Comparison of U.S. Marginal Abatement Cost Curves from a McKinsey & Co. Study with Results from the MIT EPPA Model

Appendix B: Comparison of U.S. Marginal Abatement Cost Curves from a
McKinsey & Co. Study with Results from the MIT EPPA Model*
Jennifer Morris, Sergey Paltsev, John Reilly, Henry Jacoby
This note provides a short comparison of Marginal Abatement Cost (MAC) curve derived for
USA for 2030 in the McKinsey and Company report (Creyts et al., 2007) with a curve obtained
from the MIT Emissions Prediction and Policy Analysis (EPPA) model (Paltsev et al., 2005).
The MIT Joint Program’s approach to constructing MACs, which is a relationship between tons
of emissions abated and the CO2 (or GHG) price, is described in a recent report by Morris et al.
(2008).
Figure B1 shows the McKinsey and Co (in grey) and MIT EPPA curves (in red) for all
greenhouse gases (GHGs) for 2030. The first thing to note is that the EPPA MAC does not have
any negative costs, while McKinsey analysis states that “almost 40 percent of abatement could
be achieved at “negative” marginal costs”. The McKinsey curve is bounded by construction at
$50/tCO2e cost and the resulting 3Gt CO2e reduction in emissions.



EPPA MAC



















Figure B1. McKinsey and EPPA Abatement Cost Curves for USA in 2030 (all GHGs).

* This is an appendix to Morris et al. (2008) Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse
Gas Emissions Reductions: Results from the EPPA model, MIT Joint Program on the Science and Policy of
Global Change, Report 164 (http://globalchange.mit.edu/files/document/MITJPSPGC_Rpt164.pdf).
Joint Program Report 164

Appendix B – page 1

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To put this level of reduction in perspective, one can consider the following data. In 2005 the
U.S emitted 7.05 GtCO2e. In the last 15 years, from 1990 to 2005, the U.S. GHG emissions have
increased by 15%, which corresponds to a 1% annual growth. Assuming that in the next 25
years, from 2005 to 2030, the emissions would increase only at half of the previous growth rate,
the 2030 U.S. emissions would be around 8 GtCO2e in the reference case of no climate policy.
Abatement of 3 Gt from the projected 2030 level would correspond to about a 20% reduction
from 1990 GHG emission levels.

Integrating the area under a MAC curve can provide a rough estimate of the total cost (for
uses and abuses of MACs and their relationship to welfare costs, see Morris et al., 2008). A
crude approximation of the area under the McKinsey curve combines a negative cost of $54
billion in the first part of the curve and a positive cost of $37.5 billion in the second part of the
curve (approximated by the areas of triangles: ½*90*1.2 and ½*50*1.5), so the total cost is
around negative $16.5 billion. The same exercise for the MIT EPPA curve results in the cost of
$33 billion. So the difference between the total costs is around $50 billion, which is mostly
driven by the negative part of McKinsey curve (for an example of how bottom-up based
engineering studies can be misleading as a guide to an economy-wide policy, see Jacoby, 1998).

60
60

USA MAC 2030
50
50

40
40

30
30
20
20
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10

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-50
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2
3
4
5

Q Reduction (gigaton CO2-e)

Coal
Petrol. Prod.
Gas
Nuclear

Hydro
Renewables
Biomass liquids
Reduced Use

Figure B2. MAC from EPPA for USA in 2030 (left scale) and change in energy use (right
scale)
Figure B2 separates out components of change in the U.S. energy system in 2030, at each of
the MAC points, as derived from the MIT EPPA model. We focus here on the changes in energy
use by fuel type and overall reductions in energy use. We cannot easily assign distinct
technologies and practices in the MAC as in the McKinsey analysis because in our modeling
approach there is a continuum of responses as the CO2e price rises. For example, at low prices
some reduction in energy use occurs and as the price rises there is more substitution away from
Joint Program Report 164

Appendix B – page 2

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energy. Similarly, some uses of coal are reduced at low costs and more reduction occurs at
higher costs. Also there is interaction among different technologies and policies that cannot be
easily decomposed in the MAC derived from the EPPA model. The solid black line represents an
extended MAC (not truncated at 3Gt CO2e of abatement), while the bars and the right scale
shows the changes in energy use at different levels of abatement. The biggest reduction comes
from a decrease in coal and petroleum products use, and a reduction in energy use due to a
demand response. At the same time, there is an increase in biofuels, gas, and renewables.
Considering political constraints, we keep nuclear energy roughly constant in this exercise.

REFERENCES
Creyts, J., A. Derkach, S. Nyquist, K. Ostrowski, and J. Stephenson, 2007: Reducing U.S.
Greenhouse Gas Emissions: How Much at What Cost? McKinsey and Company. (Available
at: http://www.mckinsey.com/clientservice/ccsi/pdf/US_ghg_final_report.pdf).
Jacoby, H., 1998: The Uses and Misuses of Technology Development as a Component of
Climate Policy, MIT Joint Program on the Science and Policy of Global Change, Report 43,
November. (http://globalchange.mit.edu/files/document/MITJPSPGC_Rpt43.pdf).
Morris, J., S. Paltsev, and J. Reilly, 2008: Marginal Abatement Costs and Marginal Welfare
Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA model, MIT Joint
Program on the Science and Policy of Global Change, Report 164, November.
(http://globalchange.mit.edu/files/document/MITJPSPGC_Rpt164.pdf).
Paltsev, S., J. Reilly, H. Jacoby, R. Eckaus, J. McFarland, M. Sarofim, M. Asadoorian, and M.
Babiker, 2005: The MIT Emissions Prediction and Policy Analysis (EPPA) Model: Version
4, MIT Joint Program on the Science and Policy of Global Change, Report 125, August.
(http://globalchange.mit.edu/files/document/MITJPSPGC_Rpt125.pdf).

Joint Program Report 164

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