The Cow or the Credit: Causal Relationship Between California Dairy Herd Consolidation and Anaerobic Digesters
Sizeable state investments in methane reducing technologies on dairies coupled with the California Low Carbon Fuel Standard (LCFS) have led to the rapid adoption of anaerobic digesters. The technology is effective at reducing dairy methane emissions. At the same time, the dairy sector has continued a decades-long trend of consolidation and attrition. Taken together, these trends have invited a simple conclusion: digesters and LCFS credits cause consolidation. We show that the evidence does not support this conclusion.
We prepared an analysis to test whether there is statistically significant evidence that digester adoption causes herd expansion. Our results show larger dairies are more likely to adopt digesters, but digesters are not causing dairies to become larger. Our peer-reviewed article, “The Cow or the Credit: Causal Relationship Between California Dairy Herd Consolidation and Anaerobic Digesters,” in Applied Economic Perspectives and Policy summarizes the analysis.
Digester Financial Incentives
Senate Bill 1383 established targets for reducing dairy manure methane emissions by 40 percent from 2013 levels by 2030. Anaerobic digesters have emerged as one effective means of achieving these goals. California grant programs provide financial support for capital investment in digesters, and LCFS credits from producing renewable natural gas (RNG) further incentivize digester construction.
Even with state grant funding support, investing in a new digester is not feasible for a typical California dairy. Consequently, dairies often rely on outside partners and investors to construct and operate digesters. The dairy generally receives a fraction of the state and federal revenues generated from RNG production.
The claim that digesters cause consolidation rests on the idea that dairies expand their herds to capture additional revenue streams. In practice, however, most of this revenue goes to third-party operators. This financial structure should cast doubt on a causal relationship a priori, and the statistical evidence does not support causality.
Causality Testing
California has experienced a substantial decline in the number of dairies over the past few decades, while average farm size has increased considerably. The paper does not question whether consolidation exists, but asks what is driving it.
We demonstrate that naïve statistical testing may appear to link digesters with consolidation. However, past studies have identified factors such as economies of scale, age of farmers, production costs, dairy policy, and other economic pressures as potential drivers of consolidation and attrition. When the analysis properly accounts for economic factors such as land values, feed prices, wages, water values, and operator demographics in analysis, there is no statistical evidence that digesters cause consolidation.
This economic context is essential because farms make expansion, exit, and investment decisions in response to complex economic, business, environmental conditions. Omitting these conditions from analysis can turn ordinary market responses into a misleading causal story, attributing changes to digesters that are better explained by broader economic pressures and preexisting differences among farms.
Takeaways
After accounting for economic drivers, we find that digester adoption does not lead to an increase in herd size relative to comparable non-adopting dairies.
Our results are more consistent with a selection story: dairies with the scale, location, and long-term viability needed to support a digester are more likely to adopt one. In other words, the cow comes before the credit.
The paper also highlights a practical feature of digesters that is often overlooked. Although they are located on dairies, the projects are commonly financed and operated by third-party renewable fuel companies under feedstock or related agreements. Much of the RNG revenue is collected by these companies, rather than functioning as a simple per-cow payment to the farmer. This structure weakens the assumption that farmers expand herds to collect credit revenue directly.
One of the policy implications of the study is that digester incentives are not causing consolidation and have in fact supported methane mitigation goals. Analyses that overlook the economic forces driving dairy consolidation risk drawing misleading conclusions. This can lead to policy that potentially weakens climate programs without addressing the underlying causes of farm exits and consolidation: rising input prices and stagnant output prices.
To learn more, read the full open-access article, “The Cow or the Credit: Causal Relationship Between California Dairy Herd Consolidation and Anaerobic Digesters.”
