the cost of reducing greenhouse gas emissions · the cost of reducing greenhouse gas emissions ken...

The Cost of Reducing Greenhouse Gas Emissions

Ken Gillingham, Yale University

Jim Stock, Harvard Economics Dept. & HKS

HKS Energy Policy SeminarFebruary 25, 2019

Reference: Gillingham, K. and J.H. Stock, “The Cost of Reducing Greenhouse Gas Emissions,” Journal of Economic Perspectives, Fall 2018, 55-72, in Symposium on Climate Science.


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1. Static Costs: Engineering Cost Approach

The Marginal Abatement Cost (MAC) Curve

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Background: the marginal abatement cost curve• A supply curve for abatement in general, and of CO2 (or CO2e) in particular• Built up from cheapest to most expensive ways to reduce, on the margin• In practice, constructed from average prices for categories of interventions

(usually, technologies)• MACs underly many IAMs and build in dynamic cost assumptions


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The earliest MAC curve we could find is Grubb et. al. (1993), shown here for Brazil


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The McKinsey marginal abatement cost curve (McKinsey (2009))


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Shortcomings/critiques• Out of date• Engineering estimates that might

not be realized in practice• Don’t incorporate behavioral

response (no rebound effect)• Average, not marginal, within block• Large “free” reductions!

• Energy efficiency paradox



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Shortcomings/critiques• Out of date• Engineering estimates that might

not be realized in practice• Don’t incorporate behavioral

response (no rebound effect)• Average, not marginal, within block• Large “free” reductions!

• Energy efficiency paradox

• Госплан! • States and the USG generally

don’t build these projects –they implement policies that incentive/mandate these projects.


Updated Engineering Estimates for the Power Sector

Methodology• Methodology follows Clean Air Task Force (2013)• LCOE from EIA AEO (2018)• Coal costs are for plants “still standing”• Displaced fuel: existing coal• Cost/ton reduction computed as

• Facility comes on line in 2022• LCOEs:

• Exclude tax credits• CCS, not CCSU (i.e. no recouping of costs for oil

recovery)• Renewables don’t include storage

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Technology Cost Estimate ($2017/ton CO2)

Onshore Wind 25Natural Gas Combined Cycle 27Utility-scale Solar Photovoltaic 29New Natural Gas with 90% CCS 43Advanced Nuclear 59Coal Retrofit with 90% CCS 85New Coal with 90% CCS 95Offshore Wind 105Solar Thermal 133

Notes: CCS = Carbon Capture & Storage

ComparisonUSG SCC = $52/ton CO2 (Aug. 2016 update for emissions in 2022)

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cost/MWh tons CO /MWh∆

∆

Updated Engineering Estimates for the Power Sector: Caveats

Caveats• Lots of heterogeneity underneath these national

average values• Presumption is negative-cost coal-to-gas switching has

already occurred:

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Technology Cost Estimate ($2017/ton CO2)

Onshore Wind 25Natural Gas Combined Cycle 27Utility-scale Solar Photovoltaic 29New Natural Gas with 90% CCS 43Advanced Nuclear 59Coal Retrofit with 90% CCS 85New Coal with 90% CCS 95Offshore Wind 105Solar Thermal 133

Notes: CCS = Carbon Capture & Storage

Source: Coglianese, Gerarden, Stock (2016)

Updated Engineering Estimates for the Power Sector: Lazard v. EIA LCOEs

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$60 (onshore) $138 (offshore)

$63

$165

LCOE is the installed capital costs and ongoing operating costs of a power plant, converted to a level stream of payments over the plant’s assumed financial lifetime (EIA).

$93

$120 (90% CCS)

$49

Units: $/MWh

Updated Engineering Estimates for the Power Sector: Offshore Wind

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Source: DOE (2018), Offshore Wind Update

Vineyard Wind bid (Aug 2018): $65/MWh


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2. Static Costs: Policy Costs from (mainly) Econometric Studies

Static Costs from Published Studies: Policies

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• Focus on policies

• Sources (in order of priority) – 32 papers total• Peer-reviewed in economics literature• White papers & reports• Our own calculations• 32 papers total, all since 2006, most since 2011• All figures converted to 2017 dollars

Static Policy Costs

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Policy $2017/ton CO2e

Behavioral Energy Efficiency -190Corn starch ethanol (U.S.) -18 – +310Renewable Portfolio Standards 0-190Reforestation 1-10Wind Energy Subsidies 2-260Clean Power Plan 11Gasoline Tax 18-47Methane Flaring Regulation 20Reducing Federal Coal Leasing 33-68CAFE Standards 48-310Agricultural Emissions Policies 50-65National Clean Energy Standard 51-110Soil Management 57Livestock Management Policies 71Concentrating Solar Power (China, India) 100Low Carbon Fuel Standard 100-2900Solar PV Subsidies 140-2100Biodiesel 150-420Energy Efficiency Programs (China) 250-300Cash for Clunkers 270-420Weatherization Assistance Program 350Dedicated BEV Subsidy 350-640

Notes: • Source: Author’s compilation of 32 published studies &

author’s calculations.• Rounded to two significant digits. • CO2e denotes conversion of tons of non-CO2 greenhouse

gases to their CO2-equivalent based on their global warming potential

Static Policy Costs: Discussion

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1. Extremely wide range of costs


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2. There are negative-cost policies (but…)o Behavioral EE

• O-power type pamphlets: very small quantities• This estimate is from Allcott & Mullainathan’s

(2010) meta-analysis of EE behavioral interventions (nudges)


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• O-power type pamphlets: very small quantities

o Corn starch ethanol• Up to E10: already in use

• In 2012, US gasoline supply was 10% ethanol even though the volumetric ethanol excise tax credit had expired, and RFS RIN prices were zero.

D4 and D6 RIN prices


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o Corn starch ethanol• Up to E10: already in use


• Calculation here compares ethanol to its alternative – a more expensive petroleum octane booster

• In E15 or E85: High RIN prices since 2012 incentivize the use of higher blends (E15, E85).


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o Corn starch ethanol • Up to E10: already in use


• Calculation here compares ethanol to its alternative – a more expensive petroleum octane booster

• In E15 or E85: High RIN prices since 2012 incentivize the use of higher blends (E15, E85).

o RPS’s have zero marginal cost when they aren’t binding


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Compare to Hal Harvey et. al. (2018) policy cost curve


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3. There are wide ranges of reductions within technologieso Wind subsidies

• Large variation in regional wind potential• Large variation in displaced fuel (coal, NG)• Declining wind costs, so costs vary over time• We don’t have market-based


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3. There are wide ranges of reductions within technologieso Wind subsidies

• Large variation in regional wind potential• Large variation in displaced fuel (coal, NG)• Declining wind costs, so costs vary over time• We don’t have market-based

o Solar PV subsidies• Variation in insolation• Variation in displaced fuel• Declining PV costs• Rooftop ($$$$) v. grid ($)


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4. Some of the McKinsey “winners,” aren’t.o Weatherization

• Fowlie, Greenstone, Wolfram (2018) $350/ton RCT• They conclude the problem was the

engineering assessments were off • The rebound effect was less important

o Energy efficiency paradox looks less paradoxical• Debate over whether CAFE fuel savings should be

counted as a consumer benefit• Allcott-Knittel (2018) RCT


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5. Some large-scale interventions do have low costo Clean Power Plan

• Cost estimates depend on vintage and vary regionally

• CPP allowances today would be trading at or near $0 in some regions (ACE RIA)


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5. Some large-scale interventions do have low costo Clean Power Plan

• Cost estimates depend on vintage and vary regionally

• CPP allowances today would be trading at or near $0 in some regions (ACE RIA)

o Methane flaring• Lade-Rudik (2017) – North Dakota command &

control policy• But cf. change in royalty calculations


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6. Some popular programs are very high costo Biomass-based diesel subsidies

• biodiesel and renewable diesel are first-generation• Subsidy: RFS + Biodiesel blenders’ tax credit• Under the RFS and BTC, Each gallon of biodiesel

gets the same subsidy, but different feedstocks have different GHG reductions (waste grease v. soybeans)

Spot biodiesel price and RIN subsidy/gallon, 2011-2018


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6. Some popular programs are very high costo Biomass-based diesel subsidies

• biodiesel and renewable diesel are first-generation• Subsidy: RFS + Biodiesel blenders’ tax credit• Under the RFS and BTC, Each gallon of biodiesel

gets the same subsidy, but different feedstocks have different GHG reductions (waste grease v. soybeans)

o Cash for clunkers• Inframarginal transfers by shifting forward demand


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7. Land use policies can be cost-effectiveo Reforestation

• U.N. REDD+ mechanism• Jayachandran et. al. (2017) RCT for forest

preservation in Uganda (randomized at village level), data from satellite imagery cost of $0.57/ton CO2 for two years

• Lots of issues…• Permanent or temporary

• Temporary has some benefits in NPV sense, but they are small

• Doesn’t incorporate demand shifting • urban charcoal users switch sources?• usual problem with supply-side policies


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3. Dynamic Costs

Static Policy Costs: A Dynamic Perspective

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Policies with large potential carbon reductions are estimated to be expensive

o Battery electric vehicles• Holland, Mansur, Mullen, & Yates (2016)


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o Solar PV subsidies

o Wind energy subsidies


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o Solar PV subsidies

o Wind energy subsidies

Dynamic v. static MACs. o Dynamics:

1. R&D externality2. Learning-by-doing externality3. Network externalities (in some cases)4. [Economies of scale]5. Irreversibility and state-dependent paths (lock-in)

• Vogt-Schilb et al (2018): “optimal strategy to reach a short-term target depends on the long-term target”

o The EE economics literature overwhelmingly focuses on static, not dynamic, costs

Dynamic Perspective: Solar PV

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Solar PV subsidieso California Solar Initiative: $130-$200/ton (Hughes and

Podolefsky (2015))o Feed-in tariffs in Germany and Spain: $570-$1490/ton

(Abrell et al (2017)

o Dynamic effects: Demand pull?• Nemet (2006): ~60% of early cost reduction in solar

PV was from R&D and LBD, ~40% was scale• Gerarden (2018): induced innovation effects (not

LBD or scale) increased social benefits of global solar adoption by 22%

Solar panel price indexes (left, excluding subsidies) and cumulative worldwide installed capacity (right), 1983-2015

Dynamic Perspective: Battery Electric Vehicles

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Battery EV subsidieso US Federal tax credit of $7500 (phasing out by

200,000 vehicle quantity cap)o Additional state incentives

• $2500 in MA, $3000 in CT• CA has ZEV mandate that produces hidden

subsidies

o Dynamic effects: demand pull?• DOE (2016) estimates that the price of

batteries for BEVs fell by 75% from 2009-2015, accounting for most of the decline in the finished vehicle price

• In addition to R&D, LBD externalities, a network externality (charging stations) (Li (2017), Springel (2018))Electric vehicle MSRP’s v. battery range by year of model introduction

Source: Li (2018)


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Additional slides

Static Policy Costs: Appendix Table

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Policy Reference Estimate ($2017/ton CO2) NotesA. TransportationCorn starch ethanol (U.S.) Policies to blend ethanol with gasoline

Irwin, Good (2017) -$18 Below the E10 blend wall based on costs of non-ethanol oxygenates

Authors' calculations $312 Subsidy value based on 2017 actual average RIN value and CARB (2017) average pathway emissions

Biodiesel (U.S.)Used cooking oil $146 Subsidy value based on 2017 actual average RIN value and

CARB average pathway emissions. Range excludes the biodiesel tax credit under the assumption that the tax credit does not raise the price of biodiesel but instead supplements the D4 RIN as a producer subsidy for biodiesel. In 2017, the tax credit was not in effect contemporaneously so the entire subsidy value is attributed to the D4 RIN. The total subsidy value would be higher if LCFS credit prices were included as subsidies in addition to the D4 RIN value.

Tallow - au calculations $179Soy oil - au calculations $251

Renewable Fuel Standard Policies requiring transportation fuels to contain a minimum amount of renewable fuels

Sarica, Tyner (2013) $1.10 - $15.70Holland, Hughes, Knittel, Parker (2011)

$72.70

Renewable Fuel Subsidies Policies to provide financial incentives for production of renewable transportation fuels

Holland, Hughes, Knittel, Parker (2011)

$103.30

Gasoline Tax Per gallon tax on gasolineKnittel, Sandler (2013) $18.20 - $46.70


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Policy Reference Estimate ($2017/ton CO2) NotesCAFE Standards Policies to set fuel efficiency and GHG emissions

standards for certain vehicles Kok, Annema, van Wee (2011) -$107.40 to -$155.40Sarica, Tyner (2013) $224.80Jacobsen (2013) $307.30

Low Carbon Fuel Standard Policies to limit the average emissions intensity of transportation fuels

Holland, Hughes, Knittel, Parker (2011)

$103.90

Holland, Knittel and Hughes (2009) $385 - $2852Cash for Clunkers Policy to provide financial incentives for consumers to

trade in low efficiency vehicle and purchase new higher efficiency vehicle

Knittel (2009) $270.80 - $417Dedicated Battery Electric Vehicle Subsidy

Policy to provide financial incentives for consumers to purchase electric vehichles

Archsmith, Kendall, Rapson (2015) $347.5 - $637.30B. Power SectorWind Energy Subsidies Policies to provide financial incentives for wind energy

projectsAbrell, Kosch, Rausch (2017) $126.30 - $264Abrell, Kosch, Rausch (2017) -$5.60 to -$8Marcantonini, Ellerman (2013) $66.60Frondel, Ritter, Schmidt, Vance (2010) $87.50Metcalf (2009) $14.00Callaway, Fowlie, McCormick (2015) $27 - $93.7


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Policy Reference Estimate ($2017/ton CO2) NotesClean Power Plan National regulation to limit emissions from electricity

generation in USOriginal EPA RIA (2015) $11

Concentrating Solar Power Expansion (China & India)

Policies to provide financial incentives for new concentrating solar power projects in India and China

Ummel (2010) $101.20Renewable Portfolio Standards State policies to mandate a certain percentage of

renewables in overall energy mixChen, Wiser, Mills, Bollinger (2009) $0 - $241.10Johnson (2014) $13 - $189.20

Solar PV Subsidies Policies to provide financial incentives for solar PV energy projects

Abrell, Kosch, Rausch (2017) $574 - $1492.30Abrell, Kosch, Rausch (2017) $1102 - $2146.70Hughes, Podolefsky (2015) $138.80 - $209.30Marcantonini, Ellerman (2013) $813.40Frondel, Ritter, Schmidt, Vance (2010) $1,159.60Callaway, Fowlie, McCormick (2015) $224.10 - $763.90Macintosh, Wilkinson (2011) $242.80 - $287.70Gillingham, Tsvetanov (2018) $376.90 - $615


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Policy Reference Estimate ($2017/ton CO2) NotesC. Energy EfficiencyEnergy Efficiency Programs (China) Potential for efficiency upgrades to urban production

processes in different regions in ChinaWang, Bian, Cheng (2017) $297.70

Weatherization Assistance Program Policy to fund energy efficiency improvements and lower heating fuel usage in low-income households

Fowlie, Greenstone, Wolfram (2018) $346.20Behavioral Energy Efficiency Program focusing on home energy reports

Allcott, Mullainathan (2010) -$188.50D. Land UseReforestation Payments for ecosystem services to increase carbon sinks

Jayachandran, de Laat, Lambin, and Stanton (2016)

$0.60

Jack (2011) $9.70Agricultural Emissions Policies Policies to limit GHG emissions from agricultural

productionDe Cara, Jayet (2011) $49.80 - $65.40

Soil Management Policies to limit GHG emissions through improved soil management techniques

Beach, DeAngelo, Rose, Li, Salas, DelGrosso (2008)

$56.90

Livestock Management Policies Policies to limit GHG emissions through improved livestock management techniques

Beach, DeAngelo, Rose, Li, Salas, DelGrosso (2008)

$71.20


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Policy Reference Estimate ($2017/ton CO2) NotesE. Extraction and OtherMethane Flaring Regulation State policy to limit methane flaring from natural gas

production in North DakotaLade, Rudik (2017) $20.40

Reducing Federal Coal Leasing Policies to reduce coal leasing on federal landsGillingham, Stock (2016)Gerarden, Reeder, & Stock (2016)

$33 - $68

National Clean Energy Standard National policies to mandate a certain percentage of "clean" energy in overall energy mix

Sarica, Tyner (2013) $50.60 - $112.40

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