ASSESSING THE IMPACTS OF CAP-AND-TRADE CLIMATE POLICY ON AGRICULTURAL PRODUCERS IN THE NORTHERN PLAINS: A POLICY SIMULATION WITH FARMER PREFERENCES AND ADAPTATION

The purpose of this study is to examine the possible local impacts of cap-and-trade climate policy on agricultural producers in the Northern Plains. This study explicitly considers farmer behavior with respect to agricultural opportunity in carbon offset provision and ability of adaptation to mitigate the production cost impact under a cap-and-trade climate policy. Based on empirically estimated farmer behavior models, a policy simulation with agricultural census data identifies farmer acreage enrollment in carbon offset provision, carbon offset supplies and revenues, the production cost impacts of carbon prices, and impacts on net farm income and their distributions among heterogeneous farmers. Our analysis find that: 1) farmer ex ante preferences in general are biased against participating in carbon credit programs although farmer involvement increases with carbon prices; 2) with the fertilizer industry exempted from cap-and-trade regulation, the production cost impacts would be small, and more than half of the farms or farmland would probably gain for a carbon price higher than $10 per metric ton of carbon; and 3) the production cost impacts with a capped fertilizer industry would be 2 times higher, and more than half of the farms or farmland would lose unless the carbon price could reach beyond $55 per metric ton of carbon. This study sheds some light on agricultural potential to adapt to economy-wide climate change mitigation while providing a bottom-up economic assessment of the costs and benefits of a cap-and-trade climate policy to agricultural producers in the short run.