Cost effectiveness and efficient mitigation

The basic cost effectiveness criterion is posed by the consideration of where it is cheapest to mitigate one tonne of CO2e. If mitigation is cheaper within agriculture relative to another sector (e.g. transportation), it makes sense to prioritise agricultural mitigation measures. After taking this decision, it is important to be clear on the relative effectiveness of mitigation measures within different farming systems (i.e. provide the largest volumes of gas abatement); and which among these are cheapest. In other words, to seek the cost per tonne mitigated. Note that this assessment of cost-effectiveness does not guarantee economic efficiency.

From a public perspective (i.e. government) the economic appraisal of emissions abatement through any route should compare the costs of investment in any mitigation option(s) with the benefits in terms of avoided emissions damages. This takes us a step nearer a definition of economic efficiency, where compliance costs associated with a given environmental benefit are minimised (OECD, 1989). Here, the benefit in question can be approximated by the shadow price of carbon (SPC), which is derived from the best estimate of the present value of damages associated with the release of a tonne of greenhouse gas. The current figures are a focal point of much research in the economics of climate change (Pearce, 2003; Tol, 2008; and Watkiss and Downing 2008). Accordingly an alternative benchmark can be provided by the European Union Emission Trading Scheme (EU ETS) price, which provides a notional opportunity cost approach to assessing whether a specific mitigation measure is worthwhile, relative to the purchase of an emissions reduction in the international marketplace.

Considering for convenience the SPC, the figure that emerges can be adopted as an element for judging regulatory policy. For example, Defra (2007) sets out SPC estimates to be used in appraisal of public mitigation policies (Table 5.1). These figures are rising through time to reflect increasing marginal damage of a tonne added to a growing stock. This SPC is useful because it provides a benchmark against which to judge the efficiency of mitigation options. Put simply, the marginal abatement cost of a tonne of greenhouse gas should not exceed the social benefit (avoided damage) as measured by the SPC. More technically, abatement strategies need to look across industries to apply the principle of equalising the marginal cost of abatement across sectors. So an important mitigation agenda comes down to working out whether agricultural emissions are least cost relative to other sectors (i.e. industry and households).

Table 5.1. Defra shadow price of carbon to 2040 (2007 prices, 2% per annum increase)

Year

2007

2010

2015

2020

2025

2030

2040

2050

GBP/ t CO2e

25.4

26.9

29.7

32.8

36.2

40.0

48.8

59.6

Source: Defra/Committee on Climate Change (2008).

Source: Defra/Committee on Climate Change (2008).

A notional comparison of marginal cost and benefits is presented in Figure 5.1, which shows the rising cost of mitigation relative to the shadow price for any given year. The mitigation cost curve rises to reflect the fact that initially, tonnes of carbon can be mitigated at low or even negative cost. Thereafter, more costly interventions imply that each successive unit of greenhouse gas mitigation is achieved at a successively greater cost. At some point the cost of the last unit locked up through whichever method

2 Trading at a spot price of 11.64 euro/tonne CO2 (1 February 2009) www.eex.com/de/Marktinformation/Emissionsberechtigungen/EU%20Emission%20Allow ances%20%7C%20Spotmarkt.

is just equal to the damage it would cause. In many OECD countries, the cost of some agricultural mitigation strategies can be shown to fall below the shadow price threshold.

Figure 5.1. Notional marginal abatement cost schedule for CO2e

Figure 5.1. Notional marginal abatement cost schedule for CO2e

Source: Authors.
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