Emissions Reduction Models
Executive Summary
Key Takeaways
- ✓ An emissions reduction, or marginal abatement cost, model ranks available abatement options by cost per tonne of emissions reduced, providing the analytical basis for prioritising capital toward the lowest-cost reduction opportunities first.
- ✓ Abatement options should be split between capital-funded measures, requiring upfront investment with a multi-year payback, and operational efficiency measures, which may require little or no capital but depend on sustained operational discipline to realise.
- ✓ Cost per tonne should be calculated on a consistent, disclosed basis, typically levelised over the measure's expected life, since comparing options calculated on inconsistent bases produces a misleading ranking.
- ✓ The abatement cost curve should tie directly to investment decision-making, informing which measures are actually funded and in what sequence, rather than remaining a standalone analytical exercise disconnected from the capital allocation process.
- ✓ Some abatement options carry negative cost, delivering a net financial benefit alongside the emissions reduction, and these should be identified and prioritised explicitly rather than treated identically to positive-cost options.
Objective¶
This guide covers building an emissions reduction, or marginal abatement cost, model within Climate Finance & Climate Financial Modelling, tying it to investment decision-making.
Ranking Abatement Options by Cost Per Tonne¶
A marginal abatement cost curve ranks available abatement options by cost per tonne of emissions reduced, providing the analytical basis for prioritising capital toward the lowest-cost reduction opportunities first, before moving to progressively higher-cost options as the emissions reduction target requires.
Capital-Funded Versus Operational Efficiency Measures¶
Abatement options should be split between capital-funded measures, requiring upfront investment with a multi-year payback, and operational efficiency measures, which may require little or no capital but depend instead on sustained operational discipline, process changes, and monitoring to actually realise the reduction. Each carries a distinct cost and realisation risk profile that a single, undifferentiated abatement curve does not capture.
Consistent Cost-Per-Tonne Calculation¶
Cost per tonne should be calculated on a consistent, disclosed basis, typically levelised over the measure's expected life. Comparing options calculated on inconsistent bases, some levelised over a multi-year life, some presented as a single-year figure, produces a misleading ranking that does not reflect the options' true relative cost-effectiveness.
Connecting the Curve to Investment Decisions¶
The abatement cost curve should tie directly to investment decision-making, informing which measures are actually funded and in what sequence, alongside Climate Investment Models' broader capital structuring. A curve built as a standalone analytical exercise, disconnected from the actual capital allocation process, provides no genuine decision value beyond the analysis itself.
Negative-Cost Abatement Options¶
Some abatement options carry negative cost, delivering a net financial benefit alongside the emissions reduction. These should be identified and prioritised explicitly, since they represent reduction opportunities that are financially attractive independent of any climate objective, a materially different investment case than a positive-cost option requiring an offsetting financial or strategic rationale.
Common Construction Pitfalls¶
Cost per tonne calculated on inconsistent bases across options. Produces a misleading ranking that does not reflect true relative cost-effectiveness.
Capital-funded and operational efficiency measures blended without distinction. Obscures the materially different cost and realisation risk profile each carries.
Abatement curve disconnected from actual capital allocation. Reduces the analysis to a standalone exercise with no genuine decision value.
Recommended Practices¶
- Calculate cost per tonne on a consistent, disclosed basis, typically levelised over each measure's expected life.
- Distinguish capital-funded and operational efficiency measures explicitly.
- Tie the abatement cost curve directly to the actual capital allocation and investment decision process.
- Identify and prioritise negative-cost abatement options explicitly.
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Related Pillars¶
Related Technical Guides¶
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Frequently Asked Questions
What is a marginal abatement cost curve?
A ranking of available emissions abatement options by cost per tonne of emissions reduced, providing the analytical basis for prioritising capital toward the lowest-cost reduction opportunities first, before moving to progressively higher-cost options.
How do capital-funded and operational efficiency abatement measures differ?
Capital-funded measures require upfront investment with a multi-year payback, while operational efficiency measures may require little or no capital but depend instead on sustained operational discipline, process changes, and monitoring to actually realise the reduction, and the two should be modelled with their own distinct cost and realisation risk profiles.
Why does the cost-per-tonne calculation basis matter?
Because cost per tonne should be calculated on a consistent, disclosed basis, typically levelised over the measure's expected life, and comparing options calculated on inconsistent bases, some levelised, some single-year, produces a misleading ranking that does not reflect true relative cost-effectiveness.
How should the abatement cost curve connect to investment decisions?
Directly, informing which measures are actually funded and in what sequence, rather than remaining a standalone analytical exercise, since a curve that is built but not tied to the actual capital allocation process provides no genuine decision value beyond the analysis itself.
What is a negative-cost abatement option?
An abatement measure that delivers a net financial benefit, a positive return, alongside its emissions reduction, and these should be identified and prioritised explicitly, since they represent reduction opportunities that are financially attractive independent of any climate objective, unlike positive-cost options that require offsetting financial or strategic rationale to justify.
References
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