GREENHOUSE GAS OFFSETS: ANALYSIS OF BASELINE RULES AND ADDITIONALITY FOR REDUCED NITROGEN APPLICATION ON WHEAT

Agriculture is a source of greenhouse gas emissions that could be included as offsets in a cap-and-trade system. This paper describes offset rules that could be applied to reduced nitrogen fertilizer application on wheat, a source of nitrous oxide emissions. Unlike other papers that have examined offset rules, we do not assume that farmers' business-as-usual nitrogen emissions can be perfectly predicted. We construct a structural model of wheat production and use this, along with Agricultural Resource Management Survey data, to model or estimate participation in the offset market, offset supply conditional on participation, and business-as-usual emissions. We find that roughly two-thirds of the supplied offsets would be non-additional at an allowance price of $15/tonne CO2-e. Under assumptions about the social damages from greenhouse gas emissions, we find that allowing nitrogen offsets would marginally pass a standard benefit-cost test.