Levelized Cost Of Carbon Abatement — New Tool For Investors And Policy Makers
Julio Friedmann and his team of researchers at Columbia University’s Center for Global Energy Policy have devised a new method of calculating the economic impact investors and policy makers can expect as a result of a range of actions designed to lower the amount of carbon dioxide spewing into the atmosphere. We here at CleanTechnica often speak in terms of a carbon fee or carbon tax — a sum of money that would be assessed against those who emit carbon dioxide. The theory is that if companies are forced to pay such a tax or fee, Adam Smith’s magical “unseen hand” will promote actions that will reduce carbon emissions and that’s a good thing, right?
The answer is, “Maybe, but not necessarily.” A carbon fee is a blunt instrument. Friedman and his team have devised a far more sophisticated tool that is more like a surgeon’s scalpel. In the executive summary to the new research, he and his team write:
“The levelized cost of carbon abatement, LCCA, is an improved methodology for comparing technologies and policies based on the cost of carbon abatement. LCCA measures how much CO2 can be reduced by a specific investment or policy, taking into account relevant factors related to geography and specific asset. It calculates how much an investment or policy costs on the basis of dollars per ton of emissions reduced. Previous marginal or levelized cost methodologies that assess carbon reduction options often failed to consider the specific contexts that determine the real, all-in costs of a policy and the real, all-in impacts on emissions. These costs and impacts can vary depending on the contexts and details of geography, existing infrastructure, timing, and other factors. LCCA attempts to improve understanding of the real climate costs and benefits by including specific and local CO2 reductions in all estimations and consistently applying standard financial metrics that more accurately represent and compare costs.
“Investors and policy makers interested in climate, energy, and decarbonization must balance many competing options. The scenarios and analyses presented in this report can provide a foundation for wider analytical applications, and can help focus investments in innovation for hard-to-abate sectors, determine essential infrastructure required to facilitate market uptake, and estimate the value of grants in deployment. If the LCCA is not estimated, decision makers will not know the value of their policies and investments in terms of achieving greenhouse gas reductions and their carbon goals or the opportunity costs of taking one path over another. Finally, although carbon abatement costs are only one consideration of many in crafting climate policy (e.g., jobs, trade, domestic security), LCCA analysis will deploy efficient and effective approaches of GHG reduction and help avoid waste.
“This paper uses four scenarios to illustrate the discipline and value of LCCA analysis: first, the $/ton cost of using new solar power (utility or rooftop) to displace power-sector emissions in one market (California); second, the $/ton costs of new rooftop solar generation in several states with different solar resources, grid mixes, and policy environments; third, the $/ton cost of various technology options to decarbonize a range of primary iron and steel production methods; and fourth, the $/ton cost associated with sustainable aviation fuels and direct air capture and storage of CO2.
“The analysis provides insight into (a) the highest value for carbon reduction, (b) the relative discrete costs and benefits for decarbonization options, and (c) the potential shortfalls in policy or portfolio goals. In this context, the LCCA estimates for even simple cases can prove complicated depending on how emissions reductions are achieved. For example, our first scenario finds the costs of reducing emissions by replacing existing power generation in California with solar PV range from $60/ton (utility solar PV displacing natural gas power generation) to $300/ton (rooftop solar replacing a grid-average mix of generation) to more than $10,000/ton (any solar replacement of nuclear or hydropower).
The study is long enough and complicated enough to make any mathematician blissfully happy. In an e-mail, Bloomberg attempts to simplify and demystify it. “LCCA is a simple idea. It measures the cost of an intervention — say, replacing a gas power plant with a solar farm — in relation to the tons of carbon dioxide avoided because of it. The result is measured in dollars per metric ton of carbon dioxide abated.
“Consider an example. LCCA value for rooftop solar varies hugely across the U.S. If the installation helps displace a low efficiency gas turbine in California, then LCCA is only $60 per metric ton of CO2 avoided. If it replaces a high efficiency gas plant in New Jersey, then LCCA is $320 per metric ton instead. Following this logic, each dollar provided in federal tax credits to incentivize rooftop solar — which is currently given out uniformly across the U.S. –goes much further in cutting carbon in California than in New Jersey. In effect, if LCCA were the only metric and cutting greenhouse gases the main goal, then perhaps California should get more federal support for rooftop solar than New Jersey.” The takeaway is that carbon reduction investments will have more impact if the LCCA is lower rather than higher.
Friedman is the first to admit that LCCA is only one tool in the carbon abatement tool kit. “Still, LCCA provides insight into what can bring the greatest amount of carbon reduction for the same price,” Bloomberg says. “It gives us a framework to make a more apples-to-apples comparison of policy or portfolio options to decide which will be the most effective in cutting greenhouses gases and thus which will have the biggest impact in addressing climate change.”
L=C/E0-E1
The basic formula is deceptively simple. The levelized cost of carbon abatement is the cost associated with the change of configuration divided by the greenhouse gas emissions of the original configuration minus the greenhouse gas emissions in the new configuration. The Columbia study says:
- The output is always money per unit CO2 equivalent reduction, or $/ton.
- If there are no emissions reductions, E1 = E0, the denominator is zero, and the LCCA is infinite, and the transaction fails to achieve climate benefits.
- If E1 is less than E0, there will be a fractional reduction in the cost of the transaction.
- A 100 percent reduction in emissions means E1= 0 emissions, so the cost is divided by emissions and the LCCA equals the cost of the transaction per ton.
- If the transaction results in CO2 removal, E1 is negative, so E1 is added to E0, which results in a large denominator and greater LCCA decreases.
- If money is saved in the transaction (e.g., in some efficiency actions), C is negative and LCCA is negative.
- Special case: If E1 emits more than E0, the denominator is negative. This means the new approach yields more emissions than the prior configuration, and the measure is a climate failure and not suitable for LCCA analysis.
Got all that? For more (actually much more) on this topic, check out the entire study at the Center for Global Energy Policy website.
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