In a budget-constrained environment with uncertainties such as technology, regulation, energy and carbon pricing risk, making informed decisions about the sequence and timing of greenhouse abatement investments is difficult, but critical. The development of abatement cost curves assists to evaluate the mitigation measures that could be adopted, where to prioritise resources and the timing of projects.
Ranking abatement projects is done according to their cost effectiveness using a common investment appraisal procedure based on discounted cash flow valuation which considers life cycle costs, benefits and emissions reduction potential. In evaluating the portfolio of possible emissions-reduction projects and its implementation schedule, greenhouse gas abatement cost curves are plotted at selected time horizons.
This article considers the features of greenhouse gas abatement cost curves, their use as a central decision making tool and the strategic benefits that this analysis delivers.
Key abatement cost curve dimensions
A greenhouse gas abatement cost curve depicts the available mitigation measures, their abatement potential in a specific year and their cost effectiveness, relative to a business as usual scenario.
Developing a robust abatement cost curve involves eight steps
1. Frame the abatement cost assessment in terms of time horizon(s), scope of emissions and system boundaries.
2. Develop a greenhouse gas emissions baseline and reference baseline projections for all the assets and emissions sources within the system boundaries.
3. Identify all abatement opportunities available, now and over the timeframe being considered, and develop initial abatement potential and cost estimates.
4. Build initial greenhouse gas abatement cost curve(s) using a structured bottom-up engineering approach with clear assumptions and screen all options based on your business risk criteria.
5. Refine estimates for abatement potential, cost and lead time.
6. Firm up opportunities with constraints by removing mutually exclusive abatement measures and considering inter-relationships between abatement measures.
7. Construct the final cost curve(s) and perform a sensitivity analysis.
8. Communicate findings and recommendations.
A greenhouse gas abatement cost curve should deliver a range of strategic benefits
There are a number of outcomes that benefit an organisation seeking to plan its greenhouse gas mitigation strategy:
The overall greenhouse gas abatement potential within a specific time horizon can be understood. With this insight, realistic carbon abatement target(s) can be set and sensitivity to internal growth tested.
The cost effectiveness of greenhouse gas abatement measures can be assessed on a common platform and measures are evaluated and ranked, enabling prioritisation.
Informed capital expenditure decisions can be made about the sequence and timing of abatement investments.
Different strategic options can be considered such as site expansion, power supply options, product mix changes and an organisation’s Research Development and Demonstration program can be structured.
Are all cost curves the same?
There are a number of factors that need consideration when designing and analysing greenhouse gas abatement curves.
Firstly, the barriers to the take up of individual projects can be underestimated. This is particularly the case with projects regarded as "no regret" initiatives that are assessed as relatively low cost, and high yield in terms of emissions reductions or cost savings, but might face barriers to their implementation.
An example of such a project could be an opportunity to reduce energy usage through a staff campaign to switch lights off more regularly. This could be considered a low cost and high yielding abatement option. However, a key assumption is the need for a high level of compliance, which may not be easy to ensure.
Another example of a typical barrier is the competition for capital and whether an organisation will spend its limited resources on mitigation projects. Government sponsored incentive programs assist in overcoming such financial barriers but then, especially if the cost curve aims to assess various policy options, the cost of administering such programs needs to be considered as well.
Secondly, cost curves need to consider inter-dependencies. Each abatement measure should not be assessed completely independently of the other possible measures as in some instances implementing one project will impact the abatement potential of others. The portfolio of abatement options also needs to be screened for projects/investments that are mutually exclusive.
Thirdly, the timing of a project's implementation can be varied to the organisation's advantage. The methodology should aim to provide decision makers with insight into the value of anticipating or delaying the implementation of some projects.
Examples of such decisions include investing after considering the real option value of a staged development approach, or delaying another decision based on an anticipated learning rate as an emerging technology becomes both more affordable and more efficient over time.
Expert advice needs to be sought on technically-possible emissions reduction projects in order to qualify uncertainties, risks and opportunities. An abatement strategy should not only rank current projects but also evaluate foreseeable opportunities and their technological maturity.
Finally an abatement cost assessment should be viewed as a dynamic process that takes into account information available, with various levels of confidence, such as abatement cost, the potential of abatement measures or energy and carbon price forecasts.
"What if" scenarios and sensitivity analyses can be carried out to test the robustness of proposed recommendations. From there you can build a portfolio of mitigation projects that leaves room for learning from ongoing developments in your regulatory and business environment.
You can differentiate projects that should be implemented now, options that could be viable in the future and others that will probably never be attractive. This assessment framework can be regularly updated with additional information gained such as more detailed engineering estimates of projects or revised energy or carbon price projections.
Modelling the economics of greenhouse gas mitigation policies
Such an approach can also be used to assess the impact of policy instruments at a sectoral, more macro-economic level.
It can model the long-term energy system transformations that are necessary to address climate change and provide a range of insightful outputs. The first is establishing baseline projections taking into account foreseeable economic, technological and regulatory changes. Once sector-specific market penetration models are included, the approach provides estimates of the plausible take up of technical measures driven by policy programs and quantifies the likely costs of implementing each program.
The cost curve(s) can then provide valuable inputs that are fundamental to the construction of a policy when selecting and defining the best portfolio of abatement programs that present the most attractive return.
Collaboration is the key to optimising your abatement options curve
Collaboration sits behind the development of a greenhouse gas abatement cost curve, which aims to be an insightful decision making and planning framework. The process must draw together elements such as:
Expert projections for energy prices and greenhouse gas emissions factors.
Assessment of management plans, site expansion plans and their impacts on abatement potential.
Insights into emerging technologies and their price paths over time.
Considerations of project risk and uncertainty in the basis of estimates.
Developing an assessment tool that can be used to regularly review an organisation's range of abatement actions taking into account additional information and changes in the regulatory and market environment.
Energetics can provide expert assistance based on 25 years experience assessing and implementing abatement measures, such as energy efficiency, electrical demand management and large scale distributed energy generation projects for many large customers. Our Greenhouse Gas Abatement Cost Curve methodology is a proven decision making framework which thoroughly evaluates the risks and returns inherent in alternative strategies.