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How to use the MACC marginal abatement cost curve to know the impact of my investment?

Climate Finance

How to maximize the climate impact of your investments? Ask the MACC. The carbon abatement cost is the expense needed to implement measures to reduce carbon emissions.

How to use the MACC marginal abatement cost curve to know the impact of my investment?
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How to maximize the climate impact of your investments? Ask the MACC. The carbon abatement cost is the expense needed to implement measures to reduce carbon emissions. The MACC (marginal abatement cost curve) can be obtained by taking the total additional cost required to adopt a more sustainable technology and dividing it by the amount of emissions avoided. This Carbon Abatement Cost Curve calculation helps prioritize climate actions by identifying cost-effective options for emission reduction. Understanding the carbon abatement cost is important to decide how to maximize emission reductions within a budget. Moreover, it can help you decide on the timeline of your European Union Allowances (EUA) investment. As demand for carbon allowances is increased, there is an upward price pressure. And as it get more and more expensive to release carbon emissions, industries adopt more sustainable technologies, in the order suggested by the carbon abatement cost curve. Hence, an investor can hold their EUAs until their technology of choice gets “abated”, and thus maximize their climate impact.

  • What is the carbon abatement cost? 
  • What is the CO2 abatement cost curve? 
  • What is the link between the MACC marginal abatement cost curve and carbon allowances? 
  • How can I maximize my investment impact thanks to the Carbon Abatement Cost curve? 

What is the carbon abatement cost? 

What is the definition of the carbon abatement cost? 

“The abatement cost is simply the cost of an intervention that will reduce greenhouse gas emissions by one tonne.” according to Stéphane Hallegatte, Senior Climate Change Advisor at the World Bank. He explains that for instance, when an individual replaces a gas boiler with a heat pump, their greenhouse gas emissions decrease. However, they must pay for the installation cost of the heat pump, pay for the electricity to operate it, and it is only after this that they can save money by no longer buying gas. 

How do we calculate the carbon abatement cost? 

To calculate the abatement cost, we divide the total additional cost needed to adopt a more sustainable technology (investment cost plus the difference in operating costs of the new and the old technology) by the avoided emissions. This gives you the cost per tonne of carbon not emitted, which can be positive or negative.

Why do we need to know the carbon abatement cost? 

Taking into account the abatement cost of a technology is crucial when it comes to prioritizing climate actions. Which options should one invest in at first? Negative abatement costs are an opportunity to reduce emissions with a net economic gain, while the lowest abatement costs show the most cost-effective ways to avoid emissions. When allocating a finite budget for emission reduction, selecting actions with the lowest abatement costs will maximize the reduction of emissions.

What is the CO2 abatement cost curve? 

What is the definition of the CO2 abatement cost curve?

If you have 50 options to reduce emissions, each with its own cost and potential, you can rank them from lowest to highest cost. You can start with the most affordable options and continue implementing measures until your financial budget for decarbonization is exhausted (if you have financial constraints) or until your emission reduction target is met (if you have a target defined in terms of CO2 emissions).

Is there a universal MACC marginal abatement cost curve?

Many academics and institutions have been constructing MACC (Marginal Abatement Cost Curve) abatement curves, each yielding different values based on their underlying assumptions. Also, the factors used in creating these curves, such as technology costs, interest rates, and labor costs, change rapidly over time. The timing of one technology's adoption can also influence the adoption of subsequent technologies, adding to the uncertainty. Despite these variations, MACC abatement curves remain valuable for prioritizing actions and identifying the "low-hanging fruit" in decarbonization efforts.

What is the link between the MACC marginal abatement cost curve and carbon allowances? 

The price of European carbon allowances and carbon abatement cost 

The cost of carbon can accelerate the adoption of certain technologies through Emissions Trading Schemes (ETS). If adopting a particular technology to reduce carbon emissions is cheaper than paying for EUAs, investing in decarbonization becomes more attractive. As a result, the MACC (Marginal Abatement Cost Curve) can indicate the carbon allowance price at which it becomes economically sensible to invest in decarbonization.

Is the carbon abatement curve and carbon pricing calculation useful? 

At current rates, the MACC (Marginal Abatement Cost Curve) shows that the European carbon price has made reducing some carbon emissions more financially viable than paying for carbon allowances. For example, Bloomberg energy and finance analysts have found that among technologies with a positive carbon abatement cost, those currently cheaper than purchasing EU carbon allowances include soil sequestration, afforestation, wind energy, plug-in vehicles, solar PV, and biomass.

How can I maximize my investment impact thanks to the Carbon Abatement Cost curve? 

As Homaio's clients introduce a new type of demand in the EU carbon market, they are driving the carbon price higher. This increase makes it more expensive for industries to continue emitting CO2. By looking at the MACC (Marginal Abatement Cost Curve), it becomes clear that:

  • Maximizing demand for carbon allowances to push the price as high as possible is beneficial.
  • Holding the allowances until as many technologies as possible have been abated is best to fight climate change.

A carbon investor can align their financial and climate goals with the timeline of their investments.

For example, if an investor buys EUAs at €70 and holds them until they reach €100, the higher price can make expensive carbon capture technologies viable for new buildings. The EU carbon investor can decide how long to hold their EUAs and which technologies should be abated based on their desired climate and technological outcomes.

Key takeaways

  • Carbon Abatement Cost Definition: The cost associated with implementing measures to reduce carbon emissions by one tonne. It includes investment and operational costs of adopting sustainable technologies like heat pumps over gas boilers.
  • CO2 Abatement Cost Curve: This curve ranks emission reduction options from lowest to highest cost per tonne of CO2 reduced. It helps prioritize cost-effective actions within budget constraints or emission reduction targets.
  • Link between MACC and Carbon Allowances: The Marginal Abatement Cost Curve (MACC) indicates the price of carbon allowances at which investing in emission-reducing technologies becomes economically beneficial compared to purchasing allowances. Higher carbon prices incentivize adoption of sustainable technologies.
  • Maximizing Investment Impact: By using the Carbon Abatement Cost curve:some text
    • Increase demand for carbon allowances to raise prices, making emission-intensive practices costlier.
    • Hold allowances until technologies with higher abatement costs are economically viable.
    • Align financial and climate goals by timing investments based on EUA prices and technological advancements.

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