Framing of decarbonisation pathways needs to take the value in use of low carbon technologies into account. This can provide a fuller and more positive guide to policy than analysis of marginal abatement costs alone.
Much analysis of pathways for decarbonising economies takes as its starting point Marginal Abatement Costs (MACs), looking at the cost per tonne of reducing emissions. This is a useful perspective, for example highlighting the cost effectiveness of improved insulation in buildings. However, framing decarbonisation as a problem of costs incurred in reducing emissions risks ignoring other characteristics of a low carbon economy. A broader and more positive framing needs to consider how a more attractive low carbon future can be realised. This broader framing emphasises some of the potential benefits of low carbon technologies, as well as focussing on non-price barriers to adoption. Such a framing can offer a more useful guide to the range of policies needed to develop low carbon pathways. (I should also note that carrying out reliable MAC analysis can itself pose significant challenges. Some of these are reviewed at the end of this post, but here the main focus here is on those issues difficult to accommodate within the MAC framework).
MAC analysis tends to assume that the reduction in emissions is the main difference between two products which are otherwise very similar (very close substitutes for each other). This is largely valid for commodities such as electricity, although even here issues such as timing and reliability of generation need to be considered. However for most consumer goods improving characteristics in use can greatly increase their value. Making low carbon products cheaper is crucial. But if they are also better than the higher carbon alternatives this will lead to much more willing and rapid adoption.
Electric vehicles illustrate how non-price attributes can provide additional value to consumers and others, but can also create barriers to adoption. Electric vehicles have a number of characteristics, which, at least in my experience, make them preferable to their internal combustion engine equivalents. They are quiet and pleasant to drive, as the Nissan Leaf, the world’s best-selling electric car to date, and the more recent BMW i3 both demonstrate. Refuelling by simply plugging in overnight is convenient, and there is no need to visit petrol stations, which are not generally pleasant places to be despite the best efforts of oil companies to make them more appealing. Low centres of gravity lead to good road holding, and electric motors are instantly responsive, making for smooth and often rapid acceleration. Performance has been one of the main selling points of the Tesla S, and responsiveness is one reason electric motors are finding their way into hybrid drive trains even on high performance cars such as my local car factory’s premiere product, the astonishingly quick and vastly expensive McLaren P1.
While car markets are highly competitive the variation in price for similar cars shows that consumers are often prepared to pay a premium for a car with improved characteristics. For example, variants of the Volkswagen Golf hatchback range in price from £17,000 to £26,000. Electric vehicles may similarly be able to realise premiums that reflect their benefits, with the Tesla S already the bestselling car in a third of the richest US postal codes.
Wider benefits may also play a role in adoption of low carbon technologies. Local air quality is improved by the absence of emissions of particulates and other local pollutants. This has led some cities to encourage electric vehicles, with, for example, plans for all new London taxis to be zero emission by 2018. Such non-GHG benefits are produced jointly with greenhouse gas emissions reduction and will in some cases dominate the case for change.
There are also non-price barriers to the use of EVs that can also affect uptake, most notably availability of recharging points to enable longer journeys. To ease these difficulties governments and the industry are expanding charging networks. However range limitations remain, along with price, the biggest obstacle to uptake for most electric vehicles. The Tesla S largely overcomes the range problem with its 300 mile range, but at over £60,000 excluding the government incentive it is not a cheap vehicle. Plug-in hybrids largely avoid the range problem by retaining an internal combustion engine or on-board generator, but with some compromises of their own.
Similarly, there is much that manufacturers can do to make other low carbon products more appealing. The chart below shows the spectrum from different types of lighting. The quality of the light is very different in each case, with the light from compact fluorescents (CFLs) clearly much less continuous than from other sources. Whatever else, these are clearly not exact substitutes. It was perhaps premature for the EU to regulate incandescent electric light bulbs out of the market when many people found the light from the substitutes less appealing, and, while many may prefer them to CFLs, there may be much manufacturers can still do to improve the quality of light from LEDs, alongside continuing reductions in costs.
To take one more example of non-price characteristics from among many, there is surely room for improvement in the aesthetics of rooftop solar panels, at least in some contexts, and a number of innovators are working on this.
Fortunately, gauging and meeting consumer preferences is something markets do rather well, at least when consumers know what they want and can tell what has been delivered. So markets have an important role to play in decarbonisation. But it will be the behaviour of markets for low carbon products as well as markets carbon such as the EUETS that will be crucial to successful decarbonisation.
Decarbonising an economy is difficult and complex. It can be made easier if new technologies not only have lower carbon dioxide emission than the alternatives, but are also better in other respects. Policy can help promote this by stimulating innovation, enabling early adoption and removing barriers. If the future not only has a safer, more stable climate, but is also brighter, cleaner, better looking, and more fun to drive around it will be a lot easier to persuade people that it’s a future in which they wish to invest.
Adam Whitmore – 28th February 2014
Challenges in applying a marginal abatement cost framework – Electric vehicles as an example
MAC analysis is further limited by difficulties of application in practice. Several factors complicate estimates of the cost of abatement, and some of these are illustrated here by reference to electric vehicles. These factors can be, and sometimes are, taken into account in careful analysis of abatement costs. However they are difficult to treat properly, because of the scope of the modelling frameworks and the amount of information they require make them very demanding to assess.
First, the quantity of emissions avoided, and thus cost of abatement, is very dependent on the emissions intensity of the source of electricity. For example, Norway, currently the world leader in the deployment of EVs, has a mainly hydro based grid, leading to relatively large emissions reductions. However emissions from electricity generation will be greater in countries with fossil based systems, which will lead to a lower reduction in emissions and higher abatement costs, other things being equal. However just how much lower may depend on factors such as when EVs are charged, and what the marginal generating plant on the system is at that time.
Furthermore, lifecycle emissions of the vehicle itself can vary greatly between EV models and even between the same model made with materials from different sources. For example, the emissions from smelting aluminium for a lightweight body can be very different depending the source of the electricity used in smelting, and emissions will be different again in making a carbon fibre body such as that used for the BMW i3 and i8. An additional complication is that many lifecycle emissions can fall outside the jurisdiction being assessed, and may be covered by a quite different set of policies.
Costs can also change greatly over time, sometimes to an unanticipated extent. Batteries account for a large proportion of the cost of an EV, but costs are falling rapidly. In the last five years costs have more than halved and energy densities, which set the size of battery pack, have more than doubled. This trend seems likely to continue as a result of continuing R&D and increasing deployment.
Technology spill-over benefits from early deployment are difficult to account for in a MAC analysis. They are among the reasons EVs currently attract financial incentives in many jurisdictions, for example a £5000 grant in the UK, $7500 Federal Tax Credit in the USA, and exemption from VAT and purchase tax in Norway. Other incentives can also play a role in stimulating early adoption, including exempting EVs from tolls or congestion charges, allowing EVs on High Occupancy or bus lanes, providing free parking, and mandating tight emission standards.
On battery costs: US DoE report published as part of their EV programme shows costs for batteries declining to around $300-350/kWh. For a comparison changing the specification of a Tesla S from a 60kWh battery to an 85kWh battery (the two models are otherwise quite similar) increases the price by £6170 excluding VAT, which is $400/kWh (see here).
Data in the main body of the post on the sales of the Tesla S in prosperous postcodes is from Forbes.com