Biogas recovery systems collect methane from manure and burn it to generate electricity or heat. 

Burning methane reduces its global warming potential, thereby reducing greenhouse gas (GHG) 

emissions. Climate change mitigation policies that eff ectively put a price on GHG emissions could 

allow livestock producers to “sell” these reductions to other greenhouse gas emitters who face emissions caps or who voluntarily wish to off set their own emissions. Depending on the direction and 

scope of future climate change legislation, income from carbon off set sales could make methane 

digesters profi table for many livestock producers. By modeling the main determinants of producers’ 

decisions to adopt biogas recovery systems, we illustrate how the price of carbon infl uences this decision and the potential supply of carbon off sets from the livestock sector.

Methane digesters that collect and burn methane from manure can provide numerous benefi ts to 

livestock producers and the environment. Th ey can supply a renewable source of electricity that can 

power farm equipment or be sold to the electricity distribution grid. Digesters can reduce GHG 

emissions, odors from manure, and the potential for surface-water contamination. Th ey can also be 

used to recycle manure solids for animal bedding material. Despite their benefi ts, digesters have not 

been widely adopted, mainly because the costs of constructing and maintaining these systems have 

exceeded the benefi ts accruing to operators. Of 157 methane digesters operating in the United States 

as of October 2010, 126 were on dairies and 24 were on hog operations.1

1

U.S. Environmental Protection Agency, U.S. Anaerobic Digester Status Report, October 2010.
Key, Nigel, and Stacy 

Sneeringer. Carbon Prices 

and the Adoption of Methane 

Digesters on Dairy and 

Hog Farms, EB-16 U.S. 

Department of Agriculture, 

Economic Research Service, 

February 2011. 

Recommended citation 

format for this publication:

ECONOMIC BRIEF Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms

UNITED STATES DEPARTMENT OF AGRICULTURE 2

Methane is a potent greenhouse gas. Burning 1 ton of methane is equivalent to eliminating about 24 tons 

of carbon dioxide. A number of policies could encourage farmers to use a digester, either by subsidizing 

those who install one or penalizing those who do not. While likely impacts on the environment and farm 

structure vary depending on the policy approach, one of the most promising approaches for controlling 

GHG emissions is to establish a market price for reductions in GHG emissions.

A carbon off set market is one mechanism for valuing methane emission reductions that is currently in 

use. An off set market allows livestock producers who reduce methane emissions to sell these reductions 

or “carbon off sets” to other greenhouse gas emitters (see box, “Carbon Off set Markets”). Currently, 

only a few U.S. livestock operators sell off sets in regional or voluntary carbon off set markets, partly 

because carbon prices have been low. However, future eff orts to reduce GHG emissions could result in 

substantially higher carbon prices, which could provide a new source of income for farmers who adopt 

methane digesters. 

Methane digesters and greenhouse gas emissions

When manure is kept in oxygen-free (i.e., anaerobic) environments like lagoons, ponds, tanks, or pits, 

it decomposes to produce a biogas containing about 60 percent methane. In contrast, when manure is 

in oxygen-rich environments, such as when it is deposited on fi elds, it generally produces little methane, 

though it can contribute to other environmental problems. 

Th e agriculture sector is responsible for about 6 percent of total U.S. greenhouse gas emissions, of which 

about 0.6 percent (10.5 percent of agriculture’s GHG) is from manure-based methane. Dairy cattle and 

swine production are responsible for 43 percent and 44 percent of methane emissions from manure, 

respectively. Th e other livestock sectors—including beef cattle, sheep, poultry, and horses—are collectively 

the source of only 13 percent of total manure methane, mainly because manure from these animals is 

usually handled in ways that produce little methane. 

2

Carbon Offset Markets

In a carbon off set market, farmers are paid for emission reductions without incurring Government 

expenditures. Farmers sell emission reductions to individuals or fi rms who wish to “off set” their 

own emissions. Off sets are measured in tons of carbon dioxide-equivalent emissions (greenhouse 

gases such as methane are converted to an equivalent quantity of carbon dioxide based on global 

warming potential). Carbon off sets can be exchanged in markets established to satisfy regulatory 

compliance or in voluntary markets. 

Compliance markets develop when regulations limit the amount of GHGs that fi rms are allowed 

to emit, but permit regulated fi rms to trade emission allowances. Under such a system, known 

as cap-and-trade, regulated fi rms (such as power plants) must obtain permits to emit GHGs. To 

meet their emission targets, fi rms can reduce their own emissions or purchase permits from other 

“capped” fi rms. Or, regulated fi rms can pay non-regulated emitters, such as livestock operations, to 

reduce emissions. 

Compliance markets currently exist at many levels. International compliance markets include the 

Kyoto Protocol and the European Union’s Emissions Trading Scheme. Ten Eastern States recently 

implemented the Regional Greenhouse Gas Initiative (RGGI), the fi rst mandatory market-based 

eff ort in the United States to reduce GHG emissions. Th e Federal Government recently considered 

climate change legislation that would establish a national cap-and-trade system.

Voluntary off set markets allow companies and individuals to voluntarily purchase carbon off sets. 

For example, individuals might seek to off set their travel-related emissions or fi rms might seek to 

compensate for emissions related to their products. In the United States, the Chicago Climate 

Exchange (CCX) is a voluntary, but legally binding, carbon trading regime. 
Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms ECONOMIC BRIEF

3 ECONOMIC RESEARCH SERVICE

A biogas recovery system—known variously as an “anaerobic digester,” “methane digester,” “biodigester,” 

or “methane recovery system”—captures methane from anaerobic manure storage facilities. Such systems 

collect manure, optimize it for the production of methane by adjusting temperature and water content, 

capture the biogas, and burn it for heat or electricity generation. 

Factors infl uencing methane digester adoption

A farmer’s decision to adopt a methane digester depends on the relative costs and benefi ts of doing so. 

Costs include start-up and maintenance expenditures. Benefi ts include revenues from the sale of electricity, 

foregone electricity purchases, revenue from the sale of carbon off sets, and less odor from stored manure. 

A number of factors determine these costs and benefi ts, including the size of the operation, manure 

storage method, the price of electricity, onfarm electricity expenditures, the ability to sell electricity not 

used on the farm, and—if there is a carbon off set market—the price of carbon. A model of digester 

profi tability illustrates how these factors aff ect the number of farms that might adopt digesters (see box, 

“Modeling Methane Digester Profi ts”), how the price of carbon off sets would infl uence the quantity of 

methane emitted from manure management, and how large the supply of carbon off sets from digester 

adoption might be.

Manure management method and farm size

Potential revenue from a digester system depends on the type of manure storage facility in use. Off set 

programs usually require documentation of baseline emissions and certifi cation that off sets lead to 

“additional” emission reductions. Consequently, only livestock operations using anaerobic manure storage 

before the creation of an off set market would likely qualify for an off set program. Th is limits the pool of 

potential off set market participants to swine and dairy operations having manure ponds, lagoons, or slurry 

pit systems. Operations with slab or shed manure systems or with no storage facilities would not generate 

suffi cient methane to satisfy the “additionality” requirements for off set certifi cation. We estimate that up 

to 42 percent of dairies and 64 percent of hog operations have manure management systems that qualify 

for an off set program.

 Anaerobic digesters are generally added to two main types of manure storage. Th ese are “lagoon” systems 

in which a cover is placed over an earthen storage pond, and “pit” systems in which manure is processed 

through a heated tank to induce methane production. Lagoon systems are less expensive to construct, but 

often produce less electricity in cooler climates because they are usually not heated. Pit-based systems are 

more expensive to build, but can produce more electricity when heated. 

Th e type of manure storage facility used determines the baseline methane emitted and, consequently, the 

quantity of carbon off sets that could be generated and sold. Lagoon systems generally emit higher rates 

of methane per head than pit systems, and operations in warmer climates emit more than those in cooler 

climates. While pit systems in cooler climates can be heated to generate more methane (and consequently 

more electricity), this extra methane would not be considered in the baseline emissions, and so would 

likely not qualify for carbon off sets. 

Figure 1 illustrates how profi ts from a biogas recovery system vary across manure management systems in 

the two biggest dairy States, Wisconsin and California. Th e fi gure compares the net present value (NPV) 

per head of a digester project that lasts 15 years when the carbon off set price is $13 (per ton of carbon 

dioxide-equivalent emissions). In both States, operations with lagoons are more profi table than operations 

with pit systems, mainly because lagoons have much higher initial emissions and consequently higher 

off set revenues. Also, biogas systems are more profi table in California than in Wisconsin. California’s 

warmer climate increases methane production and lowers operating and construction costs, and electricity 

prices are higher there than in Wisconsin. 

Farm size is another important determinant of digester profi ts. Digester construction at dairy operations 

with 500-1,000 head is estimated to cost between $366,000 and $652,000, while annual maintenance 

costs are estimated to range between $7,000 and $28,000. Construction costs per head of livestock 

generally decline as the operation increases in size, making adoption more profi table for larger operations. 

A digester on a 1,500-head Wisconsin dairy with a lagoon manure system (purple line) has a NPV of $333 
ECONOMIC BRIEF

UNITED STATES DEPARTMENT OF AGRICULTURE 4

The Role of Agriculture in Reducing Greenhouse Gas Emissions

per head. In contrast, a 1,000-head dairy in Wisconsin using the same manure management system would 

have a NPV of only $239 per head (fi g. 1). Th e additional income available to larger livestock operations 

from biogas recovery systems could enhance their competitive advantage over smaller producers, and 

could contribute to the ongoing concentration of production on larger farms. 

Modeling Methane Digester Profi ts

An investment model is used to estimate how farm size, manure management method, and the 

carbon off set price aff ect a producer's decision to adopt a biogas recovery system. A hog or dairy 

producer is assumed to adopt a digester if the net present value (NPV) of the project is positive. Th e 

NPV is the sum over the life of the project (15 years) of all cash fl ows (e.g., revenues from electricity 

or carbon off sets minus capital and variable costs), discounted to the present value:

 NPV = Present value of revenues – Present value of costs.

Th e gross revenue from the digester includes electricity expenditures avoided by generating one’s 

own electricity (and not having to buy it from the utility company), sales of electricity not used 

onfarm, and sales of carbon off sets: 

 Revenues = Electricity expenditures avoided + Electricity sales + Carbon off set sales.

Th e amount of electricity expenditures avoided depends on the amount of electricity used onfarm 

and the price of purchased electricity. Th e revenue from electricity sold depends on the excess 

amount generated and the price received for electricity sold. Th e price for electricity purchased may 

be diff erent from the price of electricity sold, though they are set equal in this analysis. Th e price of 

electricity is modeled to increase with the price of carbon.

Th e revenue from carbon off sets will depend on the amount of methane generated and the price 

of carbon. Th e amount of methane generated depends on the operation’s manure management 

system and the amount of manure produced, which depends on farm size. Other benefi ts from a 

digester—like odor reduction, water pollution abatement, and revenues from separated solids and 

from “tipping fees” (fees paid to deposit food wastes into the digester)—are not included in the 

model because it is diffi cult to assess their value. Consequently, the model predicts a lower bound 

to the total benefi ts from a biogas system. 

Th e costs of the digester include construction (capital, equipment, etc.) costs, maintenance and 

repair costs, and transaction costs associated with participating in a carbon off set market: 

 Costs = Construction costs + Maintenance costs + Off set market costs.

Th e model assumes that an operation will pay off the initial construction costs of the digester over 

a 15-year period.

Th e quantity of electricity that can be generated and the construction and maintenance costs of 

the digesters are functions of farm size and type of manure handling system. Th ese functions are 

specifi ed using information from case studies. State-level electricity price data are from the U.S. 

Department of Energy. Onfarm electricity use is observed in the Agricultural Resource Management 

Survey (ARMS) 2005 dairy survey and 2004 hog survey. Methane emissions are estimated using 

State-level coeffi cients based on Intergovernmental Panel on Climate Change methodologies. Th is 

analysis assumes no fi nancial support or other programs to subsidize methane digester costs. 

Th e model is used to estimate digester profi ts for every farm in the ARMS 2005 dairy and 2004 

hog surveys. Survey weights are used to develop estimates of digester adoption rates and the carbon 

off set supply at the national level. 
Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms ECONOMIC BRIEF

5 ECONOMIC RESEARCH SERVICE

Electricity prices, onfarm electricity use, and sales of excess electricity 

Revenues from the sale of surplus electricity and cost savings from farm-generated electricity depend on 

the price of electricity, which varies substantially across States. Th e electricity generated in 1 year by a 

1,000-head dairy with a pit-based digester would be worth approximately $56,300 (retail) in Wisconsin, 

versus $77,500 in California. If farmers generate more electricity than they use and they are able to sell 

this surplus electricity, then a higher electricity price increases their incentive to adopt a methane digester. 

If operations are unable to sell surplus electricity back to the electricity distribution grid, then the 

benefi ts from electricity generation are limited to the avoidance of onfarm energy costs associated with 

heating or cooling, drying grain, pumping water, lighting, and operating machinery. Onfarm energy 

expenditures vary widely across regions. Th e 2005 Agricultural Resource Management Survey (ARMS) 

dairy survey indicates that a 1,000-head dairy in Wisconsin typically spends about $125,700 per year on 

energy (electricity, natural gas, and propane; amount updated to 2009 dollars), more than double what 

it could generate onfarm with a pit-based digester ($56,300). In contrast, a 1,000-head California dairy 

typically spends about $53,600 on energy (2009 dollars), so it would use less energy than it could generate 

($77,500).2

 Consequently, without the ability to sell electricity, farms in California would receive only a 

fraction of their generated electricity’s potential value. In this example, the Wisconsin farm with higher 

energy use (due to higher heating costs) would have a greater incentive to adopt a biogas recovery system 

than the California farm, despite having lower electricity prices. However, if the California farm could sell 

its surplus electricity at a suffi ciently high price, then it could benefi t more from adopting a digester than 

the Wisconsin farm because the California farm can generate more electricity. 

One potential problem with using electricity from biogas facilities is that the onfarm supply may not 

match demand. Th e quantity of electricity generated may fl uctuate over the day, month, or year depending 

on temperature, infl ows of manure, machine malfunctions, and the like. Similarly, onfarm electricity 

use fl uctuates over time. “Net metering” laws mitigate this problem by allowing small-scale generators 

to obtain the full retail value for the electricity they generate. Under net metering laws, when surplus 

2

Th ese amounts were 

calculated using 2009 electricity 

prices for the industrial sector; 

these prices were $0.0921/

kwh for California and $0.067/

kwh for Wisconsin. Source: 

U.S. Department of Energy, 

U.S. Energy Information 

Administration, Offi ce of Coal, 

Nuclear, and Alternate Fuels. 

2010. Electric Power Monthly. 

June 2010. DOE/IEA-0226. 

Table 5.6.B. Accessed at: 

http://www.eia.doe.gov/cneaf/

electricity/epm/matrix96_2000.

html/.

Figure 1

Net present value per head for methane digesters on California and Wisconsin 

dairies using lagoon and pit manure management systems

Net present value ($) of digester per head

Number of head

Source: Authors’ calculations, using 2005 ARMS data.

1000

800

600

400

200

0

200

400

600

800

1000

1000 1500 2000 2500 3000

California, pit, carbon price = $13/ton

California, lagoon, carbon price = $13/ton

Wisconsin, pit, carbon price = $13/ton

Wisconsin, lagoon, carbon price = $13/ton

500
ECONOMIC BRIEF Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms

UNITED STATES DEPARTMENT OF AGRICULTURE 6

electricity is produced onfarm, the electricity meter spins backwards, eff ectively saving the electricity until 

it is needed. Over the billing period, the operation is only billed for its net electricity usage. More than 

40 States have net metering laws.

Operations that generate more electricity than they consume over a billing period may be able to sell their 

excess electricity to the utility at a negotiated price. Th e ability to sell surplus electricity and the selling 

price vary regionally. Recent laws and trends suggest that an increasing number of livestock operations 

may be able to sell electricity at retail or even higher prices. Since manure-derived electricity is from a 

renewable source, the negotiated price for excess electricity could enjoy a substantial premium over the 

wholesale price. Currently, about 30 States require utilities to purchase a share of power from renewable 

sources, including farms with biogas systems. 

Carbon offset price

Th e additional revenues that could be earned from carbon off sets could have a large eff ect on digester 

profi tability and adoption if the off set price is suffi ciently high. However, future carbon prices are 

uncertain. In the major international compliance markets, carbon prices have ranged between $15 and 

$30 per ton of carbon dioxide-equivalent emissions in the last decade. In the United States, off set prices 

have been much lower. Th e average price for carbon allowances in the eastern States has ranged between 

$1 and $3 per ton since the RGGI’s inception in 2008. Th e CCX carbon price has ranged between $1 and 

$7 per ton since 2004, but has been trading under $1 per ton since 2009. Th e Environmental Protection 

Agency estimates that the recently proposed House bill (H.R. 2454, the “American Clean Energy and 

Security Act of 2009”) would have resulted in a carbon off set price of $13 per ton had it been enacted. 

At a particular carbon price, some farmers will choose to adopt digesters based on their farm’s size, 

location, manure storage system, electricity prices, and onfarm electricity use. A higher carbon price 

increases the potential revenue from off set sales. A higher carbon price would also likely be associated with 

higher electricity costs, which would increase the value of electricity generated with a methane digester. 

As carbon prices increase, more livestock operations would fi nd it profi table to adopt a digester. Figure 

2 illustrates, at three diff erent carbon prices, the estimated number of dairy operations in diff erent size 

categories on which a digester would have a positive NPV. With a carbon price of $0 (no off set market), 

digesters would have a positive NPV on only 69 operations with at least 1,000 head and 2 operations with 

fewer than 1,000 head. However, if the off set price were $13 per ton of carbon dioxide equivalent, then 

digesters would have a positive NPV on 658 operations with at least 1,000 head and on 1,190 operations 

with fewer than 1,000 head. If the price were to increase to $26, digesters would have a positive NPV on 

many more small-scale operations, including 3,575 operations with fewer than 1,000 head. 

Higher carbon prices cause more farms to fi nd methane digesters profi table. If these farms install a 

digester, then the total greenhouse gas emissions from manure management would fall. By predicting 

which operations would adopt a digester (i.e., those on which a digester has a positive NPV) and then 

summing the reduction in tons of carbon dioxide-equivalent emissions, it is possible to generate a curve 

representing the relationship between the price of carbon and the amount of emissions reduced. 

Figure 3 shows this relationship for dairies, hog operations, and both livestock types combined. Without a 

carbon market (when the price is zero), no hog operations fi nd it profi table to adopt a digester, so there is 

essentially no reduction in emissions. In contrast, some dairies fi nd that electricity generation alone would 

make adoption profi table, so some emissions are reduced when the carbon price is zero. As the carbon 

price increases, more operations adopt digesters, lowering emissions. Eventually, at a price of about $70, 

the curves approach vertical and almost all of the total potential reduction of methane is reached.

At a carbon price of $13, greenhouse gas emissions are reduced by 9.8 and 12.4 million tons (carbondioxide equivalent) for the dairy and hog sectors, respectively. Th is amounts to reductions of 61-62 

percent of manure-generated methane in these sectors. A doubling of the carbon price to $26 would 

cause manure-based methane emissions from dairy and hogs together to be reduced by 78 percent. Th ese 

emission reductions represent the potential supply of carbon off sets from hog and dairy producers who 

could earn profi ts by adopting a methane digester. Th e actual off set supply will depend on how many of 

these farmers choose to adopt a digester and participate in an off set market.
Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms ECONOMIC BRIEF

7 ECONOMIC RESEARCH SERVICE

Figure 2

Number of dairy operations on which digesters have a positive net present value 

at different carbon offset prices

Number of dairies adopting at price

Operation size (number of head)

Notes: Numbers at higher prices are additive to those for lower prices; for example, at a price of 

$13/ton, an additional 491 operations of size 1,000-2,499 head are predicted to adopt, for a total of 

520 operations of this size. At a carbon price of $13/ton, no operation smaller than 250 head is 

predicted to adopt. At a carbon price of $0, no operation with fewer than 500 head and 2 

operations 500-999 head are predicted to adopt. 

29 40

458

730

491

98

1,295

718

372

62

0

200

400

600

800

1,000

1,200

1,400

<250 250-499 500-999 1,000-2,499 2,500+

Price = $26

Price = $13

Price = $0

2

Figure 3

Total reductions in manure methane emissions from dairy, hogs, and both sectors 

together at different carbon offset prices

Carbon price per ton ($)

Million tons (annually)

Source: Authors’ calculations, using 2004 and 2005 ARMS data.

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40

Hogs

Dairy

Together
ECONOMIC BRIEF Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms

UNITED STATES DEPARTMENT OF AGRICULTURE 8

At an off set price of $13, the net present value (i.e., the present value of the stream of net revenue earned 

over 15 years) of all digesters in the dairy and hog sectors together would be about $1.8 billion. At this 

carbon price, off set fees would comprise the largest source of digester revenue (66 percent of total), far 

exceeding savings in electricity costs (26 percent) and surplus electricity sales (8 percent). 

Conclusions

Th e extent to which livestock operations can reduce greenhouse gas emissions from manure management 

and the potential supply of carbon off sets from the livestock sector depend fundamentally on the number 

of livestock operations that adopt a methane digester. Th e adoption decision depends on digester 

profi tability—which in turn depends on the value of the electricity generated, revenues from the sales 

of carbon off sets, and other benefi ts and costs of the facility. Key factors aff ecting digester profi tability 

include:

• Th e size of the operation. Larger operations are more likely to fi nd participating in off set markets 

profi table because of economies of scale in digester technology.

• Farm electricity expenditures, which depend on electricity prices and onfarm energy consumption. 

Greater onfarm expenditures make digesters more profi table if an operation is unable to sell its 

surplus electricity or if the selling price is low.

• Th e selling price of surplus electricity. A higher price makes digester-generated electricity more 

valuable for operations that can generate more electricity than they use onfarm.

• Initial levels of methane emissions. Th e amount of methane generated before adopting a digester 

determines the quantity of “additional” emission reductions that can be sold as off sets. Farms with 

lagoons located in warmer regions generally produce a greater initial quantity of emissions than 

those with pit manure systems located in cooler climates. 

• Th e carbon off set price. A higher carbon price means greater revenues from off set sales. 

ERS research indicates that revenues from the sale of carbon off sets could have a substantial eff ect on the 

number of operations that would adopt a biogas recovery system. A carbon price of $13 could induce 

dairy and hog operations to supply off sets equivalent to about 22 million tons of carbon dioxide annually. 

Th is amounts to 62 percent of the potential off sets from manure management in these sectors, or about 5 

percent of total greenhouse gas emissions from U.S. agriculture.

Whether or not a carbon off set market is created, several policy tools could increase digester profi ts 

and result in more widespread adoption of the technology. For example, further expanding the scope of 

“net metering” laws and raising minimum renewable energy requirements for utilities would increase the 

price farmers receive for their generated electricity. Subsidies or tax breaks could directly lower digester 

construction costs, while public research to reduce construction and maintenance costs and improve 

digester effi ciency could raise the economic feasibility of digesters over the longer term. 

Th e U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, 

color, national origin, age, disability, and, where applicable, sex, marital status, familial status, parental status, religion, sexual 

orientation, genetic information, political beliefs, reprisal, or because all or a part of an individual's income is derived from any 

public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means 

for communication of program information (Braille, large print, audiotape, etc.) should contact USDA’s TARGET Center at 

(202) 720-2600 (voice and TDD). 

To fi le a complaint of discrimination write to USDA, Director, Offi ce of Civil Rights, 1400 Independence Avenue, S.W., 

Washington, D.C. 20250-9410 or call (800) 795-3272 (voice) or (202) 720-6382 (TDD). USDA is an equal opportunity 

provider and employer.

 Photo credit: AgStar

Th is brief is drawn from: Climate Change Policy and the Adoption of Methane Digesters on Livestock 

Operations. Economic Research Report 111. It is the third in a continuing series of ERS economic briefs 

examining agriculture’s potential role in climate mitigation and the economic and policy issues involved.