The cost of carbon abatement

What are the cheapest ways to reduce greenhouse gas emissions? How much does each carbon abatement measure cost? How does energy efficiency compare against energy generation? “Cost curve” analyses can provide some answers.

Lighting systems: CO2 abatement at negative life-cycle cost.

I’ve taken a look at the carbon emissions of electricity generating technologies in “Carbon emissions from electricity generation: the numbers”, and I’ve looked at the costs of low-carbon electricity in “Energy economics in an era of carbon pricing”, but how do these costs compare against energy conservation technologies? In this post I’ll try to broaden out the picture by bringing in the costs of energy efficiency measures. That’ll allow a side-by-side cost comparison of energy conservation and energy generation.

The reports I’m looking at here are “cost curve” analyses. These show the costs of abating greenhouse gas emissions, and plot the costs against the amount of emissions reduction available from the abatement measures. The McKinsey & Company consultancy has carried out a cost curve analysis for the Swedish energy company Vattenfall AB. That report looked at the global potential for carbon abatement, and its cost. I’ll use McKinsey’s numbers here, along with further work by Vattenfall.

Figure 1 shows the McKinsey report’s global cost curve for greenhouse gas abatement ^[1]. It plots the potential size of each abatement measure versus the cost of that measure. The vertical axis shows the cost of each abatement measure, in euros per ton of avoided greenhouse gas emissions, and the horizontal axis shows the amount of CO₂-equivalents that can be avoided by that abatement measure, in gigatons of emissions per year.

Figure 1. Global cost curve for greenhouse gas abatement measures beyond “business as usual”. (Click image to enlarge) Greenhouse gases measured in GtCO2e Ref: Enkvist et al., McKinsey & Company, 2007 (page 38) [1] Notes: (1) GtCO2e = gigaton of carbon dioxide equivalent; “business as usual” based on emissions growth driven mainly by increasing demand for energy and transport around the world and by tropical deforestation. (2) tCO2e = ton of carbon dioxide equivalent. (3) Measures costing more than €40 a ton were not the focus of this study. (4) Atmospheric concentration of all greenhouse gases recalculated into CO2 equivalents; ppm = parts per million. (5) Marginal cost of avoiding emissions of 1 ton CO2 equivalents in each abatement demand scenario.

The graph also shows the annual abatement needed to achieve stable atmospheric greenhouse gas concentrations of 500 ppm (parts per million), 450 ppm and 400 ppm of CO₂-equivalents. To illustrate how the graph works, I’ll pick off one example. A global emissions reduction of 26 Gtons of CO₂e per annum (the blue circle marked “26”) would stabilise greenhouse gas concentrations at 450 ppm of CO₂e, and that reduction would need all the abatement measures up to a cost of €40 per ton of CO₂e.

Current greenhouse gas emissions are 40 Gtons of CO₂-equivalent per year ^[1], and they are projected to grow to 58 Gtons per year by 2030 on a “business-as-usual” scenario. The 26 Gton p.a. emissions reduction represents a 45% drop relative to the “business-as-usual” value by 2030. Stabilisation at 400 ppm requires a 33 Gton p.a. reduction, 57% down on “business-as-usual”.

For context, a greenhouse gas concentration of 450 ppm of CO₂-equivalents results in a 50% probability that the eventual global temperature rise will exceed 2°C. Climate impact becomes very severe if the atmospheric temperature rise exceeds 2°C ^[2].

Taking a closer look at Figure 1, the lowest-cost end of the cost curve is dominated by energy efficiency measures, and the costs are negative. About 7 gigatons of CO₂ emissions per year can be avoided at a negative cost of abatement. That is, these measures are cost-effective even without considering the emissions impact. Beyond that, nuclear power, livestock management and reforestation are the lowest cost options.

How does the abatement potential divide among economic sectors? The McKinsey report looked at that too, and I’ve listed those results in Table 1 below.

Table 1. Abatement potential for greenhouse gases by sector

Sector	Abatement potential	Possible abatement measures (examples)
	Gt CO2e
Power	5.9	• Renewables (wind, solar, biomass) • Nuclear • Carbon capture and storage
Manufacturing	6.0	• Energy efficiency (e.g. cogeneration, process shift) • Fuel switching (e.g. biofuels) • Carbon capture and storage in industrial process
Buildings	3.7	• Improved building insulation, heating/cooling efficiency • Energy efficiency in lighting, appliances
Transportation	2.9	• Fuel-efficient vehicles • Biofuels
Forestry	6.7	• Deforestation avoided • Afforrestation/reforestation
Agriculture/Waste	1.5	• Capture of methane from landfills • New agricultural methods without tillage (1)
Total	26.7
Abatement potential for greenhouse gases by sector, GtCO2e per year by 2030 (costing up to €40 per ton) Ref: Enkvist et al., McKinsey & Company, 2007 (page 41) [1] Units are gigaton of carbon dioxide equivalent. Notes: (1) Reduces CO2 emissions from soil.

The abatement potential for transportation highlights fuel efficiency as a key measure with a negative cost of abatement. Another carbon abatement measure in the transportation sector might be a shift from private transport to public transport. McKinsey do not appear to consider this at all. It’s a curious omission.

What does McKinsey’s analysis conclude? Here’s the authors’ own summary:

For starters, in a 25-year perspective, power generation and manufacturing industry offer less than half of the potential for reducing emissions.

Almost a quarter of possible emission reductions would result from measures (such as better insulation in buildings) that carry no net life cycle cost   in effect, they come free of charge.

The study finds that a substantial share of the overall opportunities, including a large potential to reduce emissions by protecting and replanting forests, lies in developing economies.

P.-A. Enkvist et al.,
A Cost Curve for Greenhouse Gas Reduction (page 36) ^[1]

Going into slightly greater detail, I’ll pick off some of the stand-out numbers:

• The most cost-effective carbon abatement measure is building insulation, something I touched on in an earlier post, “Step one: home insulation”.
• Reforestation and avoided deforestation have a surprisingly high cost, but forestry has the largest abatement potential of all the sectors considered.
• Of the electricity generating technologies, nuclear has the lowest cost. This tallies with the findings of Prof. D. Anderson’s analyses for the Stern Review and the IPPR, which I went over in the post “Energy economics in an era of carbon pricing”.

A broader point is that this isn’t a question of energy efficiency versus low-carbon energy generation. The lowest cost measures are mainly efficiency-based, but they can’t deliver the required emissions reductions by themselves. We have to move up the cost curve, to progressively more expensive technologies, to achieve the required emissions reductions.

How much will emissions reduction cost, in total? Here’s the McKinsey report’s answer:

For the global economy, the cost of the 450-parts-per-million scenario described in this article would depend on the ability to capture all of the available abatement potential that costs up to 40 euros a ton. If that happens, our cost curve indicates that the annual worldwide cost could be around 500 billion euros on 2030, 0.6 percent of that year’s projected GDP. However, should more expensive approaches be required to reach the abatement goal, the cost could be as high as 1,100 billion euros, 1.4 percent of GDP.

P.-A. Enkvist et al.,
A Cost Curve for Greenhouse Gas Reduction (page 44) ^[1]

The authors point out that this cost might be viewed as an insurance policy, in which case the cost of emissions abatement, 0.6%–1.4% of global GDP, can be compared with the amount spent globally on insurance, 3.3% of global GDP.

Vattenfall’s Cost Curve Analysis

The Swedish energy company Vattenfall AB has conducted a similar cost curve analysis ^[3] [4], using consultancy input from McKinsey. Figure 2 below shows Vattenfall’s results.

Figure 2. Global cost curve for greenhouse gas abatement measures from Vattenfall. Ref: Vattenfall AB, 2008 (page 8) [4]

The results are very similar to McKinsey’s, but that’s not surprising since McKinsey contributed to the study.

The report finds that 7 Gton per year of CO₂ abatement is available at negative or zero cost (mainly energy efficiency and nuclear electricity), and a total of 27 Gton per year is available below €40 per ton, enough to deliver a 46% emissions reduction relative to a “business-as-usual” scenario ^[3]. That reduction would stabilise atmospheric CO₂ levels at 450 ppm.

Vattenfall presents a summary in the form of a “myths and realities” table, which highlights some of the unexpected outcomes of the analysis:

Myths and realities about GHG abatement
Myths	Realities
Abatement opportunities are concentrated in the industry and power sectors	Industry and power represent < 45% of the total 2030 abatement potential*
Limited amount of low-cost opportunities in industrialized countries	Negative cost abatement potential represents 35–45% of the total in industrialized countries
Abatement opportunities are concentrated in industrialized countries and China	Developing world excluding China represents > 40% of the total 2030 abatement potential*
We can only achieve the required abatement through new technology	70% of the total 2030 abatement potential* not dependent on new technology
Addressing GHG emissions will severely strain the global economy	Reaching 450 ppm could cost as little as 0.6% of GDP if all low-cost opportunities are addressed
*Below 40 Eur/tCO2 e

Table 2. Myths and realities about GHG abatement

Vattenfall AB 2007 (page 11) [3]

Summing Up

“Cost curves” allow all greenhouse gas reduction measures – both energy efficiency and low-carbon energy generation – to be compared side-by-side. Energy efficiency measures turn out to be the cheapest way to reduce carbon emissions. In fact many of them have a negative cost of abatement. Efficiency measures can only deliver about a quarter of the emissions cuts that are needed, though. To stabilise atmospheric greenhouse gases at 450 ppm of CO₂-equivalents, we have to adopt all measures up to an abatement cost of €40/ton CO₂e. For comparison, the Stern Review ^[2] estimates the social cost of carbon emissions to be $85/ton CO₂.

The social cost of carbon emissions is higher than the cost of avoiding those emissions. Judged by purely economic criteria, carbon abatement is cost-effective.

Some More Cost Curves

As well as the global cost curves I’ve looked at here, McKinsey & Company have produced some country-specific analyses for Germany ^[5], the U.K. ^[6], the U.S. ^[7] and Australia ^[8].

Update:  Even More Cost Curves

Updated May 6, 2009

Since I wrote this post, McKinsey have been busy producing even more country-specific greenhouse gas abatement cost curves. They now have analyses for Sweden ^[9], the Czech Republic ^[10] and Switzerland ^[11]. They’ve also turned their attentions to the key emerging markets, with analyses for China ^[12] and Brazil ^[13]. A report for India is on its way, apparently.
Most notably though, McKinsey have just brought out an updated version of their global greenhouse gas abatement cost curve ^[14].

References

1. A cost curve for greenhouse gas reduction, P.-A. Enkvist, T. Nauclér and J. Rosander, The McKinsey Quarterly, McKinsey & Company, 2007  (WebCite cache)
2. STERN REVIEW: The Economics of Climate Change, Executive Summary, N. Stern, 2006, (page v)  (WebCite cache)
3. Global Mapping of Greenhouse Gas Abatement Opportunities, Vattenfall AB, Jan. 2007  (WebCite cache)
4. The Climate Threat – Can humanity rise to the greatest challenge of our time? Conclusions from Vattenfall’s climate survey, Vattenfall AB, Feb. 2008  (WebCite cache)  (more Vattenfall documents)
5. Costs and Potentials of Greenhouse Gas Abatement in Germany, McKinsey & Company, Sept. 2007  (WebCite cache)
6. Climate change: Everyone’s business – options for greenhouse gas reduction in the UK, Executive Summary, CBI Climate Change Task Force, Nov. 2007  (WebCite cache)  (full report)
7. Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? Executive summary, J. Creyts, A. Derkach, S. Nyquist, K. Ostrowski and J. Stephenson, McKinsey & Company, Dec. 2007  (WebCite cache)  (full report)
8. An Australian Cost Curve for Greenhouse Gas Reduction, A. Lewis, S. Görner, L. Downey, J. Slezak, J. Michael and A. Wonhas, McKinsey & Company, Feb. 2008  (WebCite cache)
9. Greenhouse gas abatement opportunities in Sweden, McKinsey & Company, Apr. 2008  (WebCite cache)
10. Costs and potentials for greenhouse gas abatement in the Czech Republic, McKinsey & Company, Nov. 2008  (WebCite cache)
11. Swiss greenhouse gas abatement cost curve, McKinsey & Company, Jan. 2009  (WebCite cache)
12. China’s green revolution: Prioritizing technologies to achieve energy and environmental sustainability, McKinsey & Company, Feb. 2009  (WebCite cache)
13. Pathways to a low-carbon economy for Brazil, McKinsey & Company, Mar. 2009  (WebCite cache)
14. Pathways to a low-carbon economy, Version 2 of the global greenhouse gas abatement cost curve, McKinsey & Company, Jan. 2009