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Should marginal abatement costs differ across sectors ? the effect of low-carbon capital accumulation

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  • Vogt-Schilb, Adrien
  • Meunier, Guy
  • Hallegatte, Stephane

Abstract

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.

Suggested Citation

  • Vogt-Schilb, Adrien & Meunier, Guy & Hallegatte, Stephane, 2013. "Should marginal abatement costs differ across sectors ? the effect of low-carbon capital accumulation," Policy Research Working Paper Series 6415, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6415
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    References listed on IDEAS

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    Cited by:

    1. Oskar Lecuyer & Adrien Vogt-Schilb, 2013. "Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital," CIRED Working Papers hal-00850680, HAL.
    2. Vogt-Schilb, Adrien & Hallegatte, Stéphane, 2014. "Marginal abatement cost curves and the optimal timing of mitigation measures," Energy Policy, Elsevier, pages 645-653.
    3. repec:hal:wpaper:hal-00850680 is not listed on IDEAS
    4. Frédéric Branger & Oskar Lecuyer & Philippe Quirion, 2015. "The European Union Emissions Trading Scheme: should we throw the flagship out with the bathwater?," Post-Print hal-01137875, HAL.
    5. repec:hal:journl:hal-00850680 is not listed on IDEAS

    More about this item

    Keywords

    Climate Change Mitigation and Green House Gases; Climate Change Economics; Investment and Investment Climate; Economic Theory&Research; Environment and Energy Efficiency;

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