Climate Policies as Water Policies

This study uses an updated version of the U.S. Agricultural Resource Model (USARM)—a multi-region U.S. agricultural sector programming model—to examine effects of climate change mitigation policies on U.S. water resources. One scenario considers effects of increasing prices of energy and energy-intensive inputs (primarily fertilizers) through a carbon tax or cap-and-trade program. A second scenario combines the first scenario with an agricultural offset program where farmers are paid to retire cropland for carbon sequestration. The consequences of climate mitigation policies for agricultural water use and pollution control have received relatively little attention in part because—unlike USARM—many national agricultural sector models do not explicitly include water as an input. USARM also allows for input substitution among seven inputs in a CES framework, while accounting for all major crops as well most specialty crops, federal commodity programs, and crop exports. Major results are as follows. First, climate mitigation policies have scope to significantly reduce agricultural water use. Whether domestic offsets are included has little effect on the total amount of water conserved, but has a large effect on which parts of the country the conservation takes place. Second, either carbon taxes or cap-and-trade combined with domestic offsets combines two policies often modeled as potential solutions to the hypoxic “dead zone” in the Gulf of Mexico—increased fertilizer prices and land retirement. Climate policies may have unanticipated, near-term, environmental benefits by addressing the hypoxia problem. Third, while domestic offsets reduce total fertilizer and agricultural chemical use, they increase their use per acre. Particularly in watersheds with significant land retirement, there could be unintended intensive margin effects where fertilizer and chemical use are increased. Despite this last, cautionary finding, a key insight into decision makers is that climate policies can have unanticipated, near-term benefits of water pollution control and water conservation that could be included in benefit-cost analyses of climate policy proposals.