Abatement cost

Abatement cost refers to the expenses incurred by individuals, businesses or governments to reduce or eliminate harmful emissions, pollutants or other undesirable byproducts of economic activities ^[1]. In environmental economics the concept is fundamental to understanding how pollution control policies work and how society can achieve environmental goals at the lowest possible cost. Abatement costs can include expenses for installing pollution control equipment, implementing cleaner production processes, transitioning to renewable energy sources or adopting new technologies that reduce environmental impact.

Types of abatement costs

There are three main types of abatement costs that economists distinguish ^[2]:

Total abatement cost

Total abatement cost (TAC) represents the complete expenses associated with reducing pollution by a certain amount. It includes all direct and indirect costs of implementing pollution control measures. The total abatement cost typically increases as more pollution is eliminated because the easiest and cheapest reductions are usually made first, leaving more expensive options for further reductions.

Average abatement cost

Average abatement cost is calculated by dividing total abatement cost by the quantity of pollution reduced. It provides a useful measure for comparing the overall efficiency of different pollution control approaches or comparing costs across different firms or industries.

Marginal abatement cost

Marginal abatement cost (MAC) measures the cost of reducing one additional unit of pollution ^[3]. This concept is particularly important in environmental policy because it helps determine the optimal level of pollution reduction. The marginal abatement cost typically increases as more pollution is reduced, reflecting diminishing returns to abatement efforts. In other words, it becomes progressively more expensive to reduce pollution past a certain point as the cheapest options are exhausted first.

Marginal abatement cost curves

A marginal abatement cost curve (MACC) is a graphical representation showing the relationship between the quantity of pollution abated and the marginal cost of achieving that abatement ^[4]. The curve typically slopes upward indicating that each additional unit of pollution reduction costs more than the previous one.

Components of MAC curves

The MAC curve plots marginal abatement cost on the vertical axis (usually measured in currency per ton of pollutant) against emission reduction on the horizontal axis. Different sources or polluters may have different MAC functions because of different abatement technologies available to them. The aggregate marginal abatement function of an industry is the horizontal summation of the MACs of individual firms.

Uses in policy making

Policy makers use marginal abatement cost curves as merit order curves to analyze how much abatement can be done in an economy at what cost and where policy should be directed to achieve emission reductions ^[5]. Various economists, research organizations and consultancies have produced marginal abatement cost curves. Bloomberg New Energy Finance and McKinsey & Company have produced economy wide analyses on greenhouse gas emissions reductions for the United States. The Wuppertal Institute for Climate, Environment and Energy produced several marginal abatement cost curves for Germany.

Limitations

MAC curves have several recognized limitations. They omit ancillary benefits of emission abatement, treat uncertainty in a limited manner, exclude intertemporal dynamics and lack necessary transparency concerning their assumptions ^[6]. Traditional MAC curves only look at a single measure at a single time and do not show how technologies interact in the energy system or how to scale and sequence investments over time.

Optimal pollution level

The efficient level of emissions is where marginal damage equals marginal abatement cost (MAC=MD) ^[7]. At this intersection point society minimizes the total costs of pollution which consist of both damage costs from pollution and abatement costs from reducing it.

Firms will reduce pollution up to the point where the marginal abatement cost equals the marginal benefit of pollution reduction. This is because firms aim to minimize the total cost of abatement, balancing the incremental cost of reducing an additional unit of pollution with the benefits of a cleaner environment. If the marginal abatement cost is below the marginal benefit, it makes economic sense to reduce more pollution. If it exceeds the marginal benefit, the firm should stop reducing.

Role in environmental policy

Abatement costs play a central role in designing and evaluating environmental policies:

Carbon pricing

An economy-wide carbon price applies a uniform price on CO2 emissions regardless of the source. As a result the marginal abatement costs are equalized across firms and sectors. Both carbon taxes and cap-and-trade systems work by influencing abatement costs ^[8]:

• Carbon tax sets the price of emissions and allows the market to determine the quantity of emission reductions
• Cap-and-trade sets the quantity of emissions reductions and lets the market determine the price through trading of emission allowances

Emissions trading

In emissions trading systems companies may buy and sell allowances establishing a market price for emissions. Companies that can reduce their emissions at a lower cost may sell excess allowances to companies facing higher abatement costs ^[9]. This trading mechanism ensures that emission reductions occur where they are cheapest, minimizing total abatement costs for society.

Cost effectiveness

From a normative economic viewpoint environmental goals should be achieved at the lowest possible cost. With a fixed amount of money the most can be achieved for the environment if resources are used efficiently rather than being wasted. If there are 50 options to reduce emissions, each with their own cost and potential, they can be ranked from lowest to highest cost and implemented starting with the cheapest options ^[10].

Factors affecting abatement costs

Several factors influence the level of abatement costs for a firm or industry:

• Available technology - More advanced pollution control technologies typically offer lower abatement costs per unit of pollution reduced
• Scale of operations - Larger facilities may benefit from economies of scale in pollution control equipment
• Type of pollutant - Some pollutants are more difficult and expensive to control than others
• Existing infrastructure - Retrofitting existing facilities is often more expensive than incorporating pollution controls in new construction
• Regulatory requirements - Stringent regulations may require expensive control technologies
• Time horizon - Abatement costs may decline over time as technology improves and firms learn more efficient methods

Advantages of using abatement cost analysis

• Provides a systematic framework for comparing different pollution control options
• Helps identify the most cost-effective approaches to achieving environmental goals
• Enables policy makers to design efficient environmental regulations
• Allows firms to make informed decisions about pollution control investments
• Facilitates the design of market-based environmental policies like emissions trading

Limitations of abatement cost analysis

• Accurate measurement of abatement costs can be difficult especially for new technologies
• Does not capture all environmental benefits which may be difficult to quantify in monetary terms
• May not account for market failures such as information asymmetries or split incentives
• Static analysis may not capture dynamic effects such as technological learning and innovation
• Different methodologies can produce widely varying cost estimates

Abatement cost — recommended articles

Environmental economics — Cost — Marginal cost — Efficiency — Market failure — Tax — Technology — Investment — Economics

References

• Kesicki F., Ekins P. (2012), Marginal abatement cost curves: a call for caution, Climate Policy, Vol. 12, No. 2, pp. 219-236.
• Kesicki F. (2010), Marginal Abatement Cost Curves for Policy Making – Expert-Based vs. Model-Derived Curves, University College London.
• Perman R., Ma Y., McGilvray J., Common M. (2003), Natural Resource and Environmental Economics, Pearson Education, 3rd edition.
• World Bank (2023), What You Need to Know About Abatement Costs and Decarbonisation.
• Ackerman F., Bueno R. (2011), Use of McKinsey abatement cost curves for climate economics modeling, Stockholm Environment Institute.
• Environmental Defense Fund, How cap and trade works.

Footnotes

1. Perman R., Ma Y., McGilvray J., Common M. (2003), pp. 215-220
2. Kesicki F. (2010), p. 3
3. Kesicki F., Ekins P. (2012), pp. 219-236
4. Kesicki F. (2010), pp. 4-6
5. Ackerman F., Bueno R. (2011), pp. 1-5
6. Kesicki F., Ekins P. (2012), pp. 225-230
7. Perman R., Ma Y., McGilvray J., Common M. (2003), pp. 218-222
8. World Bank (2023)
9. Environmental Defense Fund
10. Kesicki F. (2010), pp. 8-10

Author: Sławomir Wawak