Tim Varga




Opportunities on the Abatement Cost Curve

The Story: CPI's Energy Transformation Analysis

National governments face an uphill battle to reduce greenhouse gas emissions, but not all actions are created equal. Using the (in)famous McKinsey Cost Curve as a starting point, I show how governments and large financial organizations can focus their efforts to achieve a low-carbon economy. Major opportunities exist in four discrete buckets:

1. Remove barriers to money-saving or no-cost activites: The abatement opportunities in this region are negative cost - that is, these are actions that pay for themselves through reduced expenditures on things like fossil fuels (think of how an expensive LED lightbulb ultimately saves the buyer money over an inefficient incandescent because of the large reduction in electricity use). But implementation has been spotty, and many money-making endeavors are unfulfilled or only partially implemented.

2. Improve the effectiveness of current policies: A region of the of the cost curve is positive cost (so, requires investment that won't be paid back), yet governments have made explicit or implicit a carbon price which makes these opportunities more attractive - in effect, the "politically palatable" carbon price moves the opportunities into the no-cost or money-making (below the x-axis) region. Improving the effectiveness - the bang for your buck - of these policies is crucial to fulfilling the potential for greenhouse gas abatement in this region of the cost curve.

3. Lower the cost of finance: Especially in the developing world, greenhouse gas emissions abatement projects that would generally appear to be financially viable are sometimes far too expensive because of the risks of building and operating projects, whether due to political instability or a lack of institutional support and know-how. Governments and financial institutions can act to lower the cost of finance by providing novel risk mitigation instruments, information sharing, partnering with multilateral institutions, etc.

4. Rework business models and encourage innovation: The highest cost opportunities on the abatement cost curve (to the far right) are both the most expensive and potentially the most impactful. But market inertia and stasis - in the form of outdated and poorly planned power grids or utility electricity providers whose business success depends on infrastructure investment rather than services provided - stand in the way of achieving these high-cost, high-reward opportunities. Governments must work to restructure investor-owned utilities (among other actions) to align their financial incentives with reducing greenhouse gas emissions.

CPI is working on all these issues to help policymakers figure out what works and what doesn't to achieve a low carbon economy.


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