Economic Analysis of Voluntary Carbon Offset Market and Bioenergy Policies

Abstract

This work studies the economic implications of some United States greenhouse gas mitigation related policies. The main items focused on in this work are: 1) possible agricultural entry into a voluntary carbon offset market, 2) use of marginal land for switchgrass production and 3) agriculture and energy market effects of renewable fuel standards and the integration between these two markets.

The first element of the study addressed participation in a voluntary carbon offset market under alternative baseline specifications. We find that a per unit baseline augmented with a low initial level hybrid baseline for biofuel provides effectiveness in terms of additionality, leakage and program cost. We also find that voluntary offset markets promote large scale mitigation which decreases traditional agricultural production and so decreases consumers' surplus and increase producer’s surplus.

The second study component examines the economic implications of growing switchgrass on marginal land. We simulate production patterns and market conditions when using or not using marginal land with and without a carbon offset program. We find using marginal land contributes heavily in satisfying RFS mandates and takes the pressure off of conventional land use. However with a simultaneous offset program we find that most of the switchgrass goes to electricity generation and that the pressure on conventional land use is unabated.

The third study component examines the energy–agriculture linkage using a structural vector autoregression model. The results of directed acyclic graph presents at contemporaneous time corn price fluctuations cause changes in soybean and ethanol prices. We perform conditional forecasting, taking into account the renewable fuel standards policies, and compare the forecasted path of prices with and without the renewable fuels mandates. Results of prices forecasts conditional on RFS requirements present an increase in all prices in the model by 2022 except for the crack ratio.