Climate Change Policy and the 

Adoption of Methane Digesters 

on Livestock Operations

Nigel Key

Stacy Sneeringer

Economic

Research

Service

Economic

Research

Report

Number 111

February 2011

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Recommended citation format for this publication: 

Key, Nigel and Stacy Sneeringer. Climate Change Policy and the 

Adoption of Methane Digesters on Livestock Operations, ERR-111, 

U.S. Department of Agriculture, Economic Research Service, 

February 2011.

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A Report from the Economic Research Service

Abstract

Methane digesters—biogas recovery systems that use methane from manure to generate 

electricity—have not been widely adopted in the United States because costs have 

exceeded benefi ts to operators. Burning methane in a digester reduces greenhouse gas 

emissions from manure management. A policy or program that pays producers for these 

emission reductions—through a carbon offset market or directly with payments—could 

increase the number of livestock producers who would profi t from adopting a methane 

digester. We developed an economic model that illustrates how dairy and hog operation 

size, location, and manure management methods, along with electricity and carbon prices, 

could infl uence methane digester profi ts. The model shows that a relatively moderate 

increase in the price of carbon could induce signifi cantly more dairy and hog operations, 

particularly large ones, to adopt a methane digester, thereby substantially lowering emissions of greenhouse gases. 

Keywords: methane, methane digesters, manure, livestock, climate change, greenhouse 

gases, carbon offset

Acknowledgments

The authors would like to thank Brent Gloy, Department of Agricultural Economics, 

Purdue University; Jeffrey Hyde, Department of Agricultural Economics and Rural 

Sociology, Pennsylvania State University; John Horowitz, USDA, Economic Research 

Service; Richard Hegg and Luis Tupas, USDA, National Institute of Food and 

Agriculture; and Robert Johansson and Jan Lewandrowski, USDA, Offi ce of the Chief 

Economist, for their helpful reviews and comments. Thanks also go to our editor, 

Priscilla Smith, and our designer, Wynnice Pointer-Napper. 

Nigel Key, nkey@ers.usda.gov

Stacy Sneeringer, ssneeringer@ers.usda.gov

Climate Change Policy and the 

Adoption of Methane Digesters 

on Livestock Operations

Economic 

Research 

Report 

Number 111

February 2011
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Contents

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Dairy, Hog Operations Produce Most Manure Methane . . . . . . . . . . . . . 3

Climate Change Policies Could Spur Digester Adoption . . . . . . . . . . . . . 4

Boosting Benefi ts Over Costs Would Encourage Methane 

 Digester Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

 Electricity—Prices, Onfarm Use, and Sales of Surplus—

 Is a Key to Digester Profi tability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

 Carbon Price Could Play Major Role in Digester Adoption Decision . . . 9

 Existing Types of Manure Storage and Handling Favor Southern 

 Farms for Offset-Program Qualifi cation . . . . . . . . . . . . . . . . . . . . . . . 10

 Digesters’ Other Benefi ts Include Odor Reduction, Less 

 Surface-Water Contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Scale of Livestock Operations Affects Benefi ts From Carbon Offsets . 14

 Digester Adoption Spreads to More States as Carbon Price Rises . . . . . 17

 Options for Promoting Adoption of Biogas Technologies by 

 Smaller Scale Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

More Carbon Offsets Are Supplied at Higher Price. . . . . . . . . . . . . . . . 22

Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

 The Net Present Value of a Methane Digester Project . . . . . . . . . . . . . . 33

 Case Studies and Parameter Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

 ARMS Data Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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Summary

What Is the Issue?

Methane digester systems capture methane from lagoon or pit manure storage 

facilities and use it as a fuel to generate electricity or heat. In addition to 

providing a renewable source of energy, digesters can reduce greenhouse 

gas emissions, odors from manure, and potential contamination of surface 

water. Methane digesters have not been widely adopted in the United States 

mainly because the costs of constructing and maintaining these systems 

have exceeded the value of the benefi ts provided to the operator. Policies to 

reduce greenhouse gas emissions could create new opportunities for livestock 

producers to earn revenue from burning methane from manure, making such 

biogas recovery facilities profi table for many livestock producers. However, 

there is likely to be wide variation in the scale, location, and characteristics of 

livestock operations that would benefi t, so these policies could have longrun 

structural implications for the U.S. livestock sector. In this report we estimate 

the number and type of hog and dairy operations that would fi nd it profi table 

to adopt a digester at any given carbon price. We also estimate the relationship between the price of carbon (CO2) and the amount of emissions reduced 

by digesters on these operations. 

What Are the Major Findings?

The extent to which livestock operations can reduce greenhouse gas emissions from manure management depends in part on the number of livestock 

operations that adopt methane digesters, which in turn depends on digester 

profi tability from energy savings, energy sales, and/or sales of emission 

reductions in a carbon offset market. An offset market allows livestock 

producers who reduce methane emissions to sell these reductions or “carbon 

offsets” to other greenhouse gas emitters who might face emissions caps. 

Factors that infl uence digester profi tability and that determine the characteristics and locations of the livestock operations that could benefi t from the introduction of a carbon offset market include:

• operation size—costs of constructing and operating a digester decline on 

a per-head basis, making digesters more profi table on larger operations

• the selling price of surplus electricity—a higher price makes digesters 

more valuable for operations that can generate more electricity than they 

use onfarm

• farm electricity expenditures, which depend on electricity prices and 

onfarm use—higher expenditures make digester-generated electricity 

more valuable, especially if the operation cannot sell electricity or if the 

selling price of electricity is below the retail price

• participation in cost-share and other incentive programs—this can defray 

the cost of building digesters

• farm’s initial level of methane emissions—this determines the maximum 

quantity of carbon emissions reductions that can be sold
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• carbon price—a higher carbon price makes digesters more profi table for 

operations that can sell carbon offsets.

Larger operations would be more likely to adopt a digester, and likely would 

earn substantially higher profi ts on average than smaller operations. Hence, 

introduction of a carbon market in a region could enhance existing economies 

of scale in production and result in further concentration of production on 

the largest operations. However, smaller livestock operations may be able to 

achieve a more effi cient digester scale by supplementing manure with food 

waste products or by sharing a digester with other small operations. In addition, if the adoption of methane digesters by smaller operations is a policy 

goal, several tools exist—such as cost-share subsidies or tax incentives—that 

could be used to encourage their adoption by small farms.

Additional revenues from the sale of carbon emissions reductions (offsets) 

could substantially increase the number of operations that would adopt a 

biogas recovery system. Findings in this study indicate that a carbon price 

of $13 per metric ton of carbon dioxide equivalent emissions (an initial price 

estimated under one scenario for a nationwide cap-and-trade program for 

greenhouse gases) would:

• induce dairy and hog operations to supply offsets equivalent to about 22 

million tons of carbon dioxide annually, amounting to about 62 percent of 

the current greenhouse gas emissions from manure management in these 

industries, or about 5 percent of total greenhouse gas emissions from the 

U.S. agricultural sector

• allow dairy and hog operators as a group to earn up to $1.8 billion in 

additional profi ts over 15 years from installing methane digesters.

Currently, the price of electricity and onfarm electricity expenditures are key 

determinants of digester profi tability. However, when carbon prices are above 

$4 per metric ton of CO2 equivalent emissions, carbon offset sales comprise a 

larger source of digester revenue than electricity generation. At a price of $13 

per metric ton of CO2 equivalent emissions, revenues from emission reduction 

sales (offsets) contribute 66 percent of gross digester revenues for all dairy 

and hog operations, electricity sales contribute 8 percent, and cost savings 

from avoided energy expenses contribute the remaining 26 percent. 

At higher carbon prices, the distribution of profi ts from digesters refl ects 

the location of large-scale operations and the prevalence of lagoons. Among 

States with the greatest number of dairies, the study fi nds that California, 

New York, Wisconsin, and Texas each have at least 100 such operations that 

would fi nd it profi table to adopt a digester at a carbon price of $13 per metric 

ton of CO2 equivalent emissions. At the same price, North Carolina, Illinois, 

Indiana, Missouri and Oklahoma each have at least 100 hog farm operators 

who would fi nd a methane digester profi table. 

How Was the Study Conducted?

We used a model of digester profi tability to estimate how farm size, manure 

management methods, electricity prices, and carbon prices affect producers’ 

decisions to adopt biogas recovery systems. Hog and dairy producers are 

assumed to adopt a digester if the present value of the discounted stream 
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of profi ts (the net present value) is positive. Profi ts derive from electricity 

generation and carbon emission reductions sales less the digester construction 

and maintenance costs. Using case study information, we parameterized the 

model. Electricity price data are drawn from the U.S. Department of Energy, 

and methane emissions are estimated using State-level Intergovernmental 

Panel on Climate Change emission coeffi cients. 

By computing the present value of digester profi ts for every farm in nationally representative samples of dairy and hog operations (USDA’s Agricultural 

Resource Management Survey or ARMS), we used the model to provide an 

estimate of the number, size, and location of farms that would fi nd it profi table to adopt a digester at any given carbon price. ARMS is conducted by 

USDA’s National Agricultural Statistics Service (NASS) in conjunction with 

the Economic Research Service. By predicting which operations would earn 

profi ts from digester adoption and then summing the reduction in tons of 

carbon dioxide equivalent emissions, it is possible to estimate the relationship 

between the price of carbon and the amount of emissions reduced by methane 

digesters on dairy and hog operations. We used the model to estimate how the 

present value of farm revenues changes with the carbon price and to simulate 

the effect of surplus electricity prices and Government cost-share policies on 

the potential supply of carbon emissions reductions.
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Introduction

Methane digesters, also known as “anaerobic digesters,” “biodigesters,” or 

“biogas recovery systems,” can be used to capture and burn methane from 

lagoon or pit manure-storage facilities. With lagoons (ponds surrounded 

by earthen berms), covers are installed to capture the methane. With pits 

(concrete or metal tanks located above or below ground), manure can be 

more easily heated to maximize methane production. Manure is collected and 

transported to the digester, where the water, nutrients, and heat are adjusted 

to optimize methane output. Digesters capture the biogas, treat it, and send it 

to a boiler or electricity generator. 

Methane digesters can provide numerous benefi ts to livestock producers and 

the environment. Digesters can supply a renewable source of electricity that 

can be used on the farm or sold to the electricity distribution grid. Digesters 

can reduce greenhouse gas emissions, odors from manure, and the potential 

for surface water contamination. They 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. 

Currently, there are 157 methane digesters operating in the United States, of 

which 126 are on dairies and 24 are on hog operations (U.S. EPA, 2010a). 

Digesters have received more attention lately because of their ability to 

reduce greenhouse gas emissions from livestock manure. Lagoon and pit 

manure handling systems that are common on dairy and hog operations 

emit large amounts of methane. Methane is a potent greenhouse gas (GHG). 

Burning 1 ton of methane is equivalent to eliminating about 24 tons of carbon 

dioxide (IPCC, 2007, table 2.14).1 There are a number of policies that could 

provide fi nancial incentives for farmers to use a digester to reduce methane 

emissions, and the likely impacts on the environment and farm structure vary 

depending on the policy approach. One approach for controlling GHG emissions that requires relatively little direct Government fi nancial support is to 

establish a market for GHG emissions reductions, or “carbon offsets.” 

An offset market allows livestock producers who reduce methane emissions 

to sell these reductions to other greenhouse gas emitters who face emissions 

caps or who voluntarily wish to offset their own emissions. Currently, only 

a few U.S. livestock operators sell offsets in regional or voluntary carbon 

markets. This is partly because the carbon prices in these markets have 

been low. Future efforts to reduce greenhouse gas emissions could result 

in substantially higher carbon prices. Prospects for a national carbon offset 

market within a cap-and-trade framework are uncertain. However, 10 Eastern 

States currently have a regional offset market (Regional Greenhouse Gas 

Initiative) and 7 other States are developing a regional cap-and-trade system 

(Western Climate Initiative). 

Farmers who adopt methane digesters could profi t from higher carbon prices. 

However, there is likely to be wide variation in the scale, location, and characteristics of the farm operations that would benefi t from having methane 

digesters. The main benefi ciaries would be producers whose farm operations 

emit substantial quantities of methane, particularly dairy and hog operations 

1A single ton of released methane 

has the same global warming potential as 25 tons of carbon dioxide (over 

100 years). Burning a ton of methane 

reduces its warming potential to the 

equivalent of 1 ton of carbon dioxide—

a reduction equivalent to eliminating 

24 tons of carbon dioxide. The global 

warming potential of 25 is based on 

the latest Intergovernmental Panel on 

Climate Change (IPCC) Fourth Assessment Report (2007). Some other 

studies and the U.S. Environmental 

Protection Agency’s U.S. Greenhouse 

Gas Inventory Report use a global 

warming potential of 21 based on 

the earlier IPCC Second Assessment 

Report (1996). While the older value 

from the Second Assessment Report 

has been retained in the U.S. inventory 

calculations so that results are comparable across years (U.S. EPA, 2010b, 

pp. 7-8), we use the most recent IPCC 

value in this analysis.
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with lagoon or pit manure storage facilities. Among these, larger scale operations likely would profi t more from higher carbon prices because constructing 

and operating larger digesters is generally more cost-effective. As a result, 

valuing emission reductions could have signifi cant effects on the long-term 

structure of the livestock industry. Smaller operations may be shut out of the 

profi ts of an expanded carbon offset market unless ways are found to promote 

the adoption of digesters on small-scale operations. 

In addition to these structural implications, understanding the extent to 

which the agricultural sector, and livestock in particular, participates in offset 

markets is important because of the effect this will have on “capped” industrial sectors and on agricultural producers. The supply of offsets will help 

determine the price of carbon emission permits and hence the costs that the 

“capped” industries face in meeting their emissions permit requirements. For 

livestock producers, the offset revenues could provide an additional source of 

income that could compensate them for higher feed or energy costs resulting 

from climate legislation. In this report, we explore how the carbon price 

could infl uence the supply of carbon offsets from the livestock sector. We 

also estimate the level and geographical distribution of income from carbon 

offset sales at different carbon prices. 
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Dairy, Hog Operations Produce 

Most Manure Methane

Livestock generate large amounts of manure that must be stored, spread 

on fi elds, or moved off-farm. Manure mixed with water is often stored in 

lagoons, ponds, tanks, or pits, creating anaerobic (i.e., without oxygen) conditions. The decomposition of livestock or poultry manure without oxygen 

produces a biogas containing about 60 percent methane.2 When manure 

is handled as a solid or deposited on fi elds, it tends to decompose aerobically (i.e., with oxygen) and produces much less methane. The quantity of 

methane released also depends on climate (temperature and rainfall) and the 

conditions under which manure is managed (oxygen level, water content, pH 

(acidic or basic qualities) level, and nutrient availability). 

In 2008, the U.S. agricultural sector was responsible for 6.1 percent of total 

U.S. greenhouse gas emissions (U.S. EPA, 2010b, p 2-12).3 Methane emissions from manure management were responsible for about 10.5 percent of 

these agricultural emissions.4 Dairy cattle and swine producers, who often 

use anaerobic manure management systems, were responsible for 43.1 percent 

and 43.6 percent of methane emissions from manure management, respectively (U.S. EPA, 2010b, table 6-6).5 Beef cattle, sheep, poultry and horses 

were collectively the source of only 13.3 percent of total manure methane, 

mainly because manure from these animals is usually handled in aerobic 

conditions.6 Geographic shifts and increasing scale of production have led to 

a greater share of dairy cattle and swine being raised in facilities using anaerobic storage facilities. This, in turn, has resulted in a substantial increase in 

methane emissions from manure handling—emissions increased 54 percent 

between 1990 and 2008 (U.S. EPA, 2010b, table 6-2). By trapping and 

burning methane, digesters have the potential to substantially reduce greenhouse gas emissions from manure management.7

2The remaining gas consists primarily 

of carbon dioxide, plus small amounts 

of other gases, including hydrogen sulfi de, ammonia, and nitrous oxide.

3This is the total for the “Agriculture” sector, as defi ned by the United 

Nations Framework Convention on Climate Change (UNFCCC). This total 

does not include emissions from inputs 

to agricultural production that are 

attributed to other sectors, including 

fertilizer production, transportation, 

and electricity generation.

4Livestock also emit methane from 

enteric fermentation produced during 

digestion. In 2008, over three times as 

much methane was released from enteric 

fermentation as from manure management (U.S. EPA, 2010, table 2-8).

5Manure management in the dairy 

and hog industries accounts for 0.6 

percent of total U.S. greenhouse gas 

emissions.

6Poultry (layers and broilers) operations generally have lower associated 

methane emissions than swine or 

dairies because poultry manure is often 

handled aerobically. However, some 

poultry operations (particularly layers) store manure in pits or anaerobic 

lagoons, which can result in substantial 

methane emissions (NRC, 2003).

7Burning digester biogas can create 

and destroy other greenhouse gases in 

addition to methane and carbon dioxide. Among these other gases, nitrous 

oxide (with a global warming potential 

298 times that of carbon dioxide) may 

be the most important. Nitrous oxide 

is emitted from manure handling facilities and is also emitted when biogas 

is burned. The net effect of burning 

biogas on net greenhouse gas emissions 

from gases other than methane and 

carbon dioxide is not well established 

in the scientifi c literature.
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Climate Change Policies Could Spur 

Digester Adoption

There are several possible policy approaches to mitigate greenhouse gases, 

and each could have different implications for livestock producers and their 

decisions to adopt methane digesters. One approach is to place controls 

on individual emitters by regulating the production technologies that can 

be used. Livestock producers, as emitters of greenhouse gases, might be 

required to adopt specifi c technologies that would reduce emissions, such as 

lagoon covers that collect and burn methane. Even if livestock producers were 

not subject to such “technology standards,” it is possible that utility companies would be, resulting in higher energy costs being passed along to farmers. 

Such a rise in energy costs would make digester-generated electricity more 

valuable to farmers, who would save more by generating their own electricity.

Another approach is to encourage adoption of mitigation technologies 

through subsidies or other incentives. In the case of digesters, incentives 

could take the form of grants, cost shares, incentive payments, and State or 

Federal tax credits or exemptions. As discussed later in this paper, there are 

several existing programs providing incentives for livestock producers to 

adopt methane digesters. Many existing incentive programs are designed to 

promote renewable energy, in addition to lowering GHG emissions.8

A third policy approach is to tax greenhouse gas emissions directly or to tax 

them indirectly by taxing commodities based on their “carbon content.”9

Emissions from livestock operations or livestock products such as dairy 

products and meat could, in theory, face such a carbon tax. Even if livestock 

producers or products were not taxed, electricity and petroleum-based fuels 

could be taxed, which would raise energy costs for livestock producers. 

Again, this would make digester-generated electricity more valuable, and 

consequently would encourage digester adoption. 

A fourth approach is to pay farmers for emissions reductions. Farmers could 

be compensated with Government payments or carbon offset sales. In an 

offset market, farmers sell emissions reductions to individuals or fi rms who 

wish to “offset” their own emissions. To be eligible as a carbon offset, emissions reductions generally must meet several criteria, including:

1. additional to “business as usual”—the reductions would not have 

occurred without the offset sales

2. accurate—the reductions must be verifi able by a third party

3. permanent—the emissions reductions from the offset project are not 

reversible. 

Emissions reductions resulting from the burning of manure methane can 

satisfy all of these requirements. Offsets are measured in tons of carbon 

dioxide equivalent emissions (reductions in other greenhouse gases such as 

methane are converted to an equivalent quantity of carbon dioxide based on 

their global warming potential). 

8Policies that increase the selling 

price of electricity would increase 

incentives to adopt a digester, but could 

result in unintended consequences for 

GHG emissions. For example, these 

policies could provide an incentive to 

convert from an aerobic to an anaerobic digester or to heat a digester so as 

to increase methane emissions and 

therefore electricity output. This could 

potentially increase GHG emissions as 

more methane is created and burned.

9A carbon content tax would be 

levied at a rate proportional to the 

quantity of carbon-equivalent GHGs 

emitted during the production process.
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Carbon offsets can be exchanged in compliance or voluntary markets. 

Compliance markets usually operate in conjunction with a cap-and-trade 

regime that places a legal limit on the quantity of greenhouse gases that 

can be emitted by regulated fi rms in a particular time period. Under such a 

system, regulated fi rms must obtain permits to emit greenhouse gases. To 

meet their emissions targets, regulated fi rms can reduce their own emissions 

or purchase permits from other “capped” fi rms. Alternatively, when regulations permit, fi rms could pay nonregulated emitters—such as livestock operations—to reduce emissions (i.e., the fi rms could purchase offsets). 

Compliance markets have been established at the international, national, 

and regional levels. Regimes that govern international compliance markets 

include the Kyoto Protocol and the European Union’s Emissions Trading 

Scheme. In the United States, 10 eastern States recently implemented the 

Regional Greenhouse Gas Initiative (RGGI), the fi rst domestic mandatory 

market-based effort to reduce greenhouse gas emissions. Under the RGGI, 

the capped sector (power generation) can purchase emission offsets from 

other sectors, such as agriculture, that reduce or sequester greenhouse gas 

emissions. Projects that reduce methane emissions from manure management 

are eligible for offset allowances. In 2009, the U.S. House of Representatives 

approved climate change legislation (H.R. 2454) that, if signed into law, 

would have established a national cap-and-trade system and provided an 

opportunity for farmers to sell offsets from reducing their manure methane 

emissions.

Voluntary offset markets function outside of compliance markets and 

allow companies and individuals to voluntarily purchase carbon offsets. 

For example, individuals might seek to offset their travel-related emissions 

or “green” fi rms might seek to compensate for emissions related to their 

production. In the United States, the Chicago Climate Exchange (CCX) is a 

voluntary, but legally binding, carbon trading regime. In this privately administered cap-and-trade system, methane emissions reductions from livestock 

operations can qualify as offset projects.

Depending on the price of carbon, the additional income from offset sales 

could substantially increase the number of livestock producers who would 

fi nd it profi table to install methane digesters.
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Boosting Benefi ts Over Costs Would 

Encourage Methane Digester Adoption

The decision to adopt a digester depends on the price of electricity, onfarm 

electricity expenditures, the ability to sell electricity not used on the farm, 

the manure management method employed, the size of the operation, the 

startup and ongoing costs of the technology, and the value of other benefi ts 

such as odor reduction, reduced risk of water and air pollution, and the 

sale of separated digester solids. Government policies, such as digester 

cost-share programs or policies that create a demand for electricity from 

renewable sources, can affect the economic feasibility of methane digesters. 

The price of carbon in a carbon offset market could play a role in a digester 

adoption decision. 

We developed a farm-level investment model to estimate how many of these 

multiple factors infl uence methane digester profi ts and adoption, and what 

the supply of carbon offsets would be from the livestock sector. In the model, 

profi ts from a digester are equal to the returns from electricity generation 

and the sales of carbon offsets less the costs associated with constructing 

and maintaining the digester. Hog and dairy producers are assumed to 

adopt a digester and sell carbon offsets if doing so has a positive net present 

value (NPV). The NPV is the sum of all cash fl ows (e.g., revenues from 

electricity and carbon offsets minus capital and variable costs) over the life 

of the project (assumed to be 15 years), where the cash fl ow in each year is 

discounted to its present value.

The model is parameterized using cost and production information derived 

from several recent case studies of digesters installed on dairy and hog 

operations. Other livestock sectors were not considered because of a lack of 

data and the relatively limited contribution of other sectors to total manure 

methane emissions (U.S. EPA, 2010b). Electricity price data are drawn 

from the U.S. Department of Energy, and methane emissions are estimated 

using State-level emission coeffi cients based on Intergovernmental Panel on 

Climate Change (IPCC) methods. 

For a livestock operation of a given size, type and location, the model 

provides an estimate of the NPV of the digester. By estimating NPV for every 

farm in nationally representative samples of dairy (2005) and hog operations 

(2004) (using USDA’s Agricultural Resource Management Survey (ARMS)), 

the model predicts which farms would adopt a digester at any given carbon 

offset price. ARMS is conducted by USDA’s National Agricultural Statistics 

Service in conjunction with the Economic Research Service. By summing the 

reduction in tons of carbon dioxide equivalent emissions for farms that would 

adopt a digester (i.e., farms on which a digester has a positive NPV), we can 

estimate the relationship between the price of carbon and the total level of 

emissions reduced by methane digesters on dairy and hog operations. The 

ARMS survey weights allow us to extrapolate these estimates to the national 

level. The model also is used to estimate how farm revenues change with the 

carbon offset price and to simulate the effect of surplus electricity prices and 

Government cost-share policies on the potential supply of carbon offsets. 

More detailed information about the model specifi cation, case studies, data, 

and parameters is given in the appendix (p. 32).
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Electricity—Prices, Onfarm Use, and Sales of 

Surplus—Is a Key to Digester Profi tability 

The price of electricity is a key factor determining methane digester profi tability because the price determines the cost savings from farm-generated electricity and the revenues that can be earned from the sale of surplus electricity. 

Electricity prices vary substantially across the country (table 1). For example, 

because of different retail electricity prices, the 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 compared with $77,500 in California. 

The amounts were calculated using 2009 electricity prices for the industrial 

sector—$0.0921 per kilowatt hour for California and $0.067 per kilowatt hour 

for Wisconsin (U.S. DOE, 2010). If farms are able to sell surplus electricity 

to the grid, then the higher electricity prices provide operators with a greater 

incentive to adopt biogas collectors. 

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

benefi ts from electricity generation are limited to the avoided onfarm energy 

costs associated with heating or cooling, drying grain, pumping water, 

lighting, and operating dairy or other machinery. Onfarm energy expenditures per head also vary widely across regions because of differences in 

climate and production technologies (see table 1). Data from the 2005 ARMS 

dairy survey indicate 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), which exceeds what it could generate 

onfarm ($56,300). In contrast, a 1,000-head California dairy typically spends 

about $53,600 on energy (2009 dollars), so it would use less than the energy 

it could generate ($77,500). Consequently, without the ability to sell surplus 

electricity, farms in California would receive only a fraction of their generated electricity’s potential value. In this example, the farm in Wisconsin 

would have a greater incentive to adopt a biogas recovery system than the 

farm in California, despite having lower electricity prices. 

Table 1

Electricity use and price, by region and commodity

Dairy Hogs

Average 

electricity use 

per farm 

(kWh)

Average 

electricity use 

per head 

(kWh)

Average 

electricity price 

($/kWh)

Average 

electricity 

use per farm 

(kWh)

Average 

electricity use 

per head 

(kWh)

Average 

electricity price 

($/kWh)

United States 128,918 1,048 0.069 67,122 158 0.058

West 288,702 893 0.058 7,007 105 0.058

Midwest 101,175 1,102 0.064 64,493 152 0.058

South 159,349 791 0.065 148,651 260 0.055

Northeast 106,418 1,080 0.085 32,264 77 0.072

kWh = kilowatt hour, unit of energy equal to the work done by a power of 1,000 watts operating for 1 hour.

Note: For dairies, a "head" refers to a dairy cow or heifer; for hog operations, a "head" refers to 250 pounds of live weight.

Regions are defi ned according to U.S. Census of Population and Housing; see www.census.gov/geo/www/us_regdiv.pdf/.

Source: USDA, Agricultural Resource Management Survey, NASS and ERS; for hogs, 2004, and for dairy, 2005.
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One potential problem with using electricity from biogas facilities is that the 

onfarm quantity generated may not match onfarm electricity requirements. 

The quantity generated may fl uctuate over the day, month, or year depending 

on temperature, infl ows of manure, machine malfunctions, etc. Similarly, 

onfarm electricity use fl uctuates over time. “Net metering” laws mitigate this 

problem to a large extent by allowing small-scale generators to obtain the full 

retail value for the electricity they generate. Under net metering laws, when 

surplus electricity is produced onfarm, the electricity meter spins backwards, 

effectively “saving” the electricity until it is needed. Over the billing period, 

the operation is only billed for its net electricity usage. Recently there has 

been a rapid adoption of net metering laws, and these laws are currently on 

the books in more than 40 States (DSIRE, 2010).

Operations that generate more electricity than they consume over a billing 

period may be able to sell their surplus electricity to the utility at a negotiated price. The price received for this electricity (the selling price) may be 

different from the price at which they buy electricity (the retail price). The 

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 higher prices. Since manure-derived 

electricity is from a renewable source, the negotiated price for surplus electricity could enjoy a substantial premium over the wholesale price (the price 

that utilities pay for electricity from large-scale generators). About 30 States 

require utilities to purchase a share of their power from renewable sources, 

including biogas systems (U.S. DOE, 2009). 

Figure 1 illustrates the NPV of a methane digester on a California dairy 

under different assumptions about the electricity price. Data for fi gure 1 and 

the following analyses are generated using the model of digester profi ts that 

is described in detail in the appendix. The curves in the fi gure slope upward 

Figure 1

Net present value of profits with a methane digester installed 

on a California dairy (electricity prices)

Net present value of digester per head ($)

Note: Profits are per head. Legend shows different electricity price and policy scenarios.

Source: USDA, Economic Research Service.

Number of head

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

0 500 1,000 1,500 2,000 2,500 3,000

Current electricity price, selling & retail electricity prices equal

15-percent increase in electricity price, selling and retail electricity prices equal

Current electricity price, selling electricity price = 50-percent retail price

Current electricity price, no ability to sell excess electricity
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showing that the returns per head from operating a digester increase with 

the size of the operation. We discuss the reasons for and implications of the 

increasing returns to scale in the next section. Operators for whom a digester 

has a positive NPV could be expected to install a digester, while those for 

whom the project has a negative NPV would not. 

For all the scenarios shown in the fi gure, it is assumed that operations can 

obtain the full retail value for their electricity up to the amount of electricity 

they use onfarm. In other words, we are effectively assuming that operations 

operate under “net metering” laws. The blue line shows the case where the 

selling price of electricity equals the retail price. In this case, farms having 

more than about 1,561 head would earn positive profi ts from adopting a 

methane digester. The brown line shows how the NPV changes if electricity 

prices increase by 15 percent, perhaps because of climate change policy. In 

this case, the electricity costs saved and the potential revenue from electricity 

sales would both increase, making digester technology more profi table at all 

farm sizes. At the higher electricity price, the size at which farms would earn 

profi ts from adopting a digester would fall to about 944 head. 

Figure 1 also shows that the price of surplus electricity can have a substantial effect on digester profi ts and adoption. Data from the 2005 ARMS 

dairy survey indicate that California dairies on average consume 86 percent 

of the electricity that they could generate from digesters. The additional 14 

percent of the electricity generated could be sold off-farm, but if the price 

were only 50 percent of retail (green line), this reduces the economic feasibility of digesters for smaller operations. In this scenario, no California 

dairies below about 2,058 head would fi nd it profi table to adopt a digester. 

Profi ts would be even lower if dairies had no ability to sell surplus electricity to the grid (effectively setting the selling price to zero). In this 

scenario (red line), no California dairies below 2,816 head would fi nd 

existing digester technology profi table. 

Carbon Price Could Play Major Role 

in Digester Adoption Decision

The sales of carbon offsets provide a potential second source of revenues 

from methane digesters. Under a cap-and-trade system, the amount of 

revenue generated from offsets will depend on the market price of carbon and 

the amount of methane generated, which is a function of farm size, manure 

management method, and climate, among other things.

Figure 2 illustrates the present value of the additional profi ts that could be 

earned by installing a biogas recovery system on a California dairy with a 

pit manure storage facility at three different carbon prices. In this scenario 

we assume equal retail and selling electricity prices. The blue line illustrates the NPV when there is no market for offsets—i.e., when the carbon 

price is zero. In this case, the NPV is negative for all California dairies with 

pit-based manure management and fewer than 1,561 head, so we would not 

expect any farms in this size range to adopt the technology unless there were 

other signifi cant co-benefi ts or policies to subsidize costs.10 In contrast, if the 

carbon price were $13 per metric ton of carbon dioxide equivalent emissions 

(brown line), operations with an inventory greater than about 544 head would 

10In fact, in 2010 there were 15 operating digesters on dairies in California, 

of which 3 are pit-based (U.S. EPA, 

2010). Many of these operations likely 

qualifi ed for cost subsidies or enjoyed 

other co-benefi ts that were not included 

in the investment model.
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fi nd it profi table to adopt a biogas system.11 If the carbon price were to double 

to $26 per metric ton, then the break-even size falls even lower, to less than 

265 head.

The fi gure illustrates the sensitivity of the decision to adopt a biogas recovery 

system to the carbon price. At the same time, there is a great deal of uncertainty about the future price of carbon. In the major international compliance 

markets, carbon offset prices have ranged between $15 and $30 per ton of 

carbon dioxide equivalent emissions in the last decade. In voluntary markets, 

prices have generally been somewhat lower: ranging between $5 and $15 per 

ton. In the United States, offset prices have been much lower. The average 

price for carbon allowances in the RGGI has ranged between $1 and $3 per 

ton since its inception in 2008.12 The CCX carbon price has ranged between 

$1 and $7 per ton since 2004, but has been trading under $1 per ton since 

2009.13 There is a great deal of uncertainty as to the eventual carbon price 

under a national cap-and-trade system. The EPA forecasted in 2009 that, in 

the near term, if the House bill (H.R. 2454) were to be enacted it would have 

resulted in a price of $13 per ton of carbon dioxide equivalent emissions (U.S. 

EPA, 2009). However, the carbon price could fall short of or exceed this level 

over the medium or long term.

Existing Types of Manure Storage and Handling Favor 

Southern Farms for Offset-Program Qualifi cation

The revenues that a livestock operation could earn in an offset market depend 

on the type of manure storage and handling facility that an operation has 

been using. Offset programs usually require that only emission reductions 

that are additional to current laws, regulations, or practices qualify to be sold 

as offsets (U.S. EPA, 2008). A key requirement in most offset programs is 

documentation of baseline emissions and certifi cation that offsets have led 

11The price $13/ tCO2e was used by 

the EPA in its core scenario analysis of 

H.R. 2454 (U.S. EPA, 2009).

12See Regional Greenhouse Gas Initiative, Market Monitor Reports, http://

www.rggi.org/market/market_monitor /.

13See Chicago Climate Exchange, CXX 

Carbon Financial Instrument Contracts 

Daily Report, http://www.chicagoclimatex.com/market/data/summary.jsf /.

Figure 2

Net present value of profits with a methane digester installed 

on a California dairy (carbon prices)

Net present value of digester per head ($)

Note: Profits are per head. Legend shows different carbon price scenarios.

Source: USDA, Economic Research Service.

Number of head

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

0 500 1,000 1,500 2,000 2,500 3,000

Carbon price = $0/ton

Carbon price = $13/ton

Carbon price = $26/ton
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to “additional” emissions reductions. Consequently, only operations that had 

been using an anaerobic manure storage facility before the creation of an 

offset market would likely qualify for an offset program.14 This limits the 

pool of potential offset market participants to swine and dairy operations 

with manure ponds, lagoons, or slurry pit systems. Operations with slab 

or shed manure systems or with no manure storage facilities likely would 

not generate suffi cient methane to satisfy the “additionality” requirements 

for offset certifi cation.15 We estimate that up to 42 percent of dairies and 

54 percent of hog operations have manure management systems that could 

qualify for an offset program, with Southern States having a higher prevalence of qualifying farms (table 2). However, a much larger share of production occurs on qualifying farms, especially for hog operations. We estimate 

that 60 percent of dairy production and 92 percent of swine production occurs 

on farms with either pit or lagoon systems.

The type of manure storage facility used determines the baseline methane 

emitted and, consequently, the quantity of offsets that could be generated and 

the profi ts that could be earned from a methane digester. 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. About 

8 percent of dairies and 14 percent of hog operations have only a lagoon, 

compared with 31 percent and 38 percent, respectively, with only a pit (about 

2 percent of operations have both) (see table 2). While pits are more prevalent, larger operations tend to use lagoons more often so that almost a quarter 

of all dairy cows and more than third of hogs are raised on operations using 

only lagoons.

Different types of manure storage facilities also have a range of associated 

digester construction and operating costs. In general, earthen lagoon digester 

systems are less costly than complete-mix or plug-fl ow pit systems, which 

are constructed from concrete or steel. However, lagoon digesters can be 

14Construction of an anaerobic 

digester on an operation currently 

producing little methane from its 

manure handling practice may not 

result in a net reduction in greenhouse 

gas emissions. In fact, construction 

of an anaerobic digester would likely 

increase emissions on the operation, 

though the subsequent burning of the 

methane to generate electricity could 

offset this increase.

15We assume in the model that the 

initial level of methane emissions 

determines the “baseline” level of 

emissions. Emission reductions below 

the baseline can be sold as offsets. 

If the number of head on an operation changed over time then program 

rules would need to establish how the 

baseline emission levels would change, 

if at all. This study does not consider 

scenarios where the number of head of 

livestock on farms changes over time.

Table 2

Percentage of operations with different types of manure management systems, by region and commodity

Total 

number of 

farms

Percentage 

of farms

Percent of farms with... Percentage 

of 

production

Percent of production with...

Lagoon Pit

Lagoon 

and pit Lagoon Pit

Lagoon 

and pit

Dairy

United States 52,237 100.0 8.1 30.9 2.6 100.0 24.7 29.4 5.7

West 6,095 11.7 26.5 18.4 11.6 33.3 36.5 12.2 8.0

Midwest 28,438 54.4 4.3 34.4 1.5 36.4 13.7 45.3 4.8

South 4,034 7.7 22.5 25.9 4.6 9.2 40.5 17.3 8.8

Northeast 13,670 26.2 3.7 30.5 0.2 21.1 18.0 34.4 2.2

Hogs

United States 40,940 100.0 14.3 37.5 2.3 100.0 35.2 51.9 4.5

West 5,586 13.6 1.0 0.0 1.2 0.6 5.1 0.0 11.8

Midwest 28,539 69.7 9.9 50.3 2.8 71.9 17.7 69.4 5.8

South 5,571 13.6 53.1 4.4 1.3 25.5 87.7 0.9 0.9

Northeast 1,245 3.0 2.1 59.1 1.7 2.0 6.6 84.6 3.1

Note: Regions are defi ned according to U.S. Census of Population and Housing; see www.census.gov/geo/www/us_regdiv.pdf/.

Source: USDA, Agricultural Resource Management Survey, NASS and ERS; for hogs, 2004, and for dairy, 2005.
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less productive in Northern States because of low ambient temperatures in 

the winter months. In cooler climates, pit systems can be heated to promote 

anaerobic digestion and methane production. However, emissions reductions 

can only qualify as carbon offsets if they are below the baseline level and the 

baseline emissions would not include the additional methane generated from 

heating the digester. 

Figure 3 illustrates how the profi ts from a biogas recovery system can vary 

substantially across regions and across manure management systems. The 

fi gure compares the NPV per head for dairy operations in the two biggest 

dairy States, Wisconsin and California, when the carbon offset price is $13 

(per ton of carbon dioxide equivalent emissions). For 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 offset revenues. Lagoons also have lower construction and 

operating costs. For operations using the same type of manure storage 

facility, biogas systems are always more profi table in California compared 

with Wisconsin. This differential is partly explained by California’s warmer 

climate (which increases methane production) and partly by the higher electricity prices in California. 

While pit-based systems are generally more profi table without a carbon 

market, lagoon-based digester systems become relatively more profi table 

as the carbon price increases. Figure 4 compares the NPV per head of 

California pit- versus lagoon-based digester systems with carbon prices of 

$0 and $13 per ton. Without an offset market (price equal to $0), the pitbased system is more profi table, while at $13 the lagoon-based system has a 

higher NPV. This is due to the higher baseline methane emissions of lagoons, 

enabling more revenue from carbon offsets.

Figure 3

Net present value of profits for a methane digester installed 

on California or Wisconsin dairies (lagoons or pits)

Net present value of digester per head ($)

Note: Profits are per head. Legend shows different manure management systems and States.

Source: USDA, Economic Research Service.

Number of head

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

0 500 1,000 1,500 2,000 2,500 3,000

California, pit, carbon price = $13/ton

California, lagoon, carbon price = $13/ton

Wisconsin, pit, carbon price = $13/ton

Wisconsin, lagoon, carbon price = $13/ton
13

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Digesters’ Other Benefi ts Include Odor Reduction, 

Less Surface-Water Contamination

Biogas recovery systems can offer other benefi ts to livestock producers in 

addition to electricity generation and marketable emission reductions. Lagoon 

covers and well-managed anaerobic digestion can substantially reduce odors 

from manure storage (Welsh et al., 1977; Pain et al., 1990; Wilkie et al., 

1995). Digesters can also be designed to reduce the potential for surfacewater contamination from pathogens that can be hazardous to animal and 

human health (Demuynck et al., 1985). By excluding rainwater, a lagoon 

cover can substantially increase a lagoon’s storage capacity and thereby 

reduce the size or number of lagoons required per operation.16 An anaerobic 

digester also can be designed to accept food waste from local food processors 

or manure from other (local) farms, which can provide additional “fuel” for 

the digester and a potential source of revenue from “tipping fees” charged to 

the waste depositors (Bishop and Shumway, 2009).17 Farms that use a solids 

separator can use the collected solids onfarm for bedding material or sell 

them as a soil amendment, which can provide a signifi cant source of income 

(Leuer et al., 2008).

16See “Covers for Long-term Dairy 

Manure Storages, Part 2: Estimating 

your Farm’s Annual Cost and Benefi t.” 

at: http://www.ansci.cornell.edu/pdfs/

pdFactSheetSC2PDv.pdf/.

17In the case study analyzed by Bishop and Shumway (2009), accepting 

food waste was found to be profi table 

for the digester owner, while transportation costs made accepting manure 

from local farms unprofi table.

Figure 4

Net present value of profits for a methane digester installed on 

California dairies (lagoons or pits; carbon prices = $0 or $13 per ton)

Net present value of digester per head ($)

Note: Profits are per head. Legend shows different manure management systems 

and carbon prices.

Source: USDA, Economic Research Service.

Number of head

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

0 500 1,000 1,500 2,000 2,500 3,000

California pit carbon price = $13/ton

California, lagoon, carbon price = $13/ton

California, pit, carbon price = $0/ton

California, lagoon, carbon price = $0/ton
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Scale of Livestock Operations Affects 

Benefi ts From Carbon Offsets

There is wide variation in the characteristics of producers who likely would 

benefi t from the introduction of a carbon offset market. The model of digester 

profi ts illustrates which producers might benefi t from a higher carbon price.

While the costs of installing a biogas recovery system can vary, unit costs 

generally decline with scale (see the appendix for a discussion of case study 

data). Scale economies make digester adoption relatively more profi table for 

larger operations. There are multiple sources of scale economies in biogas 

recovery and electricity generation. First, the costs of constructing the 

digester, storage facility, and buildings, which usually comprise the largest 

component of capital costs, generally decline on a per-unit basis with the 

size of the operation. Second, the costs of maintaining and repairing the 

electricity generator and storage facility also tend to decline on a per-unit 

basis. For example, it usually takes fewer than twice as many hours of labor 

to monitor or repair a 200-kilowatt (kW) generator compared to a 100-kW 

generator. Third, there are numerous fi xed transactions costs associated 

with selling electricity or certifying and marketing offsets that do not vary 

substantially with farm size. Larger operations can spread these fi xed costs 

over a larger revenue base. 

Figures 1-4 illustrate the scale economies in manure biogas recovery. They 

show that profi ts per head increase for different types of operations. For 

example, in fi gure 3, a digester on a 1,500-head Wisconsin dairy with a 

lagoon manure system (red line) would have an NPV of $333 per head. 

In contrast, a digester on a 1,000-head dairy in Wisconsin using the same 

manure management system would have an NPV of only $239 per head. The 

additional income from biogas systems could enhance existing economies of 

scale in dairy and hog production.

We next use our model of digester profi ts to estimate the number, size, and 

location of operations that would fi nd it profi table to adopt a biogas system 

at a particular carbon offset price. This provides information about the size 

and geographic distribution of potential digester adopters under alternative 

offset market assumptions. In this section we assume that the selling price of 

surplus electricity equals the retail price.

Figures 5 and 6 illustrate the estimated number and share of U.S. dairy operations in different size categories on which a methane digester would have a 

positive NPV. Figures 7 and 8 provide the same information for hog operations. Overall, 42 percent of dairies and 64 percent of hog operations have 

anaerobic manure management systems. The fi gures show how the number 

and share of small-scale operations that would potentially adopt a digester 

increase with the carbon offset price. For all the analyses, the offset price is 

assumed to be constant over the economic life of the digester.

With a price of zero (no offset market), digesters on about 40 (or 16 percent 

of) dairy operations with at least 2,500 head and 29 (or 3 percent of) operations with 1,000-2,499 head would have a positive NPV. Very few smaller 

operations would have digesters with a positive NPV. However, if the offset 
15

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Figure 5

U.S. dairy operations on which a methane digester has a positive 

net present value (three carbon prices)

Number of dairies adopting

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 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 of 500-999 head are predicted to adopt. 

Source: USDA, Economic Research Service.

Operation size (number of head)

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

0

200

400

600

800

1,000

1,200

1,400

Price = $0/ton

Price = $13/ton

Price = $26/ton

Figure 6

U.S. dairy operations that would profit from methane digesters

Percentage of dairies in size range

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

of $13/ton, an additional 54 percent of operations with 1,000-2,499 head are predicted to adopt,

for a total of 57 percent of 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 0.1 percent of operations with 500-999 head are predicted to adopt. 

Source: USDA, Economic Research Service.

Operation size (number of head)

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

0

20

40

60

80

100

Price = $26/ton Price = $13/ton Price = $0/ton

Not potential adopters No adoption at these prices among potential adopters
16

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price were $13, then digesters on nearly half of operations with more than 

500 head and about 15 percent of operations with between 250-499 head 

would have a positive NPV. If the price were to increase to $26, then the 

number of digesters with a positive NPV would increase for all farm size 

Figure 7

U.S. hog operations on which a methane digester has a positive net

present value (three carbon prices)

Number of operations adopting

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

of $26/ton, an additional 557 operations with 2,000-2,999 head are predicted to adopt, for a 

total of 992 operations of this size. At a carbon price of $0, no operation is predicted to adopt. 

Source: USDA, Economic Research Service.

Operation size (number of head)

Price = $26/ton Price = $13/ton Price = $0/ton

<500 500 - 999 1,000 - 1,999 2,000 - 2,999 3,000+

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Figure 8

U.S. hog operations that would profit from methane digesters

Percentage of operations in size range

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

at a price of $26/ton, an additional 31 percent of operations with 2,000-2,999 head are 

predicted to adopt, for a total of 56 percent of operations of this size. At a carbon price of $0, 

no operation is predicted to adopt. 

Source: USDA, Economic Research Service.

Operation size (number of head)

0

20

40

60

80

100

Price = $26/ton Price = $13/ton Price = $0/ton

Not potential adopters No adoption at these prices among potential adopters

<500 500 - 999 1,000 - 1,999 2,000 - 2,999 3,000+
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categories except the largest (the number of profi table digesters on large 

farms does not increase because all large farms having either a pit or lagoon 

manure system already earned profi ts at the lower price). If carbon offsets 

could be sold for $26 per ton, then about 1,295 or 3 percent of operations in 

the smallest size category (< 250 head) would experience positive profi ts. 

For hog operations, the positive relationship between farm size and digester 

profi tability is illustrated in fi gures 7 and 8. With an offset price of $13 per 

ton, 74 percent of the operations with more than 3,000 head fi nd a digester 

profi table compared to only 24 percent of operations with 2,000-2,900 head, 

25 percent of those with 1000-1,999 head, 4 percent of those with between 

500 and 999, and 2 percent of operations with less than 500 head. The pattern 

is similar at the higher carbon price of $26.

Without a carbon offset market, no hog operations are estimated to earn positive profi ts from a digester compared to 71 dairies. This is consistent with the 

fact that there are currently a much greater number of dairies than hog operations with biogas systems in the United States (U.S. EPA, 2010a). However, 

at a higher carbon price ($13 per ton), over 7.5 percent of all hog operations 

would fi nd a digester profi table, compared to 3.5 percent of dairies. This 

higher rate is partly explained by the fact that a greater share of hog operations have lagoons, which have higher initial methane emissions and are 

eligible for more offset sales (see table 2).

A substantial share of operations (especially in the smallest size category) 

lack an anaerobic manure management facility (fi gs. 6 and 8). While these 

operations could construct a digester, it may not be cost effective to do so. 

Farms that replace an aerobic manure management system (e.g., depositing 

manure on fi elds) with a pit or lagoon system would likely not qualify to sell 

offsets because the resulting emission reductions would not be “additional.” 

Digester Adoption Spreads to More States 

as Carbon Price Rises

Figures 9 and 10 illustrate the location of dairy and hog operations, respectively, on which digesters are predicted to have a positive NPV when carbon 

offsets are priced at $13 and $26 per metric ton. The data used to construct 

the fi gures are drawn from a 2004 survey of hog producers and a 2005 survey 

of dairy producers conducted as part of the USDA’s Agricultural Resource 

Management Survey (ARMS). These surveys were conducted in the States 

accounting for most dairy and hog production. 

Figure 9 shows that with an offset price of $13 per ton, there would be 

over 500 dairies in California, and between 100-500 dairies in New York, 

Wisconsin, and Texas that would fi nd it profi table to adopt a digester. At 

a price of $26 per ton, most dairy States see an increase in the number of 

potential digester adopters. At the higher price, Wisconsin joins California as 

having over 500 operations that would fi nd it profi table to adopt a digester. 

Figure 10 illustrates the geographic distribution of hog operations on 

which digesters have a positive NPV. At $13 per ton, North Carolina has 

the largest number of potential adopters. At $26 per ton, Iowa, Illinois, 

Missouri, and Oklahoma join North Carolina in having at least 500 potential 
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TX

CA

ID

AZ NM

OR

IL

MN

IA

WI

MO

FL

MI

IN

GA

NY

PA

TN

KY VA

OH

ME

MI

VT

No color = no data in ARMS

0

1– 100

101 – 500

501+

Figure 9

Dairy operations that would profit from methane digesters by State, with carbon prices of $13 

and $26 per metric ton carbon dioxide equivalent (CO2e)

WA

TX

CA

ID

AZ NM

OR

IL

MN

IA

WI

WA

MO

FL

MI

IN

GA

NY

PA

TN

KY VA

OH

ME

MI

VT

Carbon price = $13/tCO2e

Carbon price = $26/tCO2e

Note: Information for major dairy producing States. Other States indicated by white.

ARMS = Agricultural Resource Managment Survery, NASS and ERS. 

Source: USDA, Economic Research Service.
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No color = no data in ARMS

0

1– 100

101 – 500

501+

Figure 10

Hog operations that would profit from methane digesters by State, with carbon prices of $13 

and $26 per metric ton carbon dioxide equivalent (CO2e) 

Carbon price = $13/tCO2e

Carbon price = $26/tCO2e

Note: Information for major dairy producing States. Other States indicated by white.

ARMS = Agricultural Resource Managment Survery, NASS and ERS. 

Source: USDA, Economic Research Service.

CO

SD WI

MI

GA

PA

AR

KY

MN

KS

NE

IN

VA

OH IL

IA

OK

MO

NC

CO

SD WI

MI

GA

PA

AR

KY

MI

KS

MN

NE

IN

VA

OH IL

IA

OK

MO

NC
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adopters. There is a somewhat greater share of potential adopters located in 

Southern States because lagoons are more common in that region. However, 

the number of potential adopters (shown in fi g. 10) does not refl ect this 

geographic pattern because a large portion of hog production is concentrated 

in the Midwest.

Options for Promoting Adoption of Biogas 

Technologies by Smaller Scale Operations

Because of economies of scale, larger producers are likely to benefi t most from 

climate change legislation or other policies that make biogas recovery systems 

more profi table. The model results suggest that additional profi ts from biogas 

systems would tend to enhance existing economies of scale in dairy production (MacDonald et al., 2007) and hog production (Key and McBride, 2008), 

which could promote further concentration in production over time. In addition, banks may be willing to lend more money to operations with additional 

digester revenue, which would provide these operations with a greater capacity 

to expand production over time. However, there are several avenues by which 

private actions and public sector investments and policies could promote the 

adoption of biogas systems by smaller scale operations. 

Figures 1-6 illustrate how higher profi ts from biogas recovery (resulting from 

higher carbon or electricity prices) decrease the size threshold above which 

it is profi table to adopt the technology. Policies that raise returns will tend 

to encourage participation by smaller scale operations. Such policies include 

grants (e.g., USDA Rural Energy for America Program grants), incentive 

payments (e.g., the U.S. Department of Energy Renewable Energy Production 

Incentive), tax credits (e.g., the Renewable Electricity Production Tax 

Credit), accelerated depreciation (Accelerated Cost Recovery System, which 

allows qualifying renewable energy systems to be rapidly depreciated for tax 

purposes), property and sales tax exemptions (usually at the State level), and 

other regulations such as net metering laws and “green” pricing that raise 

the effective price of electricity. Policies that raise the profi tability of biogas 

recovery systems can be targeted toward smaller scale operations.

Obtaining fi nancing for the large capital investment associated with most 

biogas systems can be a signifi cant barrier, particularly for smaller scale operations (Gloy and Dressler, 2010). Digesters have little resale value, making 

their collateral value low. This problem could be addressed by loan guarantee 

programs such as USDA’s Rural Energy for America Program. The uncertainty surrounding digester systems’ benefi ts and costs is another barrier to 

fi nancing and adoption. Investors who are uncertain about the returns to a 

project are likely to delay investment or require substantial compensation for 

the uncertainty (Stokes et al., 2010). Future climate change legislation could 

increase energy prices and raise carbon offset prices far above current prices 

in regional carbon trading schemes. However, there is a great deal of uncertainty about the extent and timing of these price increases. Stable and longterm Government policies and programs can help reduce price uncertainty 

and encourage investment, for example, by providing long-term contracts for 

carbon offsets and/or electricity.

With high carbon offset prices, it may be possible to design a profi table 

lower cost biogas system that fl ares methane rather than using the gas to 
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generate electricity. This approach removes electricity generation from the 

biogas system, which eliminates the costs of the generator, electrical connections, and maintenance.18 Such an approach might be economically viable 

for smaller scale operations that would fi nd it unprofi table to construct and 

maintain an electricity generator. This option has the greatest potential in the 

South, where lagoon covers can be installed relatively inexpensively and offer 

additional benefi ts to producers such as odor control and rain exclusion.

Centralized digesters used by several livestock producers could allow smaller 

scale operations to benefi t from economies of scale in construction and 

maintenance. In addition to cost effi ciencies, centralized systems could offer 

benefi ts in terms of greater marketing leverage in negotiating the sale of electricity, better access to fi nancing, tax credits or grants, and benefi ts derived 

from having a manager who could develop specialized skill in digester maintenance and operations (U.S. EPA, 2002). The main disadvantage of centralized digesters is the additional costs of transporting manure to the centralized 

facility from the individual farms (Ghafoori and Flynn, 2006). Depending on 

how the manure is used, there could be additional costs of transporting the 

digested manure back from the centralized facility to farmland where it can 

be spread. 

Smaller scale livestock operations may be able to achieve a more effi cient 

scale by supplementing manure with food waste products from crop and meat 

processing facilities, breweries, bakeries, restaurants, etc. (MDA, 2005). 

When mixed with manure, food waste can provide an effi cient feedstock 

for biogas production and livestock operators can charge “tipping fees” for 

receiving the waste. However, there is substantial variation in the availability 

and suitability of food waste for digestion, which may limit the economic 

and practical feasibility of co-digestion. In addition, there could be additional 

regulatory requirements associated with handling solid waste, including food 

waste that could substantially increase costs.19

In the hog sector, a large share of fi nished hog output is produced under 

production contracts (Key and McBride, 2007). Currently, most production contracts assign growers the responsibility for manure management. 

However, if digesters become profi table, it is plausible that contractors would 

seek to share some of the value derived from manure, either directly through 

a contract or indirectly by reducing the fees they pay farmers to raise hogs. 

Contractors could potentially facilitate digester adoption on individual operations by helping their contract growers to obtain fi nancing and by providing 

technical assistance. It is also possible that contractors might establish 

centralized digesters and require growers to dispose of their manure at a 

specifi c facility. 

18Costs associated with electricity 

generation comprise a substantial share 

of the total cost of biogas systems. For 

example, Bishop and Shumway (2009, 

p. 399) report in their case study of a 

1,500-head digester that the cost of the 

generator was about 31 percent of the 

total capital costs.

19Methane from food waste may not 

be included in the livestock operation’s baseline GHG emissions levels. 

So it is not clear whether burning 

methane generated from food waste 

would qualify for carbon offsets—this 

would depend on offset market rules 

and whether the initial GHG emissions 

from food waste decomposition could 

be included in the baseline.
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More Carbon Offsets Are Supplied 

at Higher Price

As the carbon price rises, so does the potential revenue that can be earned 

from offset sales. A higher carbon price would likely be associated with an 

increase in the price of electricity, as most current electricity is generated 

using “carbon intensive” energy sources. A higher electricity price increases 

the value of the electricity generated with the methane digester. Hence, a 

higher carbon price will increase the NPV of digesters and there will be 

more potential adopters (as was shown in fi gs. 5 and 7). If we assume that 

digesters are installed if they have a positive NPV, then we can estimate how 

an increase in the price of carbon offsets will cause the total greenhouse 

gas emissions from manure management to drop. By summing the reductions in tons of carbon dioxide equivalent methane emissions from the farms 

that adopt digesters, we can generate a curve representing the relationship 

between the price of carbon and the potential quantity of carbon offsets that 

could be provided. 

Figure 11 illustrates this price relationship for dairies, hog operations, and 

both livestock types combined. The fi gure shows that 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 price is zero. As the carbon offset 

price increases, more and more operations adopt digesters and reduce their 

emissions. Between about $2 and $13 per ton of carbon dioxide equivalent 

emissions (tCO2e), the supply of emissions reductions from hog operations 

increases rapidly. Above a price of about $13/tCO2e the supply increases 

at a slower rate. Eventually, at a price of about $70 per ton, all the curves 

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

While dairies supply a larger share of total emission reductions when prices 

Figure 11

Total reductions in manure methane emissions from dairy, hogs, 

and both sectors together at different carbon offset prices

Carbon price ($/tCO2e)

tCO2e = ton of carbon dioxide equivalent.

Source: USDA, Economic Research Service.

CO2e (millions of tons annually)

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40

Hogs

Dairy

Together
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are below about $6, above that price more of the emission reductions are 

supplied by hog operations. 

In our study, we fi nd that the supply of offsets from the dairy sector (brown 

line, fi g. 11) is similar, but somewhat less responsive to the price than was 

estimated by Gloy (2010). For example, at a price of $15/tCO2e, Gloy estimates dairies would supply 11.6 tCO2e, compared with our estimate of 10.5 

tCO2e. At a price of $30/tCO2e, Gloy estimates a supply of 16.8 tCO2e, 

compared with 12.9 tCO2e for our study, and at $50/tCO2e, Gloy estimates 

dairies would supply 19.2 tCO2e, compared with our estimate of 14.2 tCO2e. 

There are several differences between our model and that used by Gloy that 

could explain these discrepancies.

Figure 12 shows the relationship between the carbon offset price and methane 

reductions as a percentage of the total possible reductions from dairies, hog 

operations, and both operation types combined. At a carbon price of $13, 

greenhouse gas emissions are reduced by 9.8 and 12.4 million tons (carbon 

dioxide equivalent) for the dairy and swine industries, respectively. This 

amounts to reductions of 61 percent and 62 percent of manure-generated 

methane in these industries (or about 62 percent overall). A doubling of the 

carbon price to $26 would cause the manure-based methane emissions from 

dairy and swine together to be reduced by 78 percent. 

Higher carbon prices cause the NPV and the present value of electricity 

cost savings, electricity sales, and offset sales to increase (fi g. 13). At an 

offset price of $13, the dairy and swine industries together could collect a 

present value of $3.1 billion in offset fees, save $1.2 billion in electricity 

costs, and earn $361 million in electricity sales (over the 15-year lifespan of 

the digesters). The present value of total costs are estimated to be nearly $3 

billion, yielding an NPV of $1.8 billion at this carbon price over the 15-year 

lifespan of the digester. As the offset price rises, offset sales contribute an 

increasingly larger share to digester gross revenues. At a carbon offset price 

Figure 12

Percentage reductions in manure methane emissions for dairy, 

hogs, and both sectors together at different carbon offset prices

Carbon price ($/tCO2e)

tCO2e = ton of carbon dioxide equivalent.

Source: USDA, Economic Research Service.

Percentage (annually)

Hogs

Dairy

Together

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80 90 100
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of $5, offset sales contribute only 42 percent of gross revenues, compared 

with 66 percent when the carbon price is $13, and 76 percent when the carbon 

price is $26. When the carbon price is low, digester profi ts are quite sensitive 

to changes in the price of electricity, as shown in fi gure 1. However, at higher 

offset prices, profi ts are relatively less sensitive to the changes in the price of 

electricity because electricity sales and savings from avoided costs contribute 

a relatively small share of profi ts. 

So far we have assumed that operators do not receive any subsidies to help 

defray the costs of constructing or maintaining the digester. In fact, the 

operators of virtually all digesters in operation today have received some 

fi nancial assistance. If farm operators were to receive Government funds for 

the capital costs of digesters (from a cost-sharing program, for example), 

digesters would be profi table for more farms, resulting in a greater reduction 

in emissions and a greater potential supply of carbon offsets. Figure 14 illustrates the percentage reductions in carbon dioxide equivalent methane emissions that could be achieved with different capital cost-share levels at three 

different carbon prices. Figure 15 shows total Government dollars instead 

of the cost-share percentage. In the absence of a carbon offset program (a 

carbon price of $0/ton), a 75-percent reduction in manure-based methane 

from hog and dairy operations could be funded by an 84-percent cost-sharing 

program in which the Government supplies $4.3 billion. If a carbon offset 

program existed with a price of $13/ton, then this same reduction could occur 

with only a 43-percent cost share (or $1.5 billion of Government funds). At a 

carbon price of $26, no cost sharing would be necessary to induce an emissions reduction of more than 75 percent. Eliminating 95 percent of manurebased methane emissions without a carbon trading scheme could be achieved 

with a 92-percent cost share and $7.3 billion in Government expenditures. 

Comparatively, this 95-percent reduction could occur with $6.1 billion 

(an 84-percent cost share) if the offset price were $13, and $4.8 billion (a 

70-percent cost share) if the offset price were $26.

Figure 13

Gross revenues from methane digester adoption for U.S. dairy 

and hog industries

Present value of revenue (million $)

tCO2e = ton of carbon dioxide equivalent.

Source: USDA, Economic Research Service.

Carbon price ($/tCO2e)

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Revenue from electricity savings

Revenue from electricity sales

Revenue from offsets

Net revenue
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Figure 14

Percentage reduction in U.S. dairy and hog manure methane 

emissions by cost-sharing percentage and carbon price

Percentage cost share

Source: USDA, Economic Research Service.

Percentage reduction in manure-based methane emissions

Carbon price = $0/ton

Carbon price = $13/ton

Carbon price = $26/ton

0

20

40

60

80

100

0 10 20 30 40 50 60 70 80 90 100

Figure 15

Percentage reduction in U.S. dairy and hog manure methane 

emissions by management by cost-sharing program expenditures

Cost to Government (million $)

Source: USDA, Economic Research Service.

Percentage reduction in manure-based methane emissions

Carbon price = $0/ton

Carbon price = $13/ton

Carbon price = $26/ton

0

2,000

4,000

6,000

8,000

10,000

0 10 20 30 40 50 60 70 80 90 100
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Conclusions

A policy or program that allows producers to be paid for reductions in carbon 

emissions, such as a carbon offset market or a direct subsidy for emissions 

reductions, could provide a competitive advantage to U.S. livestock producers 

who adopt a methane digester. Dairy and hog producers are likely to benefi t 

most from such a policy or program. Among dairy and hog producers, those 

with high current emissions, particularly those with manure lagoons located 

in warmer climates, could benefi t most from offset sales or emissions reduction subsidies. 

Our fi ndings indicate that revenues from the sale of carbon emissions reductions (or offsets) could have a substantial effect on the number of operations 

that would adopt a methane digester (biogas recovery system). We estimate 

that a carbon price of $13 per ton would induce dairy and hog operations 

to supply offsets equivalent to about 22 million tons of carbon dioxide per 

year. This amounts to about 62 percent of the potential offsets from manure 

management in these industries, or about 5 percent of total greenhouse gas 

emissions from U.S. agriculture.

We also found that larger operations would be more likely to participate in a 

carbon offset market, and likely would earn substantially higher profi ts per 

head than smaller scale operations. Among operations with a suitable manure 

storage facility, only 15 percent of diaries with 250-499 head, compared 

with 56 percent of operations with more than 2,500 head, could earn positive 

returns from a digester if the carbon price were $13 per ton. For hog operations, only 4 percent of those with 500-999 head would fi nd it profi table to 

adopt a digester at that price, compared with 53 percent of operation with 

more than 3,000 head. Hence, introduction of a carbon offset market could 

enhance existing economies of scale in production and result in a further 

concentration of production in the livestock industry among large operations. 

There is scope to enhance the adoption of methane digesters on small-scale 

operations by promoting the provision of long-term contracts for electricity, 

the construction of centralized digesters (collectively or by a contractor), or 

the construction of large-scale digesters that take advantage of off-farm food 

waste. Policies that increase digester profi ts by increasing the demand for 

renewable energy, facilitating the ability of livestock operations to sell electricity, or investing in research to lower construction and maintenance costs 

would encourage greater participation by small-scale operations. Subsidies 

and tax policies that lower the costs of constructing a digester also could be 

targeted at smaller operations.
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of HR 2454 on U.S. Agriculture, Offi ce of the Chief Economist. Accessed 

at: http://www.usda.gov/oce/newsroom/archives/releases/2009fi les/

HR2454.pdf/.

U.S. Department of Energy. 2000. Carbon Dioxide Emissions from the 

Generation of Electric Power in the United States. Available at: http://

www.eia.doe.gov/electricity/page/co2_report/co2emiss.pdf/.

U.S. Department of Energy. 2009. States with Renewable Portfolio 

Standards. Accessed at: http://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm#chart/. 

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/.

U.S. Environmental Protection Agency. 2002. Managing Manure with 

Biogas Recovery Systems: Improved Performance at Competitive Costs.

AgSTAR Program. EPA-430-F-02-004. Available at: nepis.epa.gov/Exe/

ZyPURL.cgi?Dockey=2000ZL4E.txt/.
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U.S. Environmental Protection Agency. 2006. Market Opportunities for Biogas 

Recovery Systems: A Guide to Identifying Candidates for On-Farm and 

Centralized Systems. AgSTAR Program. EPA-430-8-06-004. Available at: 

nepis.epa.gov/Exe/ZyPURL.cgi?Dockey=P1008VEI.txt/.

U.S. Environmental Protection Agency. 2008. Climate Leaders Greenhouse 

Gas Inventory Protocol Offset Project Methodology for Project Type: 

Managing Manure with Biogas Recovery Systems, Version 1.3. Available at: 

www.epa.gov/climateleaders/.../draft_reforestation_offset_protocol.pdf/.

U.S. Environmental Protection Agency. 2009. EPA Analysis of the American 

Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress.

June 23, 2009. Available at: http://www.epa.gov/climatechange/

economics/pdfs/HR2454_Analysis.pdf/.

U.S. Environmental Protection Agency. 2010a. Number of Operating 

Digesters (April 2010), AgSTAR Program Accomplishments. Accessed at: 

http://www.epa.gov/agstar/accomplish.html#wi/.

U.S. Environmental Protection Agency. 2010b. Inventory of U.S. Greenhouse 

Gas Emissions and Sinks: 1990-2008. EPA 430-R-10-006. April 15, 2010.

Welsh, F., et al. “The effect of anaerobic digestion upon swine manure odors,” 

Canadian Agricultural Engineering 1977 19(2): 122–126. 

Wilkie, A.C., Riedesel, K.J. and Cubinski, K.R. 1995. “Anaerobic digestion 

for odor control,” Nuisance Concerns in Animal Manure Management: 

Odors and Flies, H.H. Van Horn (ed). University of Florida, Florida 

Cooperative Extension Service, Gainesville, FL, pp. 56-62.

Wright, Peter E., and Stephen P. Perschke. 1998. Anaerobic Digestion and 

Wetland Treatment Case Study: Comparing Two Manure Odor Control 

Systems for Dairy Farms, Paper No. 984105, presented at the American 

Society of Agricultural and Biological Engineers Annual International 

Meeting, Orlando, FL, March 8-10, 1998. 
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Appendix

For this study, we use a model of methane digester profi ts that depends on 

farm size and location, electricity and carbon prices, and parameters that 

characterize the costs and generation capacity of the methane digester. The 

model is used to estimate digester profi ts for every farm in two nationally 

representative surveys of dairy and hog producers. 

Recent studies that have modeled the economic benefi ts and costs of methane 

digesters include Lazarus and Rudstrom (2007); Leuer et al. (2008); Stokes 

et al. (2008); and Bishop and Shumway (2009). These studies focus on 

particular regions, markets, or types of farms, and do not attempt to estimate 

nationwide digester adoption rates or profi ts. An exception is Gloy (2010), 

who develops a general model of digester profi tability for dairies in order to 

estimate the potential supply of carbon offsets from the sector. The modeling 

approach used in this study is similar to Gloy, but we extend his analysis in 

several ways by estimating methane digester parameters using case study 

data, incorporating the hog sector in the analysis, allowing electricity prices 

to be a function of the carbon offset price, and allowing for transaction costs 

associated with carbon offset market participation. 

We use a discounted cash fl ow or net present value (NPV) approach to assess 

the profi tability of a digester project. The NPV is the sum of all future cash 

fl ows (e.g., revenues from electricity or carbon offsets minus capital and variable costs) discounted to its present value. The NPV approach used in this 

analysis is deterministic in the sense that real prices are assumed to be known 

and constant by the operator throughout the economic life of the digester. In 

fact, many of the benefi ts and costs associated with a digester are uncertain 

and variable. For example, both retail prices and selling prices of electricity are 

likely to fl uctuate depending on global economic conditions and policy changes 

that are diffi cult to predict. Similarly, carbon offset prices have varied dramatically over time, and estimating future carbon prices is diffi cult. There is uncertainty about variable costs, which could fl uctuate from year to year depending 

on system reliability and unexpected weather or mechanical failures, as well as 

uncertainty about methane and electrical output from a digester.

If we knew how much prices and other model parameters are likely to vary, 

then it would be possible to estimate the probability distribution of the NPV, 

which would provide a more accurate representation of a digester project’s 

value (Leuer et al., 2008). A further extension could also take into account 

the irreversible nature of a digester investment. Stokes et al. (2008) use a real 

option framework to estimate the value to a producer of the option to delay 

investment in a digester. The authors fi nd that producers would require significant fi nancial compensation, perhaps in the form of assured grant funding or 

greater electricity prices in order to immediately adopt the technology, rather 

than delay investment even if the NPV is positive. 

By not accounting for the stochastic nature of a digester’s benefi ts and costs 

nor the option value of delaying investment in this study, we tend to overestimate the value of the digester system and the predicted adoption rates. 

However, as noted in the text, we also do not account for some possible 

benefi ts from a digester such as from “tipping fees” or bedding sales, which 
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causes us to underestimate the value of the project. In addition, we do not 

account for “nonmarket” benefi ts from a digester such as odor control or 

reduced water or air pollution, which also cause us to underestimate the 

private and social benefi ts of the project. 

The Net Present Value of a Methane 

Digester Project

An operator who is considering investing in a methane digester has two 

related decisions: whether to construct a digester that will produce electricity and whether to sell carbon offsets. An operator with a digester will 

sell offsets if the expected discounted stream of revenues from offset sales 

exceeds the expected discounted costs of doing so. In other words, the net 

present value of participating in a carbon offset market NPVM is positive. 

The decision to invest in a digester depends on the net present value of 

electricity NPVD and of carbon offset sales NPVM. Hence, there are three 

possible outcomes:

(1)

0 and 0: no investment

0 and 0: construct digester; do not sell offsets

0 and 0: construct digester; sell offsets

D DM

D M

DM M

NPV NPV NPV

NPV NPV

NPV NPV NPV

£ +£

> £

+> >

Another possibility is to construct a digester without an electricity generator 

and to fl are the methane and sell offsets. This scenario is not considered in 

this study.

The NPV of the digester enterprise for operation i, located in State s, using 

manure management facility type f is: 

(2) 0 ( )/(1+ ) T t NPV R C d , D isf ift t= = - é ù ê ú ë û å

where T represents the lifespan of the digester, t indexes time, d is the 

discount rate, Risf is the value of generated electricity (used onfarm and/or 

sold), and Cift is the cost of constructing and maintaining the digester.

The value of electricity generated by the digester Risf is assumed to be certain 

and constant over the life of the digester. The value depends on whether the 

quantity generated onfarm G Eif is less than or greater than the quantity used 

onfarm U Ei :

(3) ( )

if

if

ER G G U

s if if i

isf ER U EW G U G U

s i s if i if i

P E E E

R

P E P E E E E

ìï

ï ⋅ £ ï =í

ï

ï ⋅+ ⋅ - > ïî

. 

If the quantity generated is less than or equal to what is used onfarm, then the 

generated electricity is valued at the buying (retail) price ER PS . If more electricity is generated than is used onfarm, then this surplus electricity 

( ) G U E E if i - is valued at the selling (wholesale) price EW PS .
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Since the power generation sector is likely to be affected by climate change 

legislation, we allow the retail and wholesale electricity prices to depend on 

the carbon intensity of the State energy sources and the price of carbon. 

Specifi cally, the retail price of electricity is a function of the observed current 

retail price E PS plus an increase that is proportional to the average carbon 

dioxide equivalent emissions rate from power plants s

 (in pounds per kilowatt hour (kW/h)) times the carbon price PM:

(4) 0 00045 φ ER E M PP. , ss s = + ⋅⋅P

where we multiply by 0.00045 to convert pounds to metric tons. 

The selling price of farm-generated electricity will likely also increase with 

the carbon price. For simplicity, the selling price of electricity is assumed to 

be proportional to the retail price:

(5) θ EW ER P P, s s = ⋅

where  is a parameter that can be varied for policy simulations.

Electricity generation depends on the type of manure storage facility in place 

and the quantity of manure produced. Generation does not depend on the 

methane emission factor because emission rates can be increased beyond 

baseline levels by heating the digester (in pit systems) and by controlling 

nutrients and liquid/solids ratios. Since the quantity of manure produced is 

a linear function of the number of head, the quantity of electricity generated 

can be expressed simply as:

(6) G Ee . if f i = ⋅N

The costs of the biogas system are certain, but vary over the lifespan of the 

digester. In the initial year (t = 0), costs include capital construction costs Kif

plus maintenance and operating costs Vif .

20 In subsequent years (1 t  T), 

costs of the biogas digester only include operating costs:

(7)

λ if 0

if1

if if

ift

if

K V t

C

V t T .

ìï + = =ïï

í

ï

ï £ £ ïî

Capital costs include costs of the constructing and designing the pump, pit, 

heating, building, solids separator, effl uent holder, generator, power lines, 

and so forth. A share of capital costs  is born by a Government cost-share 

program. The capital costs increase with the scale of the operation at a 

decreasing rate that depends on parameters af

 and bf. The cost of this investment is: 

(8) f b K a (N ) if f i = ⋅

Annual variable costs Vif include costs of maintenance and repairs. Following 

past studies, we assume that variable costs are proportional to the quantity 

20In this study, we did not explicitly consider costs associated with 

obtaining air quality permits or costs 

associated with installing equipment 

to comply with air quality standards. 

Recent news accounts suggest that in 

some regions or States (such as California) these costs could be substantial 

(Huffstutter, 2010).
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of electricity generated (which depends on farm size and type of manure 

handling facility):

(9) G V v E v N. if if f i =⋅ =⋅ ⋅ e

The NPV of participating in a carbon offset market is given:

(10) 0[( ) (1 ) ] T M t NPV P M Z / d , M isf t = ⋅- + åt=

where PM is the price of carbon offsets ($/tCO2e), Misf is the quantity of 

methane that could be sold in the offset market, and Zt

 are transaction costs 

associated with selling carbon offsets. 

The quantity of methane produced and burned that would qualify for offset 

sales is: 

(11) 24 365 0 001 M Nm . , isf i sf = ⋅ ⋅⋅ ⋅

where Ni is the number of head and msf is the methane emission factor 

(kilogram/methane (kg/CH4 per head per day)), which is multiplied by 24 

(tCO2e/t CH4)21, 365 (days per year), and 0.001 (tons per kg) in order to 

express in tons of carbon dioxide equivalents (tCO2e).

Transaction costs associated with selling carbon offsets are certain but vary 

over the life of the digester. These costs include the initial one-time fi xed 

start-up cost for entering the offset market (ZE) plus ongoing annual costs of 

monitoring and verifi cation (ZV):

(12) if 0

 if 1

E V

t V

ZZt Z .

Z tT

ìïï + = =í

ïïî £ £

Case Studies and Parameter Values

The model parameters, units, and data sources used are shown in table A1. 

Electricity generation and cost parameters are estimated using information 

from case studies drawn from three compilations (Lusk, 1998; Kramer, 

2004; DPPP, 2006) and from individual articles and reports (Wright and 

Pershke, 1998; Martin, 2003; Lazarus and Rudstrom, 2007; NNRC, 2007; 

Michigan Department of Agriculture, 2008; Bishop and Shumway, 2009; 

Keske, 2009; Moser, undated; Pennsylvania State University, undated). 

Data from the case studies were used to estimate the parameters if the 

studies met the following conditions:

1) The case farm was producing heat and/or electricity with its digester 

technology at the time of the study. This excluded digesters that were 

constructed solely for odor control or that were nonoperational or had 

not produced electricity at the time of the case study. 

21Methane has 25 times the global 

warming capacity of carbon dioxide 

over 100 years (IPCC, 2007). Burning 

methane emits 1 ton of CO2, so burning 1 ton of methane is equivalent to 

eliminating 24 tons of carbon dioxide.
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2) The digester was located on an individual farm operation. This 

excluded digesters at research stations and those that combined 

manure or other byproducts from multiple sources. This also 

excluded data collected and synthesized by other researchers or 

generated by economic models (e.g., Ernst et al., 2009; Crenshaw, 

2009; Gloy, 2010; Leuer et al., 2008; Stokes et al., 2008).

3) The case study provided information on the type of digester, specifi -

cally whether it was a lagoon- or pit-based system (this excluded 

Denley and Herndon, 2008). 

4) The case study provided startup cost estimates. 

5) The name of the farm was provided or the farm could be uniquely 

distinguished in another fashion (e.g., it was in a State with no other 

case studies). This was required to avoid double-counting, as several 

digesters were the subjects of multiple case studies. 

We identifi ed 23 case studies of dairies and 11 of hog operations that satisfi ed 

our listed conditions. The average farm size, capital and variable costs, and 

per-head electricity output for the farms used in the analysis are displayed in 

table A2. 

Construction costs per head for the case study operations decline with farm 

size as illustrated in fi gure A1. To estimate the cost model parameters (af

 and bf

from equation (8)) we use ordinary least squares and a log-log functional form:

(13) ln( ) 1n( ) αβ ε K N, if f f if if =+ +

where Kif is total observed capital construction costs for case study operation 

i using manure facility type f. The parameters in (8) are computed from the 

estimated parameters as follows: αα β exp( ) and f f ff ˆ = = ˆ b . Separate regressions are estimated for the pit and lagoon operations and the estimates are 

shown in table A3.

For dairies, the coeffi cient estimates are plausible and statistically signifi cant 

at the 10-percent level. In contrast, coeffi cient estimates for the digesters at 

hog operations are either not statistically signifi cant or are implausible (negative). Given the small sample and insignifi cant coeffi cient estimates for the 

hog operations, we do not use these parameter estimates, but instead use the 

dairy coeffi cients adjusted for differences between hogs and dairy cows in 

terms of the quantity of manure produced per head.22 Specifi cally, we use 

the value from table 1 in Fulhage et al. (2002), which reports that a 1,000-lb 

dairy cow produces approximately 1.6 times the amount of manure per pound 

of weight as a 150-lb hog. Hence, we divide the hog inventories that are 

expressed in pounds by 1,600 to convert into head-of-cow equivalents. For 

the case studies, we convert number of head of hog to head-of-cow equivalents by multiplying by 150 (to convert to pounds) and then dividing by 1,600.

The variable cost parameter from (9) for dairies is a simple average of 

the 16 case studies for which variable costs are reported (see table A2). 

Distinguishing the pit versus lagoon systems showed very little difference 

22We assume that among “pit” or “lagoon” manure storage facilities, dairies 

and hog operations will have similar 

construction and operating costs, after 

correcting for livestock manure output 

and methane content. However, there 

may be differences in how manure 

facilities are constructed on hog and 

dairy operations, which could cause 

costs to differ. Unfortunately, there is 

currently insuffi cient case study information to accurately quantify these 

differences.
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Table A1

Model parameters, values, description, and sources

Variable Value Units Description Source

Estimated parameters

ef = pit (dairy) 841 kWh/cow Electricity produced per dairy cow at an 

operation utilizing a pit-based digester

Averages based on case 

studies

ef = lagoon (dairy) 450 kWh/cow

Electricity produced per dairy cow at 

an operation utilizing a lagoon-based 

digester

ef = pit (swine) 41 kWh/hog Electricity produced per hog at an operation utilizing a pit-based digester

ef = lagoon (swine) 37 kWh/hog Electricity produced per hog at an operation utilizing a lagoon-based digester

v (dairy) 0.033 $/kWh Variable cost for dairies

v (swine) 0.014 $/kWh Variable costs for hog operations

af = pit 11,708 No unit Capital investment cost parameter for 

pit-based digesters

Regression estimates based 

on case studies

bf = pit 0.582 No unit

af = lagoon 7,864 No unit Capital investment cost parameter for 

lagoon-based digesters

bf = lagoon 0.618 No unit

E PS Varies by State $/kWh State retail electricity price for industrial sector U.S. DOE, 2010, table 5.6.B

msf

Varies by State 

and manure 

management 

method

kg CH4 per 

head per day

State methane emission factors by 

manure management method

Chicago Climate Exchange, 

2009, tables 3-4

s Varies by State lbs/kWh Carbon emissions factor US DOE, 2000, table 4

Assumed parameters

d 0.05 rate Discount rate

t 15 years Economic life of a digester

TE 10,000 $ Initial offset market transaction costs

TV 3,000 $ Annual offset market transaction costs

 1 Selling price as a fraction of retail price 

of electricity

PM Varies by policy $/t CO2e Price per ton of CO2e

 Varies by policy Percentage of capital costs covered by 

cost-share program

kWh = kilowatt hour, unit of energy equal to the work done by a power of 1,000 watts operating for 1 hour.

tCO2e = per ton of carbon dioxide equivalent.

Source: USDA, Economic Research Service.
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between the two types, so the same parameter is assigned to both types of 

systems. Variable costs for hog operations are estimated in the same way 

using data from four case studies. 

For dairies, the electricity generation parameter ef

 is estimated as the average 

value from the 19 case studies that report this information (see table A2). Pit 

systems generate substantially more electricity per head than lagoon systems. 

This is mainly because pit systems are heated in the cooler months to optimize methane production, and therefore electricity output. For hogs, we use 

Table A2

Averages from case studies

Livestock type

Manure 

management

Cow 

equivalents

Capital 

costs ($)

Capital costs 

per cow 

equivalent ($)

Variable 

costs 

($/kWh)

Electricity 

(kWh/year/cow 

equivalent)

Dairy Pit 1,195 $750,039 $828 $0.033 841

(977) (502,240) (592) (0.018) (382)

Number of case studies 19 19 19 16 15

Dairy Lagoon 3,916 $1,317,760 $438 $0.033 450

(2,541) (977,011) (264) (0.018) (136)

Number of case studies 4 4 4 16 4

Hog Pit 1,340 $709,255 $719 $0.014 437

(570) (281,157) (713) (0.005) (251)

Number of case studies 8 8 8 3 3

Hog Lagoon 1,648 $264,876 $300 $0.014 391

(1,503) (129,366) (237) (0.005) (287)

Number of case studies 3 3 3 3 3

Notes: Standard deviations shown in parentheses. The number of case studies varies according to the number of studies providing information on 

the specifi c variable. Variable costs for dairies and hog operations are estimated without dividing between pit and lagoon. All dollar values are in 

2009 dollars. Number of head of hog is converted to cow equivalents in the following manner: We assume a 1,000-lb. dairy cow produces approximately 1.6 times the amount of manure per pound of weight as a 150-lb. hog (Fulhage, Pfost, and Schuster (2002), table 1). Hence, we divide the 

hog inventories that are expressed in pounds by 1,600 to convert into head-of-cow equivalents.

kWh = kilowatt hour, unit of energy equal to the work done by a power of 1,000 watts operating for 1 hour.

Source: USDA, Economic Research Service.

Figure A1

Capital per head by number of head, dairy and hog operations

Capital costs per head

Note: Head are in terms of cow equivalents.

Source: USDA, Economic Research Service.

Number of head

0

500

1,000

1,500

2,000

2,500

3,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Dairy pit

Dairy lagoon

Hog pit

Hog lagoon
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six case studies to compute the average kilowatt hours per head per year 

generated by digester systems at pit and lagoon systems. We report these on a 

per-hog basis in table A1 and on a per-cow-equivalent basis in table A2.

The methane emission factors msf are based on IPCC tier 2 standards (Chicago 

Climate Exchange, 2009, tables 3-4). The carbon emissions factors s

 for electricity use by region are from the U.S. Department of Energy’s Carbon Dioxide 

Emissions from the Generation of Electric Power (U.S. DOE, 2000). We assign 

the same carbon emissions factor to each State within the region. 

The model is used to predict digester profi ts for each farm in the 2005 Dairy 

and the 2004 Hogs Production Practices and Costs and Returns Reports, 

which are part of the Agricultural Resource and Management Survey 

(ARMS). ARMS is a restricted-use dataset conducted by USDA’s National 

Agricultural Statistics Service in conjunction with the Economic Research 

Service. ARMS contains information on the number and type of animals, 

type of manure management systems, and costs of electricity consumed. 

ARMS Data Description

Farm level data are drawn from the 2005 Dairy and the 2004 Hogs 

Production Practices and Costs and Returns Reports, part of ARMS. Farms 

must have sold $1,000 minimum of agricultural products in the prior year in 

order to qualify for the sample. 

Manure Management. ARMS allows farmers to record up to four types 

of manure storage facilities. For dairies, we classify the following systems 

as lagoons: “Single stage lagoon (for anaerobic or aerobic digestion)” and 

“Two stage lagoon (for anaerobic or aerobic digestion in 1st stage, storage 

in 2nd stage).” We characterize the following as pit-based manure management: “Manure pit (open),” “Manure pit (closed).” The other types of 

manure storage systems that we do not characterize as either pit or lagoon 

are “Stacking slab or other open storage of manure,” “Slurry or manure tank 

(open),” and “Slurry or manure tank (covered).”

For hogs, we classify the following systems as lagoons: “Single stage lagoon” 

and “Two stage lagoon.” We characterize the following as pit-based manure 

management: “Manure pit under building,” “Other manure pits (not under 

Table A3

Regression estimates: Capital costs as a function of farm size

Dependent variable: ln(capital)

Dairies Hog operations

Pit Lagoon Pit Lagoon

Constant 9.368*** 8.970** 13.88*** 9.844*

(0.974) (1.644) (2.137) (1.480)

ln(head) 0.582*** 0.618* -0.0670 0.367

(0.143) (0.206) (0.301) (0.211)

N 19 4 8 3

R-squared 0.495 0.818 0.008 0.752

Note: Head for hog operations are in cow equivalents, adjusted for weight and manure production. Standard errors shown in parentheses. ***, **, and * refer to signifi cance at the 1, 5, and 10 

levels, respectively.

Source: USDA, Economic Research Service.
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building).” The other types of manure storage systems that we do not characterize as either pit or lagoon are “Holding pond (for storage, not anaerobic or 

aerobic digestion),” “Slurry or manure tank—Open,” and “Slurry or manure 

tank—Closed.” 

Some farms have both manure and pit systems. In these cases, we discern the 

percentage of manure held in each type of system, and then use these percentages to weight estimates dependant on the type of manure management (electricity produced, methane produced, and capital costs).

Number of Head. For dairies, ARMS provides the number of head in three 

categories: Milk cows, dry cows, and breeding bulls. We exclude breeding 

bulls and fi nd the average number of milk and dry cows over the course of 

the year.

For hogs, ARMS provides the number of head of various sizes at the beginning and the end of the year. We use these to calculate the total number of 

pounds of hogs at the operation. We fi nd the average of the beginning and 

ending number of hogs in each category, and then assign the pounds to each 

category as shown in table A4. By summing the pounds in each category, 

we compute the total number of pounds in hogs at the operation. A head is 

defi ned as 150 pounds for the computations; however, it is defi ned as 250 

pounds in the fi gure. 

Electricity Use. ARMS records the total amount spent on electricity. We 

instead need the amount of electricity used. We therefore use the State 

electricity price from another source (see below) to calculate electricity 

used in kWh. 

State Methane Emissions Factors. The Chicago Climate Exchange provides 

methane emissions factors by livestock and manure management system for 

the following categories: (1) Dairy cow, (2) Swine 59 pounds and under, (3) 

Swine 60 to 199 pounds, (4) Swine 120 to 179 pounds, (5) Swine 180 pounds 

and above, and (6) Breeding swine. Because ARMS reports the number of 

hogs in the same swine categories, we use these to calculate specifi c emissions by hog type. However, there are only two possible methane emissions 

factors for dairies: “dairy cow” and “dairy heifer.” Since ARMS data do not 

distinguish between dairy cows and dairy heifers (just between milk cows 

and dry cows), we only use the emission factor for “dairy cows.”

Table A4

Agricultural Resource Management Survey hog categories and weights

Category Assigned weight

Pounds

A sows, gilts, and young gilts bred and to be bred 330

B boars and young males for breeding 330

C cull breeding stock including sows, gilts, and boars 330

D other hogs under 60 pounds 30

E other hogs 60–199 pounds 89.5

F other hogs 120–179 pounds 149.5

G other hogs 180 pounds and over 215

Source: USDA, Agricultural Resource Management Survey, National Agricultural Statistics 

Service and Economic Research Service.