Carbon Finance

Marginal Cost of Abatement: Understanding the Basics

October 13, 2021


Many corporations across the globe have set ambitious targets in order to substantially reduce their carbon emissions over the coming years. The first multilateral effort to tackle rising greenhouse gas (GHG) emissions can be traced back to the 1998 Kyoto Protocol. Kyoto Protocol established comprehensive monitoring, review, verification, and a compliance system to guarantee transparency and hold corporations and governments accountable. Under the Protocol, many country’s actual emissions were monitored and complete records exist of the trades carried out.

Faced with legally binding commitments, the challenge of reducing carbon emissions in a cost-efficient way remains.

Que marginal abatement cost (MAC) curves.

Policy-makers and firms use MAC curves to illustrate the economics of climate change mitigation and contribute to decision-making when it comes to developing internal carbon strategies. The concept of a carbon abatement curve has been around since the early ‘90s to illustrate the cost associated with carbon abatement.

In this article, the GHG emissions management experts at SINAI define marginal cost of abatement, and what a marginal abatement cost curve is. We also explain how to calculate total abatement costs to empower your sustainability leaders and achieve real growth for your firm.

Abatement costs: the basics

Abatement costs harm a corporation's earnings while also impacting a company's reputation among consumers who increasingly demand greener practices. In particular industries, abatement costs can significantly impact a company.

Take an industrial company required by the United States Environmental Protection Agency (EPA) to clean up pollution created by a firm’s manufacturing, processing, or waste discharge site, for example. The majority of the time, abatement costs are involved.

When referring to abatement fees, the term ‘marginal abatement cost' also touches on the marginal benefit needed to efficiently reduce pollution.

Calculating a marginal abatement cost curve, also known as a MAC curve or MACC, is the activity of mapping out the cost-effectiveness of GHG emissions reductions, for example, balancing a firm's toxic waste against reforestation initiatives they fund.

What do we mean by the marginal cost of abatement?

The marginal cost of abatement refers to the marginal loss in company profits from avoiding the last unit of pollution or the marginal cost of reaching a specified pollution target because of some degree of output.

When several pollutant sources exist, each with a different marginal abatement cost curve, the efficient amount of pollution needs to balance the marginal cost of abatement across various sectors. This can be achieved by using market-based tools and techniques such as tradable permits and emissions charges, for example.

What is a marginal abatement cost curve?

A marginal abatement cost (MAC) curve is a popular policy tool that helps your company identify GHG emissions abatement potential and related abatement costs.

MAC curves are used for various environmental issues across different countries and are increasingly applied to government climate change policy and corporate climate strategies.

Historically, complex climate policy decisions were partially based on MAC curves, providing both pros and cons when it comes to helping a firm measure, track, and reduce its carbon emissions. Nevertheless, MAC curves are a beneficial policy for companies to utilize. Many firms rely on their MAC curve exclusively, providing an accessible guide for robust analysis. This helps to better inform your carbon strategies as more information on costs and policy effectiveness comes to light. Read our recent article that goes into detail about the challenges and benefits of using a MAC curve.

How to calculate total abatement cost

Calculating total abatement costs is a complex task.

Source: GRID-Arendal

Using the country of Mexico as an example, you can see that the exercise of formulating a MAC curve produces valuable information that can inform the development of your firm’s carbon strategy. In 2020, Mexico had substantial economic benefits gained from an approach that took their transport sector into account, coupled with the level of emissions that were reduced. The country was also able to lower costs associated with mitigation processes based on avoided deforestation, water treatment, and landfills.

Next-generation, dynamic MAC curves

Creating a MAC curve manually can be time-consuming and extremely difficult. To ensure your corporation’s MAC curve reflects its latest evolving conditions, you’ll want a system in place that automates essential updates.

Using SINAI’s software solution, your firm can build a robust MAC curve that incorporates sector-specific mitigation options and takes into account your firm’s unique climate-related forecasting needs, no matter what stage of your decarbonization journey you are in.
With intelligent GHG emissions management, your firm will be able to monitor and manage climate risk quickly and easily. Make better business decisions that align with your agreed emission reductions targets, using data and insight that’s accurate and accessible. To see how SINAI’s platform can revolutionize how your company calculates, tracks, and measures its CO2 emissions, contact us for a demo of our software today.

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