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Carbon Prices Required to Make Digesters Profitable on U.S. Dairy Farms of Different Sizes

William Lazarus, Andrew Goodkind (), Paul W. Gallagher and Roger K. Conway

No 98628, Staff Papers from University of Minnesota, Department of Applied Economics

Abstract: The objective of this analysis is to evaluate the impacts of three factors: 1) methane emission differences related to climate and manure storage type, 2) digester economies of size, and 3) electricity values on the minimum breakeven carbon dioxide (CO2) -equivalent methane (CH4) destruction prices that different-sized dairy farms in different U.S. states would require to make anaerobic digester installation profitable. The number of digesters that would be installed at different prices, and the resulting emission reductions and electrical generation are also estimated. Dairy cows are a significant source of the greenhouse gas methane, so anaerobic digesters are receiving policy attention as a climate change mitigation strategy. Dairy farm methane emissions by state are calculated in this study using the methods used in the U.S. Environmental Protection Agency’s annual greenhouse gas inventories. While all of the farms with 2,500-plus cows would install digesters at prices of less than $6 per metric tonne, prices of $39-55 would be required to justify digesters on the 100-199-cow farms. Supply curves are generated empirically for number of digesters, CH4 emission reductions, and digester-generated electricity as a function of a carbon dioxide (CO2)-equivalent CH4 destruction prices ranging from zero to $100/metric tonne. Modeled electricity generation and CH4 destruction are complementary goods in that higher values on the destroyed CH4 encourage generation of more electricity. For example, a price of $40 would encourage as many as 4,138 digester installations with 24 teragrams of CO2-equivalent methane reductions and 468 megawatts of electrical generation. Digester CH4 destruction revenues may exacerbate consolidation in the dairy industry somewhat because digesters are not financially feasible below around 200 cows in most states. Methane destruction revenues under a $40 CO2 price will reduce the milk production cost by between $2.19 and $2.83 per 100 kilograms ($0.99 and $1.28 per 100) pounds on farms of 2,500 cows or more. On farms of 200 to 499 cows, CH4 destruction revenues would have less impact on milk production costs, from 70 cents to $1.32 per 100 kilograms (32 to 60 cents per 100 pounds). The above results assume that digester-displaced electricity has a REC value equal to the CH4-destruction price per CO2-equivalent tonne. Without that REC value, 5-8 percent fewer digesters would be installed. Many of the digesters that are installed would flare the biogas rather than generating electricity, so that electrical generation capacity would be 33-42 percent less than with a REC value.

Keywords: Environmental Economics and Policy; Livestock Production/Industries (search for similar items in EconPapers)
Pages: 48
Date: 2011-01
New Economics Papers: this item is included in nep-agr, nep-ene and nep-env
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DOI: 10.22004/ag.econ.98628

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