The U.S. farmer is a key stakeholder in the current debate surrounding climate legislation. Would a cap-and-trade regime be a farmer's friend or foe?

In our assessment, there are two key components to the cap-and-trade math as it pertains to agricultural producers. Where these two ultimately net out will determine the answer to our question.

The first is the degree to which a carbon regime serves to increase energy costs. By placing a limit on U.S. greenhouse gas (GHG) emissions and forcing GHG emitters to purchase offsets in order to comply with cap limits, the government would effectively tax energy consumption, which would drive up prices. A potential knock-on effect is that energy consumers may shift to lower GHG-emitting energy sources like natural gas. Natural gas is a key agricultural input, so a potential spike in both its price and demand could send a ripple effect through everything from fertilizer prices to grain drying costs.

The second piece of the equation is the degree to which U.S. agricultural producers will be able to benefit from this framework. This will depend in large part on the quantity and price of carbon offset credits which they themselves are able to generate. This, in turn, will largely be a factor of the types of practices and investments that ultimately qualify for offset credits and the supply and demand for credits in the market. Practices like no-till farming, which leaves soil undisturbed and keeps carbon trapped, would qualify for offset credits. However, calculating the appropriate amounts seems to us to be an imprecise science at best.

So where will this math net out? While answers vary widely, the one certainty is that there is a great deal of uncertainty surrounding the net effect a climate bill might have on the farm.

In the cap-and-trade corner, there is the EPA (amongst others), which has recently released a study estimating the net annualized benefit of a U.S. carbon cap to the agriculture sector at an extremely wide range of $1.2-$18.8 billion. The cornerstone of the EPA's argument is that revenue generated by monetizing carbon offsets would more than offset any incremental increase in energy and other costs that would result from a carbon cap. Under this scenario, farmers would be net beneficiaries of climate legislation.

In the anti-cap-and-trade corner are organizations like the American Farm Bureau (AFB), which hang their counter-argument on the notion that a carbon cap would drive energy and food prices skyward. The AFB argues that higher prices would, in part, result from a reduction in planted acreage, as crops give way to trees on more productive land as part of a possible offset program.