Assessment of Carbon Tax Policies: Implications on U.S. Agricultural Production and Farm Income

We assess the regional differences of three carbon tax scenarios on U.S. agriculture in terms of commodity prices, crop production, and farm income. Our model covers corn, sorghum, soybeans, and wheat between 2018 and 2030 and carbon prices ranging from $62 to $144 t-1 CO2-e at the end of the projection period. The basis for the analysis are the carbon tax projections from the 2020 Annual Energy Outlook produced by the U.S. Energy Information Administration. Our county-level results indicate the smallest percentage decline in terms of net revenue in the U.S. Midwest despite the operating cost for corn increasing the most. We find that the increase encourages the reduction in corn area which raises corn prices such that the overall decline in net returns is small relative to other crops. Net returns for wheat in Kansas, Montana and the Dakotas decline the most. From a policy perspective, it is important to note that crop prices together with input cost are increasing and thus, the decline in net returns for farmers is offset to a certain degree. We hypothesize that the presence of the Conservation Reserve Program (CRP) dampens some of the declines in net returns because the retirement of cropland increases commodity prices for counties remaining in crop production.