Marginal abatement cost of carbon dioxide emissions: The role of abatement options

Abstract

Reducing carbon dioxide (CO2) emissions is often not free, and estimating the marginal abatement cost of CO2 emissions (MCAC) provides valuable information for policy analysis and decision-making. Past studies often assume that producers would take a uniform abatement option that overlooks the heterogeneity of abatement options and the possibility of taking energy-related abatement options (e.g., merely cutting down fossil fuel consumption). This study contributes to the literature by investigating how different abatement options can be incorporated into estimating the MCAC. It first provides an expository derivation of the MCAC by opening the “black box” of the production process, which reveals that the MCAC can be negative if switching to fuels with lower carbon content generates positive marginal profit. We then develop a new approach for estimating the MCAC, where six alternative abatement options are considered. A case study on China's thermal power industry is presented, which reveals that the least-cost abatement option varies across different provinces and periods. Compared with the option of reducing energy consumption and downscaling production activity, switching to cleaner energy tends to abate CO2 emissions at lower costs for most provinces in most years.