Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model
Author(s)Morris, Jennifer; Paltsev, Sergey; Reilly, John M.
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Marginal abatement cost (MAC) curves, relationships between tons of emissions abated and the CO2 (or GHG) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) are MAC relationships independent of what happens in other regions? (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from them? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. It would be a great convenience if a reduced-form response of a more complex model could be used to reliably conduct empirical analysis of climate change policy, but it appears that, at least as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated. Care is needed to derive MACs under conditions closely related to the policy under consideration. In such a circumstance they may provide approximate estimates of CO2 or GHG prices for a given policy constraint. They remain a convenient way to visualize responses to a range of abatement levels.
Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).
MIT Joint Program on the Science and Policy of Global Change
Report no. 164
;Report no. 164