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2.4.4 Use of MAC Curves in Strategic Policy Making

What is the proper use of MAC curves? If the carbon price derived by using MAC curves and used in policy appraisal is simply the most expensive measure in the strategy to meet the budgets and other overall government targets (for instance an emission reduction target, or emission stabilization levels), then any policy can be easily judged against others (FOEI, 2008). Therefore, measures that cost up to a specific threshold should be proposed for adoption. In this case, the measures reported in the MAC curve should be mutually exclusive. Otherwise, the graph is just a list of the MAC of different measures sorted by their cost-effectiveness. MAC curves have been prepared for various industries, see for example the MAC curves for shipping in Chap. 8 of this book (Fig. 2.10).

Recent literature has shown that MAC curves are very sensitive to numerous assumptions, including, among others, the projected (up to 2020 or 2030) fuel price and fleet size, the abatement measures that are considered, the discount rate used in the NPV calculations, the reduction potential of each measure and the uptake of these technologies in the future.

2.4.5 Negative Marginal Abatement Costs

It is interesting to note that in many MAC curves there are measures that have a negative MAC. These measures are at the left-most part of the MAC curve, as the

Fig. 2.10 Illustration of a MAC curve and its uses in policy-making. Source: Smokers, Buck, and van Valkengoed (2009)

curve is constructed by non-decreasing order of MAC. A negative MAC means that the benefit of adopting an emissions reduction measure in monetary terms is more that its cost. This means that whoever contemplates the measure would have an economic incentive to apply it, and, in that sense, a win-win solution would be achieved. Conversely, a measure with a positive MAC would provide no economic incentive for its adoption and would have to be mandated by regulation if deemed appropriate.

A negative MAC is likely to be caused by a variety of factors. Perhaps the easiest to understand is a high fuel price. If a measure (such as for instance a more fuelefficient engine) results in reduction of fuel consumption (and hence emissions), and fuel price is high, most of the measure's economic benefits will come in the form of savings in fuel cost. If these savings are high enough, the associated MAC may be negative.

A caveat here is a MAC that is calculated as negative but in reality is positive because of incorrect calculation of its components. For instance one may have an incorrect or incomplete estimate of the abatement cost, and/or an incorrect estimate of the private (or social) discount rate. Errors of such nature may be common for technologies that are at the design stage and cost data may be inaccurate or elusive. Errors may also inevitably occur in the benefits side. An example is in the estimation of future fuel prices, which are probably the single most influential factor in determining the benefits of a certain measure and hence its MAC. All such errors may seriously misrepresent a measure's cost-effectiveness.

Another caveat concerns the existence of barriers, as is described in the section that follows.

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