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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.
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.
“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.
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.
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.
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).
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.
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.
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.
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:
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.
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