From carbon measurement to the necessary financing of reduction actions
Many companies that are committed to the climate are currently content to measure their carbon footprint. This first step is necessary but insufficient to ensure the resilience of the company in the context of a low-carbon transition.
Once the main emission items have been identified, how can an effective decarbonization plan be established?
How to identify the most relevant actions?
And above all, how to anticipate the financial means to be released to implement the action plan?
A successful climate strategy therefore requires the involvement of all of a company's stakeholders, and in particular its financial management, because any change represents either a cost or a savings opportunity. It is therefore essential to translate the impact of decarbonization actions into financial terms, and to make this information accessible to as many people as possible.
A practical tool can be made available to decision-makers:the Marginal Abatement Cost Curve ( MACC).
But what's behind this rather barbaric name?
What is the Marginal Abatement Cost?
The marginal abatement cost of a decarbonation solution corresponds to its marginal cost, i.e. the cost of the last unit produced, in relation to the emissions it will reduce. It is therefore expressed in euros per ton of CO2e emissions reduced, or €/tCO2e.
This concept appeared in the 1990s and was popularized by McKinsey in 2007.
Let's take a concrete example. A manufacturer wants to install solar panels on his roof to reduce his electricity consumption:
- The installation will cost him 80 000 €, amortized over 20 years or 4 000 € / year
- 200€ of maintenance, cleaning and upkeep per year
This represents a total cost of 4 200 €/year.
- Reduced emissions are estimated at 2 tons of CO2e per year.
The marginal abatement cost of this decarbonation action is therefore €2,100/tCO2e.
Visually translate the carbon and financial impact of a decarbonization action plan.
Within a decarbonization action plan, some emission reduction actions will require expenditures and therefore have a "positive" cost for the company, while others, by changing the way of production, energy consumption or sources and quantities of supply, will generate immediate savings for the company and therefore have a "negative" cost.
The marginal abatement cost is a good indicator for prioritizing decarbonization actions according to their carbon impact and their financial impact, whether positive or negative. In particular, it allows us to identify the actions that are likely to maximize greenhouse gas emission reductions at an equivalent level of financial effort.
After calculating the costs of each action, it is important to be able to compare them visually. This is where the marginal abatement cost curve comes in.
On this curve, the different decarbonation actions are represented as a rectangle:
- The width of the rectangle on the x-axis corresponds to the reduced emissions, in tC02e.
- The height of the ordinate rectangle corresponds to the marginal abatement cost of the action, in €/tC02e.
As we have seen, some actions can have a negative cost, such as reducing food waste. For a better visualization of the actions on the curve, they are generally sorted from left to right according to their marginal abatement cost, from the most financially beneficial on the left to the most costly on the right.
Thus, the MACC makes it possible to visualize the actions to be undertaken in priority to respect the reduction trajectory set by integrating the financial dimension and not only carbon:
- The larger the rectangle of an action, the more the action will reduce the company's carbon footprint.
- The flatter the rectangle, the more interesting the action is to implement in order to decarbonize one's activity at lower cost.
- The greater the height of an action's rectangle and towards the bottom (on the left of the graph), the more the action represents substantial savings while having a decarbonizing impact.
- The higher and more upwards (on the right of the graph), the more expensive the action will be to deploy.
MACC and the cost per ton of Carbon as a decision-making tool.
The MACC should be updated regularly to reflect changes in costs and actions already taken.
Within the framework of the French National Low Carbon Strategy, this tool is used in particular by comparing abatement costs to a Social Value of Avoided Carbon (SVC, in €/tCO2eq), which corresponds to the effort that society as a whole is willing to commit to reducing greenhouse gas emissions [1]. This value is roughly close to the value of a ton of carbon on the regulatory market, about 80 €/tCO2e at the end of October 2022. If the action has a lower cost than this SCV, it should be implemented as a priority.
A similar reasoning can be applied in a company that can set an internal carbon price and decide that all actions that cost less than this price must be deployed because in the end, the company will win. This will be even more relevant when the internal price of carbon is really associated with regulatory constraints, and this for any type of company.
The limits of the MACC.
Although a very practical decision support tool, MACC has its limitations. For example, it does not distinguish between the cash flows required each year: does the action require a large initial investment or rather high annual operating costs? It also does not take into account the technical and operational feasibility of the actions.
Moreover, the construction of a MACC can be laborious because it is necessary to calculate both the cost and the impact of possible actions, with a cost that can vary over time and depend on the different entities of an organization.
Relying on a MACC with "fresh" data is, however, necessary to ensure proper implementation of an ambitious decarbonization plan.
Sources
1. Criqui P. (2021), Les coûts d'abattement. Part 1 - Methodology, report of the commission on abatement costs, France Stratégie, June.
2. Quinet A. (2019), The value of climate action. Une valeur tutélaire du carbone pour évaluer les investissements et les politiques publiques, report, France Stratégie, February.
3. CO2: the European carbon market in seven questions - https://www.vie-publique.fr/questions-reponses/282323-co2-le-marche-du-carbone-dans-lunion-europeenne
4. Internal Carbon Pricing: A PIC Solution for Business? - https://www.institutmontaigne.org/publications/prix-interne-du-carbone-une-solution-qui-tombe-pic-pour-les-entreprises
