Payments for carbon mitigation by agriculture: Implications for risk, land use and biomass supply

Majeed, Fahd

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https://hdl.handle.net/2142/120337 Copy

Description

Title

Payments for carbon mitigation by agriculture: Implications for risk, land use and biomass supply

Author(s)

Majeed, Fahd

Issue Date

2023-02-16

Director of Research (if dissertation) or Advisor (if thesis)

Khanna, Madhu

Doctoral Committee Chair(s)

Khanna, Madhu

Committee Member(s)

• Miao, Ruiqing
• Paulson, Nicholas
• Atallah, Shadi

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Bioenergy Crops
• Carbon Mitigation Payments
• Miscanthus
• Switchgrass
• Risk and Uncertainty

Abstract

The potential contributions of agriculture to mitigating climate change have attracted much attention as the United States has re-joined the Paris Agreement on climate change with ambitious goals for mitigating carbon emissions. Further, increasing legislation, for example, the Growing Climate Solutions Act of 2021 and the Inflation Reduction Act of 2022, focuses on the potential of conservation practices on agricultural land. Cellulosic ethanol from lignocellulosic perennial crops used for second-generation bioethanol production, such as miscanthus and switchgrass (henceforth referred to as bioenergy crops) and corn stover and can provide substantial carbon mitigation benefits, first, through the production of low carbon fuels as cellulosic ethanol can displace less carbon-intensive gasoline and, second, via carbon mitigation through soil carbon sequestration. These feedstocks vary in terms of their carbon intensities, production costs, and risks due to differing and spatially varying input requirements, yields, and soil carbon sequestration effects. For instance, bioenergy crops like miscanthus and switchgrass provide spatially varying carbon mitigation benefits through relatively high annual yield over the mature period of the crop, substantial soil carbon sequestration through the life of the crop, and their ability to grow on lower-quality land. However, long establishment periods with high upfront costs and uncertain yields due to weather variations reduce incentives for risk-averse, impatient, and credit-constrained farmers to produce these carbon-mitigating bioenergy crops. In contrast, corn stover is a low-cost but low-yielding source of biomass readily available to farmers planting corn. However, harvesting stover also removes soil carbon that would have otherwise remained sequestered in the ground. Farmers may reduce soil carbon loss by adopting more conservation tillage practices or rotation choices. In this dissertation, I study the effects of carbon mitigation payments in the agriculture sector. Particularly, I focus on carbon mitigation provided by cellulosic bioethanol feedstocks and corn and soybean. I examine first how payments for carbon mitigation affect the profile of returns. Next, I examine how the design of carbon mitigation payments affects farmer land allocation to bioenergy feedstocks and the aggregate carbon mitigation provided through such policies for risk-averse, impatient, and credit-constrained farmers. Lastly, I consider U.S. agriculture’s role in mitigating carbon and examine bioenergy feedstocks’ role. These studies provide insights into the economic and behavioral implications of bioenergy crop adoption, carbon mitigation policy design, the potential of the agriculture sector to mitigate carbon and the effectiveness of the current policy landscape. Perennial bioenergy crops can provide substantial carbon mitigation benefits through fossil fuel displacement and increasing soil carbon sequestration relative to conventional crops. However, they are considered less appealing to risk-averse farmers (i.e., those willing to accept lower but more certain returns over higher but more variable returns). Farmers considering planting bioenergy crops can be expected to compare the returns and risks of bioenergy crop production to those under conventional crop choices. In the first chapter, I examine the effect that carbon mitigation payments can have on the spatially varying returns and risk profiles of bioenergy crops (miscanthus and switchgrass) relative to conventional crops (corn and soybean) by coupling an economic model that includes carbon mitigation payments with a biogeochemical model (DayCent) at the county level across the U.S. rainfed region. Further, I use stochastic dominance methods (a method to compare and order two risky prospects from a decision-maker’s perspective when their risk preferences are unknown) to identify the counties where bioenergy crops would be preferred over conventional crops. Our analysis shows that carbon and biomass prices can complement each other in increasing the returns to bioenergy crops over a wider geographical region. At low biomass prices, carbon prices can make bioenergy crop production appealing to risk-averse farmers by reducing the riskiness of these crops. Higher biomass prices make them appealing to all farmers, regardless of risk preferences. Further, I show that a uniform carbon price can result in a spatially heterogeneous effect on the returns and riskiness of bioenergy crops. Carbon credit programs that offer a uniform practice-based carbon mitigation payment per unit of land disregard this heterogeneity and are likely inefficient. Moreover, carbon mitigation payments largely make miscanthus and switchgrass most appealing to farmers in the Midwest southern states, respectively. Our work explains the effect of carbon mitigation payments on the relative riskiness of bioenergy crops and conventional crops. It could contribute to designing carbon mitigation payments to incentivize bioenergy crop adoption. Our work contributes to the bioenergy crop profitability literature by incorporating the return riskiness of bioenergy and conventional crops and conducting stochastic dominance analyses across the entire U.S. rainfed region. Additionally, conducting stochastic dominance analyses on bioenergy and conventional crop returns allows us to compare and order farmer preferences for these crops without making assumptions about farmer risk preferences. I consider four tillage and rotation choices for corn and soybeans for conventional crop returns, each with the option to harvest corn stover. Our work also contributes to the carbon accounting literature for cellulosic ethanol feedstocks by accounting for lifecycle emissions from cellulosic ethanol production from the farm to the refinery. Second, in determining the soil carbon sequestration effect of bioenergy feedstocks, I consider the temporal effect of bioenergy crops and incorporate benefits from changes in crop rotation and tillage choices. Our analysis shows how bioenergy crop returns, return riskiness, and stochastic dominance change across various biomass prices at different carbon prices. The development of carbon credit markets or public policies that offer payments for carbon benefits provided by cellulosic ethanol feedstocks has the potential to monetize non-market ecosystem services and incentivize the adoption of these crops. However, the potential of carbon mitigation payments to incentivize risk-averse, present-biased, and credit-constrained farmers is yet to be realized. Previous research shows that upfront subsidies that reduce establishment costs can incentivize the adoption of bioenergy crops by risk-averse, present-biased, and credit-constrained decision-makers. However, annual payments linked directly to carbon mitigation provided in a year may incentivize higher carbon mitigation in cases where farmers are less credit-constrained or risk-averse through greater adoption of bioenergy crops. Furthermore, as feedstocks that have the lowest cost for biomass feedstock cultivation may not necessarily be in areas with the highest carbon mitigation potential, the manner of payments will have differing effects on the spatial pattern and feedstock choices of cellulosic feedstock adoption, depending on whether farmers are risk-averse, present-biased, or credit-constrained. Additionally, soil carbon sequestration is costly to measure and may be temporary as harvesting and replanting crops may release some carbon sequestered by earlier crops, leading to the carbon sequestered being overvalued. Carbon mitigation payments that account for soil carbon sequestration may overvalue these benefits. In contrast, carbon mitigation payments not accounting for soil carbon sequestration may result in bioenergy crops being incentivized in areas with lower soil carbon mitigating potential. The second chapter examines the effect the design of various payment schemes for carbon mitigation can have on bioenergy feedstock, conventional crop adoption, biomass production, and carbon mitigation. Specifically, I compare feedstock adoption under no payment, annual carbon mitigation payment, and upfront carbon mitigation payments across eight permutations of farmer risk-aversion (high and low), time-discounting (high and low), and access to credit (yes and no). Next, I compare adoption when farmers are paid for fossil fuel displacement and soil carbon sequestration with when we exclude soil carbon sequestration and pay only for fossil fuel displacement. To do this, I first develop a theoretical framework to examine how carbon mitigation payments affect a representative farmer’s optimal land allocations under various risk and time preferences and credit constraint specifications. I show that while carbon payments encourage feedstock production, crop allocations depend partly on yield riskiness, the temporal profile of returns, and the diversification of the farmer’s crop portfolio. I next use a stylized integrated numerical simulation framework that links an economic model with a biogeochemical model, DayCent, to analyze farmers’ cropping allocation in the rainfed region in the eastern United States under varying exogenous biomass and carbon mitigation payments. Without carbon mitigation payments, risk-averse, credit-constrained, and present-biased farmers require high biomass prices to grow bioenergy crops. These farmers are also less likely to plant bioenergy crops in areas with the most carbon-mitigating potential. Carbon mitigation payments lower the biomass price at which farmers adopt bioenergy crops and mitigate more carbon at moderate biomass than at higher prices without payment. Further, I show that lump sum upfront payments incentivize more carbon mitigation in risk-averse, credit-constrained, and present-biased farmers, and annual payments do so with farmers who are not. Carbon payment programs may also include provisions that appeal to farmers with differing risk aversion, credit constraints, and time-discounting. Additionally, when farmers are paid only for fossil fuel displacement, they tend to overproduce corn stover and underproduce bioenergy crops. Our work highlights the importance of carbon mitigation payments in incentivizing bioenergy crops and can serve to inform policymakers as they design such programs. I extend the economic literature on bioenergy feedstock adoption, examining the effect of carbon mitigation payments across the entire U.S. rainfed region while accounting for farmer risk aversion, credit constraints, and time-discounting. In it, I focus on how the design of payments incentivizes bioenergy feedstock production. Further, I contribute to the literature on soil carbon sequestration by examining the effect of incentivizing soil carbon benefits. In addition to bioenergy feedstock production, agricultural activities such as rotation, tillage changes, and cover crop establishment can have spatially varying effects on soil carbon levels. Earlier studies estimate that the potential for U.S. agriculture to mitigate soil carbon is between 45 to 98 Mil. metric tons of carbon a year; however, uncertainty remains about agriculture to mitigate carbon as the adoption of these conservation practices remains low. Further, competition between competing conservation and conventional cropping practices, heterogeneity and spatial variation in carbon benefits and returns from conservation practices, and return riskiness associated with conservation practices make it difficult to accurately assess the impact of carbon payments on the adoption of conservation practices. In the third chapter, I examine the allocation of land to conservation practices and aggregate the carbon mitigated when farmers receive payment for their carbon mitigation across eight permutations of farmer risk-aversion (high and low), time-discounting (high and low) and access to credit (yes and no). I use a stylized integrated numerical simulation framework that links an economic model with a biogeochemical model, DayCent, to analyze farmers’ cropping allocation to conservation practices in the rainfed region in the eastern United States. The representative farmer may choose allocations to conventional and bioenergy crops and choose whether to harvest a portion of the corn stover from areas under corn production, switch rotation and tillage to more carbon-mitigating practices, or establish cover crops under exogenously varying carbon prices. I show that carbon mitigation potential in U.S. agriculture is sensitive to carbon prices and depends on individual conservation practices being incentivized. I find that the lowest cost strategies are rotation and tillage changes, followed by bioenergy crops and corn stover, with cover crop establishment being the most expensive. However, I show that bioenergy crops and cover crop establishment can provide the largest carbon mitigation benefits. Rotation and tillage changes, as well as corn stover harvest, can not significantly mitigate carbon despite having the potential to be adopted in large parts of the rainfed U.S. The choice of bioenergy crop largely depends on farmer risk-aversion, time-discounting, and credit constraints. Farmers who are risk-averse, impatient, and credit-constrained will choose switchgrass, while those who are not risk-averse, patient, and have access to credit will prefer to plant miscanthus. Furthermore, I show that while U.S. agriculture has the potential to mitigate carbon, farmers can only be incentivized to do so in the existence of a biomass market structure and carbon mitigation payments. Additionally, I compare conservation practice adoption under carbon mitigation payments and those under per-practice pay (where the farmer receives uniform payments per unit of land for each conservation practice). I show that per-practice payments at current market rates will not incentivize rotation and tillage changes or the adoption of cover crops. At prices where per-practice payments lead to the adoption of conservation practices, adoption does not necessarily occur in regions where such practices have the most carbon-mitigating potential. This research underlines the importance of bioenergy crops and cover crops in using the U.S. agriculture sector to mitigate carbon. Our work contributes to the carbon mitigation literature by examining the aggregate supply of carbon mitigation provided by U.S. agriculture. I extend the literature on the conservation practice adoption by incorporating into an economic model the soil carbon benefit of cover cropping and rotation and tillage choices.

Graduation Semester

2023-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2023 Fahd Majeed

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