How Much Should Dairy Farms Get Paid for Trapping Methane?
The answer hinges on four important numbers.
One way to reduce pollution is to trap pollutants before they escape into the atmosphere. Examples include scrubbers in power plant smokestacks (NOx), catalytic converters in cars (CO, NOx, hydrocarbons), and anaerobic digesters on dairy farms (methane). The burning question surrounding these technologies is who pays for them and how much. This question is important because budgets are limited. Overpaying for mitigation in one setting means less money available for other things we value.
California has decided that gasoline and diesel buyers should pay for anaerobic digesters to trap methane from decomposing dairy cow manure, which is responsible for 25% of the methane produced in the state. California’s low carbon fuel standard (LCFS) allows farmers to earn credits from capturing methane, a potent greenhouse gas. Gasoline and diesel producers buy these credits to satisfy their obligations under the LCFS and pass the cost of these credits along to consumers. I summarized the role of digesters in the LCFS in January.
The state’s air resources board (CARB) is currently considering changes to the LCFS, including the timeline for phasing out these credits for dairy farms. Here, I assess CARB’s options by comparing four numbers: (i) the cost of building a digester, (ii) the cost of operating a digester, (iii) the benefit to society of reducing methane emissions, and (iv) the value of credits from state and federal policies.
How much do digesters cost?
Anaerobic digesters are essentially giant covers that seal manure in a lagoon to keep oxygen out while microbes feed on the contents. According to data provided to CARB, it cost $8.6m to construct a typical digester in 2023 on a dairy with 2,500 milking cows. This equates to $1.2m per year if amortized over 10 years.
To participate in the LCFS, the digester operator cleans the trapped gas and injects it into a pipeline for use in transportation. For an average digester project, it costs $1.1m per year to operate the digester, and the operator can sell the gas for approximately $230,000 at 2023 city gate natural gas prices, so the net operating cost is $870,000. If the project cannot connect to a pipeline and needs to truck the gas to an existing utility pipeline tap, then it would incur an extra $500,000 in cost.
It will be helpful to express these costs in dollars per ton of abated methane so we can compare them to benefits. Luckily, CARB computes an estimate of tons abated for every project in the LCFS.
This representative digester is estimated to prevent 760 metric tons of methane emissions per year (calculation details at end of article). So, amortizing over 10 years, the annual capital cost works out to $1580 per ton abated per year. The net operating cost after subtracting revenue from selling the gas is between $1150 and $1800 depending on whether the operator has to pay trucking costs.
What is the social value of preventing methane emissions?
According to the EPA, a ton of methane emitted in 2023 imposes costs of $2200 on society. This number is measured in 2023 dollars and is based on a 2% discount rate (calculation details at end of article).
How Large are the Subsidies to Digesters?
When they sell the biogas trapped by a digester, dairy farms earn credits under both the LCFS and the federal Renewable Fuel Standard (RFS). Credit prices in the RFS are higher this year than last. At the current price of $3.20 per credit under the RFS, digester operators would receive $2200 per ton of methane abated.
LCFS credits for dairy biogas have two components:(i) a payment for the methane that would have been emitted from decaying manure had the digester not been present, and (ii) a payment for the fact that combustion and production of biogas emits less CO2 than the specified standard. At the going price of $55 per credit, an average digester would earn $1340 per ton of methane abated, of which $1240 stems from preventing methane emissions and $100 from the fact that biogas burns cleaner than the LCFS standard.
California digester projects can get grants from the state to cover up to half of capital costs. I do not include these grants here, in part because two-thirds of biogas generated by livestock digesters comes from out of state. Yes, out of state producers are eligible to participate in the LCFS.
We now have all four numbers, summarized in the figure below.
Are digesters cost effective?
Digesters can last for decades. Over the first 10 years, the net cost of constructing and operating a digester is between $2730 and $3380 per ton of methane abated. This amount exceeds the estimated social value of the avoided methane emissions, which is $2200.
Importantly, the social cost of methane number I use is based on a time horizon extending to 2300. Methane causes most of its damage in the first 20 years, after which its effects dissipate dramatically. Therefore methane emissions are vastly more damaging than CO2 if evaluated over a 20 year horizon, but relatively less damaging if evaluated over a longer horizon. If damages are evaluated only over the next 20 years, then a ton of methane is 80 times worse than a ton of CO2. Evaluated over 100 years, it is 25 times worse, and over 300 years it is about 10 times worse.
CARB uses a 100 year horizon, which means that it quantifies the damage caused by a ton of methane as equal to 25 times the damage caused by a ton of carbon dioxide. I think EPA makes a strong case to use a longer horizon. However, using the CARB approach would raise the estimated social value of the avoided methane emissions by a factor of 2.5.
At current credit prices, digesters receive $3540 per ton of methane abated. This amount substantially exceeds the estimated social value of the avoided methane emissions. However, it is quite similar to the upper bound cost of building and operating a digester. If we have decided that anaerobic digesters are the way we are going to prevent manure methane emissions, then the federal and state credits combined are just enough to make that work over the first 10 years of a digester’s life.
Capital costs vs operating costs
CARB policy discussions center around the length of time a digester can claim credits for avoided methane. Current policy allows crediting for methane prevented in the first 10 years a digester operates, but it allows renewal for up to two additional 10 year periods. CARB’s modest proposal is that projects breaking ground before January 1, 2030 will be limited to two consecutive 10-year crediting periods and those breaking ground later would be further limited.
After the first 10 years, once capital costs have been paid, there is little economic justification for digesters to receive prevented methane LCFS credits. At current prices, credits from the RFS, plus the component of the LCFS credit stemming from fuel combustion, are more than sufficient to cover costs. This statement is particularly pertinent for the two thirds of digester credits generated outside the state. The federal program is providing enough to keep these digesters running; California drivers are effectively donating additional dollars.
If credit prices were to revert to their 2021 values (much higher LCFS credit prices and somewhat lower RIN credit prices), then the figure below shows that prevented methane credits would provide a substantial windfall to existing digesters.
There are caveats. If the cost numbers I am using are too low, then existing digesters may shut down if prevented-methane crediting were to disappear. If biogas were to stop earning credits in the RFS, then the same would be true.
Conclusion
Prevented methane emissions credits cover the cost of constructing a digester. However, after the initial 10 year crediting period, there is little economic justification to continue these credits.
Most fuels in the LCFS are evaluated based on the emissions generated during their production and combustion. Credits for prevented methane emissions make digesters on livestock operations unique. Digesters on landfills do not receive such credit. We should be asking why the state, through its LCFS and other programs, should value the same pollutant so much more based upon its source. It undercuts the goal of the LCFS to be technology neutral.
My analysis takes as given that the state has decided to use digesters in the LCFS to reduce livestock manure methane emissions. I did not consider other potential methane-reduction technologies, such as worms, flies, or drying and spreading. I also did not consider other policy levers such as subsidies funded by taxpayers or pricing methane emissions directly, some of which I addressed in my prior article. A drawback of subsidizing green technologies is that it may cut off potentially less expensive options. There’s also the weirdness of running agricultural emissions policy through a transportation program.
This article is cross-posted on the EI Blog.
Addendum: Details on calculations
How I got 760 metric tons of prevented methane emissions
I started with this project’s LCFS carbon intensity of -355 grams of CO2-equivalent per megajoule of energy delivered. This value stems from approximately 45g of emissions from burning the biogas to power a CNG vehicle and 400g of prevented emissions (45-400=-355). CARB equates a gram of methane to 25 grams of CO2, so our digester is preventing 400/25 = 16g of emissions per megajoule. The digester produces 45,000 MMBTU per year, which is 47.5 million MJ, so it is preventing 47.6*16 = 760 metric tons of methane emissions per year.
How I got a social cost of $2200 per ton
EPA estimates damages of $1600 in 2020 and $2400 in 2030. For simplicity, I interpolated linearly to get damages of $1840 in 2023. Then, to convert from 2020 dollars to 2023 dollars, I added 20% inflation to get $2200.
How big are the subsidies?
LCFS credits are based on the difference between the carbon intensity standard (87.01 in 2024) and the carbon intensity of the digester (-355 in our example). So, the LCFS credit value is (45000/760)*(CI+355)*0.9*1055*(LCFS credit price)/1000000 per ton of methane abated.
RFS credits are based on the volume of the fuel rather than its estimated life cycle carbon emissions. Dairy biogas generates 11.727 RIN credits per MMBtu, so the RIN value is (45000/760)*11.727*(RIN credit price) per ton of methane abated.
I appreciate you mentioning California residents (not just active drivers, as I assume the majority of added transportation cost resulting from increased fuel costs are passed on to end consumers as well) are subsidizing out of state digesters via LCFS. When I explain this to other Californians, none are happy to learn this. You may have seen a recent Tier 2 biodiesel pathway that claimed avoided methane emissions in their final CI score by utilizing food waste feedstock that they document would be landfilled otherwise. They had negative-CI BD as a result. I argued against this via public comment, as did ICCT. To no avail. So I expect additional creative methane emission avoidance applications for non-methane fuels going forward.