Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Joint Program Report
Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model
Morris, J., S. Paltsev and J. Reilly (2008)
Joint Program Report Series, 45 pages

Report 164 [Download]

Abstract/Summary:

Marginal abatement cost (MAC) curves, relationships between tons of emissions abated and the CO2 (or GHG) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) are MAC relationships independent of what happens in other regions? (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from them? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. It would be a great convenience if a reduced-form response of a more complex model could be used to reliably conduct empirical analysis of climate change policy, but it appears that, at least as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated. Care is needed to derive MACs under conditions closely related to the policy under consideration. In such a circumstance they may provide approximate estimates of CO2 or GHG prices for a given policy constraint. They remain a convenient way to visualize responses to a range of abatement levels.

Appendix A: Data Tables (MS Excel file: 340 kB)
Appendix B: A Comparison of U.S. Marginal Abatement Cost Curves from a McKinsey & Co. Study with Results from the MIT EPPA Model

Citation:

Morris, J., S. Paltsev and J. Reilly (2008): Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model. Joint Program Report Series Report 164, 45 pages (http://globalchange.mit.edu/publication/14181)

Superseded by:

Reprint 2012-16. Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model (Environmental Modeling and Assessment, 2012)
  • Joint Program Report
Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Morris, J., S. Paltsev and J. Reilly

Joint Program Report Series

Report 

164
45 pages
2008

Abstract/Summary: 

Marginal abatement cost (MAC) curves, relationships between tons of emissions abated and the CO2 (or GHG) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) are MAC relationships independent of what happens in other regions? (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from them? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. It would be a great convenience if a reduced-form response of a more complex model could be used to reliably conduct empirical analysis of climate change policy, but it appears that, at least as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated. Care is needed to derive MACs under conditions closely related to the policy under consideration. In such a circumstance they may provide approximate estimates of CO2 or GHG prices for a given policy constraint. They remain a convenient way to visualize responses to a range of abatement levels.

Appendix A: Data Tables (MS Excel file: 340 kB)
Appendix B: A Comparison of U.S. Marginal Abatement Cost Curves from a McKinsey & Co. Study with Results from the MIT EPPA Model

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