Should Marginal Abatement Costs Differ Across Sectors? The Effect of Low-Carbon Capital Accumulation
The optimal timing, sectoral distribution, and cost of greenhouse gas emission reductions is different when abatement is obtained though abatement expenditures chosen along an abatement cost curve, or through investment in low-carbon capital. In th...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/04/17606425/marginal-abatement-costs-differ-across-sectors-effect-low-carbon-capital-accumulation http://hdl.handle.net/10986/15559 |
| Summary: | The optimal timing, sectoral
distribution, and cost of greenhouse gas emission reductions
is different when abatement is obtained though abatement
expenditures chosen along an abatement cost curve, or
through investment in low-carbon capital. In the latter
framework, optimal investment costs differ in each sector:
they are equal to the value of avoided carbon emissions,
minus the value of the forgone option to invest later. It is
therefore misleading to assess the cost-efficiency of
investments in low-carbon capital by comparing levelized
abatement costs, that is, efforts measured as the ratio of
investment costs to discounted abatement. The equimarginal
principle applies to an accounting value: the Marginal
Implicit Rental Cost of the Capital (MIRCC) used to abate.
Two apparently opposite views are reconciled. On the one
hand, higher efforts are justified in sectors that will take
longer to decarbonize, such as urban planning; on the other
hand, the MIRCC should be equal to the carbon price at each
point in time and in all sectors. Equalizing the MIRCC in
each sector to the social cost of carbon is a necessary
condition to reach the optimal pathway, but it is not a
sufficient condition. Decentralized optimal investment
decisions at the sector level require not only the
information contained in the carbon price signal, but also
knowledge of the date when the sector reaches its full
abatement potential. |
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