Subscribe to the Homing Bird for exclusive updates on carbon markets, economic news and sustainable investments that make a difference.
The Marginal Abatement Cost of Carbon curve (MACC curve) is a tool to assess the cost-effectiveness of emissions reduction solutions. It shows the “abatement cost”, or the investment needed to reduce CO2 emissions.
The Marginal Abatement Cost of Carbon curve (MACC curve) is a tool to assess the cost-effectiveness of emissions reduction solutions. It shows the “abatement cost”, or the investment needed to reduce CO2 emissions. Abatement is simply a fancy word for reduction. We call it the marginal abatement cost because it shows the cost of one incremental ton of CO2. Essentially, it is the cost for someone to reduce “one more” ton of CO2.
By plotting this marginal cost of abatement against a quantity of emissions to be reduced, the MACC helps to decide which initiatives to prioritize to achieve environmental targets while using financial funds in the most effective way possible. The marginal abatement cost curve calculations have been helpful to many actors - governments, private sector representatives... The CO2 abatement curve is also very useful when it comes to pricing carbon and the EU emissions trading scheme. The marginal abatement cost curve helps to inform on where the price of carbon allowances needs to go for the economy to adopt greener technologies.
The MACC is a graphical representation that illustrates the cost-effectiveness of various emissions reduction measures. It plots the marginal cost of abatement against the quantity of emissions reduced. It aims to provide a visual tool for prioritizing emission reduction strategies. Basically, it says “For every additional $XX invested in greener technologies, YY tonnes of CO2 emissions are reduced through ZZ technology.”
The MACC is used in EU environmental policy by helping policymakers identify the most cost-effective measures to achieve emission reduction targets. How can the government spend its revenues for climate action in the most effective way? The CO2 abatement cost curve is also built and used by private sector representatives. Just like public institutions, a lot of businesses maximize environmental benefits while minimizing financial costs thanks to the MACC.
In practice, the MACC is used to evaluate the costs and benefits of different emissions reduction options. By comparing the marginal cost of abatement for each option, decision-makers can determine the most efficient allocation of resources to achieve a given level of emission reduction. Is it better to invest in gas instead of coal for my production? Or buy electric cars for all the employees? How much do these options cost and what are the environmental benefits? Marginal abatement cost calculations help out answering those questions.
At the beginning of the emissions reduction efforts, the initial units of emissions often are relatively easy to remove, given that existing technologies can readily address them. Basically, the initial costs needed for decarbonization are low - “the low hanging fruit”. It is easy at one’s house to replace a lightbulb with a more energy efficient one. It gets harder to change the cook-stoves, even harder to change the overall energy source supplier etc. So, the readily accessible and less expensive options are gradually all used, and then the Marginal Abatement Costs (MACs) of reducing emissions through alternative technologies or in different sectors escalate.
In Germany, policymakers utilized MACC to prioritize investments in renewable energy integration into the national grid. By analyzing the cost-effectiveness of various renewable energy technologies, such as wind and solar, against traditional fossil fuel sources, Germany directs a lot of subsidies and incentives towards such energy sources. It has now completely phased out from its nuclear production, and MACC calculations have played an important role in decision making.
In the Netherlands, MACC was employed to inform policies aimed at reducing emissions from the transportation sector. By comparing the marginal costs of implementing measures such as incentivizing electric vehicles, improving public transportation infrastructure, and promoting cycling, policymakers were able to design targeted interventions minimizing costs to consumers and businesses.
As a refresher, Emissions Trading Schemes(ETS) are cap-and-trade schemes, requiring industries and power producers to pay for the carbon emissions stemming from their operations. Every year, they must buy and surrender a number of European Union Allowances (EUAs) to regulators corresponding to the volumes of CO2 emitted. This mechanism aims at incentivizing the adoption of more sustainable technologies over paying for EUAs, carbon becoming more costly than decarbonization.
As previously discussed, the MACC curve shows the necessary investments in decarbonization to achieve specific emissions reduction targets. Carbon pricing plays an important role in this equation. In the absence of an ETS, the MACC incorporates the costs associated with implementing decarbonization technologies. However, when there is a carbon pricing mechanism in place, the MACC curve is shifted. This shift makes adopting greener technologies more financially appealing, as it becomes economically favorable to invest in decarbonization rather than paying for expensive carbon allowances.
Once the carbon price gets higher than the marginal abatement cost of a certain technology, it becomes more financially viable to invest in the greener technology. Here are some examples:
As carbon reduction efforts progress, the cost of abating each additional ton increases. Sectors with challenging abatement processes may experience significant spikes in their abatement costs.
Different assumptions and different models give rise to significant differences in the assessment of the actual marginal abatement cost of every technology.
For instance, the steel industry faces an average abatement cost nearing $500 per ton according to the study explained below. However, the Bloomberg analysts who have built the model resulting in the graph just above, have found much lower abatement costs. Once thing is certain - carbon prices are far from being high enough (yet) to engender the necessary carbon abatement efforts.
There is a correlation between a sector’s average cost of abatement and market proportion of companies that have set or committed to set Science-based Targets (SBT). To simplify, we can use the the information on whether a company has committed to a Science-based Targets (SBT) as a proxy to its commitment to fight against climate change.
This is why the EU ETS is designed to appreciate over time. As prices rise gradually, new abatement solutions become economically competitive, driving further emissions reductions in the economy.
.webp)
Start your journey
