the success of economic institutions in managing human activity. However, in contrast to institutions that aim to address climate change, many international economic institutions, such as those that govern commerce and banking are essentially addressing a coordination problem. Their success is not easily replicated when dealing with a global cooperation problem like climate change.

Maybe the approaches of more traditional and Indigenous societies have something to offer us as a complement. These societies have broad networks of relationships that extend into the natural world and rely on these and shared belief systems rather than institutions to manage goals and conflicting interests. Traditional ways of thinking of Māori, the Indigenous people of New Zealand, contrast strongly with the hierarchical assumptions about how humans relate to each other and the natural world, “the Great Chain of Being,” common in much contemporary Western thought.

Can we harness shared belief systems and existing North-South relationship networks and reduce the tragedy of distance? Could that help us build deep collaborations among small groups of countries to support the large-scale transfers of resources needed for efficient global climate action?

Is it better to think about transfers to support mitigation in developing countries as primarily about establishing networks of relational contracts, and the strong communication and trust that supports them, rather than centralized carbon commodity trading systems where all have to trust one system?

Posted in Climate Change, emissions, International / Leave a comment

How can economics contribute to decarbonizing power markets?

By / Bio / Published: February 19, 2021

Electricity system operators balance supply and demand precisely at every moment of every day through market design grounded in economic principles. As the share of variable renewable resources like wind and solar electricity on our electricity system increases, system operators, policy makers and energy market regulators are facing new questions on how to design the rules governing our electricity market to support decarbonization of our energy system.

Christopher Holt, PhD student in agricultural and resource economics at the University of Maryland, recently published an EDF Economics Discussion Paper, in which he reviews these new questions in wholesale electricity market design and identifies a number of areas where economic research can help inform decision-makers to facilitate decarbonization.

Chris wrote this paper during a summer pre-doc fellowship at EDF and Kristina Mohlin, who hosted Chris during the fellowship, recently chatted with him about his paper and his experience as a pre-doc fellow at EDF.

Kristina: What was your starting point for this pre-doc fellowship?

Chris: State and local leaders have been setting ambitious decarbonization targets. More recently, President Biden has pledged to make US electricity production free of carbon by 2035. My starting point was to try and understand how electricity market practitioners are working to change and refine the sophisticated set of rules governing wholesale markets, so that these targets can be met.

During my time at EDF, I spoke with industry representatives, policy makers, external economists, and other stakeholders at policy meetings, conferences, through video chats, and over countless cups of coffee. I also learned a lot by chatting with the highly talented folks internal to EDF. These conversations alerted me to many gaps in the applied economics literature, which I then described in the paper.

Kristina: One defining characteristic of electricity markets is that consumers do not respond to wholesale price fluctuations in real time. How can markets be designed to enable and encourage price-responsive demand?

Chris: California’s Demand Response Auction Mechanism (DRAM) is a promising example of how market design can reward innovation that encourages response to prices at the individual user level. This mechanism, still in its pilot form, allows companies to bring together demand across a group of electricity consumers, e.g. by coordinating power drawn from their appliances. The aggregator can then curtail demand when electricity is scarce at a minimal loss to consumers, who may be compensated for their agreement to participate. Wholesale market prices are kept low by way of the curtailed demand, benefitting all consumers of electricity (not just the participating ones). This is a “win-win”: lower prices for consumers and a profitable return for the aggregator. Importantly, this arrangement would not exist without the wholesale market design.

While the incentives are powerful, getting the design right is not easy. Projects like DRAM have a long way to go before they are approved for permanent integration into market operations—which is exactly why additional research is needed.

Kristina: Another key defining characteristic of electricity markets is that electricity is not storable. How will utility-scale storage affect market operations?

Chris: Yes, storage is not yet available at large scale, but this seems likely to change in the near future. The Federal Energy Regulatory Commission’s landmark Order 841 is intended to facilitate the participation of storage resources in energy markets. Some firms have already begun to complement variable renewable generation assets with large-scale battery technologies, and industry forecasts suggest major cost reductions for batteries in the near future. When storage technologies are deployed at scale, short-run market operations will require a new set of rules, which must be guided by economic research.

Kristina: Could you explain to our readers what this has to do with decarbonization?

Chris: Both price responsive demand and storage are closely tied to decarbonization because they allow consumers to buy electricity when it is cheap and clean rather than when it is expensive and carbon intensive (this is most apparent when there is a price on carbon). Electricity from wind and solar is essentially free once investment costs have been incurred and the plants have been built. Currently, when electricity is scarce, carbon-intensive peaker plants are needed to maintain reliability. These peaker plants, which are also relatively expensive to run, are increasingly needed to complement the variability of renewables, e.g. when the sun goes down in California, or the wind stops blowing in Texas. Unlocking price responsive demand and introducing storage capacity will reduce the need to rely on peakers.

Kristina: How will long-run investments be affected by increased participation of electric storage and price-responsive demand?

Chris: Changes to demand-side price response and the storability of electricity have crucial implications for how firms plan to invest in new generation assets and retire old plants. If consumers are able to pre-empt the high prices associated with peaker plants, why invest in peaker plants at all? Storage may bring benefits in helping to reduce emissions, but will firms be incentivized to invest in it? Regulators in New York, for example, have set considerable storage capacity targets. Experts suggest many ways to reach such targets and to ensure that more storage capacity indeed translates to decarbonization (carbon pricing is central among them).

The difficult task of guiding efficient long-run investment is further complicated when an electricity system spans political jurisdictions with differing policies. The simple fundamentals of electricity market economics are of value here, reminding us that proper pricing is often the key to efficiency—pricing that reflects resource scarcity, the value of quickly dispatchable resources and demand response, and the harm imposed by carbon pollution. Through my EDF pre-doc fellowship, I found that we need new research to connect these classic fundamentals to the new challenges associated with scaling up renewables.

Kristina: Finally, what would you like to tell other PhD students who have the opportunity to apply for an EDF pre-doc fellowship about your experience at EDF?

Chris: The pre-doc fellowship is a great way to focus in on the questions you might want to address in your dissertation. My job market paper was inspired in large part by my time at EDF. Having access to the network of experts that the fellowship offered was an ideal way to become more familiar with certain areas and overcome the steep learning curve associated with my field. EDF also values their alumni—I have continued to keep in touch with folks I met through the fellowship and attend EDF workshops. Overall, I would highly recommend the fellowship!

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Barriers to tapping the potential of carbon markets for agriculture

By / Bio / Published: January 21, 2021

An EDF analysis of carbon credits for rice growers shows great climate and cost-savings potential, but is that enough for farmers to participate?

In 2015, rice became the first crop for which agricultural carbon credits were valid for compliance in the California cap-and-trade system. Unfortunately, as of September 2020, no compliance credits have been generated. A newly released report by EDF explores the reasons why.

In the U.S., agricultural greenhouse gas emissions comprise approximately 10% of the economy-wide total emissions. The share of emissions from agriculture is larger for non-CO2 GHGs, making up approximately 78% of the U.S. total for nitrous oxide and 38% for methane.

Policymakers are eager to find mitigation opportunities in the agriculture sector, best evidenced by the bipartisan Growing Climate Solutions Act, which seeks to enable voluntary credit markets for producers to mitigate climate change.

As both policymakers and producers eye the potential of the agriculture sector to grow climate solutions, it’s worth taking a closer look at both the opportunities and the challenges that must first be addressed to tap this potential.

A case study of carbon credits for rice

EDF’s work on agricultural carbon credits began in earnest in 2007 after receiving the first of several U.S. Department of Agriculture grants to investigate how to bring agricultural emissions reduction credits to market. The objective was to design crediting systems that achieve the dual benefits of reducing GHG emissions while also providing meaningful revenue opportunities to landowners.

An EDF discussion paper summarizes some of the underlying analytics of these efforts for a series of crops and geographies. One specific example from the paper — rice in California — highlights both the carbon- and cost-saving opportunities associated with conservation practices like bailing and drainage, and the challenges associated with agricultural credits as a viable abatement measure.

The opportunity: Lowering costs and emissions

Rice is a GHG-intensive crop. It emits twice the amount of emissions per calorie as wheat, three times that of maize, and accounts for 5-20% of global methane emissions. EDF’s research focused on the nation’s two most intensive rice production regions — California’s Sacramento Valley and Mid-Southern U.S. These regions produce 26% and 72% of the domestic rice supply, respectively.

Our analysis began by using a biogeochemical model, DeNitrification-DeComposition (DNDC), to assess the abatement potential for current (baseline) practices and other lower-GHG alternatives in the California rice region. This led our scientists to discover a fairly large overall mitigation potential of more than 0.6 MMt-CO2e-100/year, or approximately 15%, of overall California rice emissions.

We then developed estimates of abatement costs by practice through cost budgets and consultation with agronomists. Combining this with the GHG modeling yielded the following marginal abatement cost curves (one for each practice).

Marginal Abatement Cost Curves for Rice Practices in California. Abbreviations: N (number of fields); WF (winter flooding of rice paddies); NWF (no winter flooding). WF/NWF practices follow a 60/40% distribution, historically, and play a role in determining the scale of achievable reductions.

These graphs illustrate that for all but one practice there are negative abatement costs with averages ranging from -$29.45/acre to -$0.45/acre, suggesting potential savings for farmers from implementing practice changes. For yields, the DNDC model projected that yields would remain relatively unchanged, aside from dry seeding, for which growers would experience an average 4.5% decrease.

These findings show great promise in terms of GHG abatement potential and cost savings for producers with minimal yield impacts (dry seeding aside). So, why aren’t growers already pursuing these practices? What barriers are getting in the way?

Three key barriers to entry

Our analysis identified a few potential barriers for farmers to generate carbon credits.

  1. Weak price signals

Understanding why growers are passing up potential cost savings from practices that reduce GHG emissions requires a closer look at farm economics. Adam Jaffe offers a useful typology for the various barriers to adoption, some of which I have identified below.

Putting the practice costs and yield impacts together, we can imagine a scenario where we have a carbon market in place and a carbon price of $10/ton (the California spot price at the time this work was carried out). In this instance, we’d find that with an average 0.7 ton/acre reduction, most rice growers would be looking at potential revenue from the market of approximately 0.5% of their overall crop sales revenue (typically $1,500/acre), or 2.6% of their net profit (approximately $250/acre), not including further potential gains from the negative abatement costs of certain practices and locations.

Unfortunately, in context of the overarching farm economics, this makes for a weak incentive.

If we now imagine a new scenario with a carbon price closer to today’s social cost of carbon ($42/ton), we find that the potential revenue from participating in the market rises closer to 2% of crop sales revenue and 11% of net profit. At this price, the incentive appears to be substantially more robust, which tells us that, from a social standpoint and with a strong price signal, the market could be viable. But as it currently stands, conditions are falling short of this potential.

  1. Large transaction costs

Another critical consideration for engaging in any market is transaction costs — for GHG markets in particular, monitoring, reporting and verification (MRV) costs.

Our analysis found transaction costs to be significant on a per-grower basis at approximately $14/acre for an average 1,000-acre California farm. At a market price of $10/ton, transaction costs are double the average expected return from carbon markets of $7/acre, providing a steep disincentive. Even with credits priced at the higher social cost of carbon ($42/ton), transaction costs would still equal nearly 50% of potential revenue, essentially cutting their expected financial gains in half.

Further economic modeling showed the importance of allowing a way to aggregate projects for MRV transations due to the very large third-party fees incurred to verify reductions. However, even if growers use aggregation as a means to cost-share, it will be critical to find ways to use technologies like remote sensing and automated data generation and analysis to streamline this process, realize savings and still guarantee accurate verification.

  1. Changing behavior is an obstacle in itself

Finally, behavioral factors represent a hurdle that cannot be ignored — the hidden additional cost of switching practices. This cost is difficult to quantify precisely, but we know from experience that behavior is hard to shift and farming practice changes typically require planning and close coordination with a number of consultants and business partners.

Understanding this, we performed a survey for corn and almond growers, asking how much participants in a carbon market would need to be paid to reduce fertilizer applications, and thereby decrease nitrous oxide emissions. To isolate the behavioral barriers, we designed the survey to encourage the farmers to assume no additional costs, risks or yield impacts.

Their responses ranged from $18-40/acre, when a representative farmer might only receive $7/acre in returns with a $10/t carbon price. This gap in the valuation likely represents factors such as personal or cultural values and aversion to risk and uncertainty that may be very difficult to overcome using market incentives alone[1].

Managing risk and risk perceptions is a challenge that must be addressed to see widespread uptake of mitigation practices.

Where do we go from here?

The agricultural sector has the potential to play a key role in contributing to national climate goals.

Crediting systems are just one tool to support this, but more research and pilot programs are needed to help overcome the barriers to entry, increase confidence in high-quality and cost-effective credits, and also evaluate and correct for potential inequities and injustices.

EDF is launching a new phase of research dedicated to this work, in addition to developing complementary finance and policy tools that correct for existing disincentives and inequities to create a more just and resilient food system.

With the right combination of tools in the toolbox, we can unleash the power of carbon markets to boost long-term resilience on the farm and beyond.

 

[1] It is important to note that all of the numbers depicted above represent averages, and there are certainly cases for which incentives are large at the individual level, and some growers may have zero or even negative switching costs, so many farmers have ripe potential for carbon market participation.

 

Posted in Cap and Trade, emissions, Uncategorized / Leave a comment