I wrote the article below for The Climate Trust’s newsletter:

California’s suite of climate policies create two distinct environmental markets: a cap-and-trade market for allowances and offsets, and a Low Carbon Fuel Standard (LCFS) market for LCFS credits. Both generate significant revenues for dairy digesters, but, according to recent informal discussions, the Air Resource Board has decided that biogas projects cannot sell both at the same time. Dairy digesters whose biogas is used as transportation fuel therefore need to determine which market offers the most value. This analysis is trickier than it first appears.

Carbon Intensity LCFS graphic

Prices for both offsets and LCFS credits are reported with the same units, dollars per metric ton of carbon dioxide equivalent reduction ($/mtCO2e). The baseline from which each reduction is calculated, however, is different. Offsets are based on the methane emissions that would have occurred if the dairy had not installed a digester. LCFS credits, on the other hand, are based on the reduction from the LCFS’s annual carbon intensity target. The same dairy digester project will therefore generate a very different number of offset and LCFS credits. To determine which market offers the most value, projects need to calculate how many of each credit they could generate.

Credits Per Cow

LCFS credits are calculated based on the quantity of transportation fuel generated, the carbon intensity of the fuel and the LCFS’s annual carbon intensity target.  Based on the Dairy Management Institute’s assumption that each cow can generate 51,072 BTUs/day, under the current carbon intensity for biogas (13.42 gCO2e/MJ) a project will generate 1.66 LCFS credits/cow/year.

This biogas carbon intensity does not include the largest source of greenhouse gas reductions, avoiding methane emissions. ARB has announced that they will update this carbon intensity to include these massive emission reductions. This will lower the carbon intensity significantly, some have guessed as low as -80 gCO2e/MJ. If this were to occur, each cow would instead generate 3.5 LCFS credits/year.

Offsets are calculated based on a model of the methane emissions that would have occurred if the digester had not been implemented. The credits per cow per year can vary significantly based on temperature and manure management practices at the dairy. Credits generally range from 2 to 5 offsets/cow/year, so an estimate of 3 offsets/cow/year is a good average.

Takeaway

At the LCFS’s current dairy biogas carbon intensity, dairy projects should expect to generate around twice as many offsets as LCFS credits. When LCFS prices are at least double the offset price, it’s therefore worth it for projects to pursue the LCFS. That is currently the case, with LCFS credits at $25/mtCO¬2e and offset somewhere between $7 to $10/mtCO2e, but both markets can be volatile. If ARB updates the carbon intensity for dairy biogas to include avoided methane emissions, the economics could change significantly—tipping the balance even more in favor of the LCFS. Yet, as always seems to be the case in these nascent environmental markets, significant uncertainty remains around future prices and accounting methods.

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