Look! It's a carbon supply curve

Reader David Jeffery at Oikos posted this graph taken from The Economist a few weeks back.  I didn't read the original article, so I'm not sure of all of the broader points being made, but the graph does illustrate something I try to convince basic econ students all the time:  Supply curves exist!   

The graph depicts the additional (marginal) cost of reducing carbon by 1 ton by different methods.  Another way of saying that is the graph depicts the potential supply of carbon abatement.  As you move left to right, carbon abatement becomes more expensive. 

As David points out, the graph raises some interesting questions.  If carbon were priced properly, we would expect to see the cheapest abatement technologies utilized first.  In fact, based on this graph, there are abatement technologies out there right now--for example better insulation, efficient lighting--that would save money relative to the current technologies.  To me that says there must be a reason the market is failing to allocate these resources properly.

Also, according to the graph, the technologies we hear most often for carbon abatement are the most expensive--wind, solar, sequestration.  Does that mean we have exhausted the cheaper technologies and are ready to move up the supply curve to more expensive technologies--assuming the demand for abatement intersects somehere to the right of nuclear technologies?  Or are we missing low-hanging fruit? 

A cap and trade system would answer this question really quick.  I'm guessing there are really cheap ways to reduce carbon emissions that aren't being used right now.  A cap on emissions would result in a scramble for the low-hanging technologies.  But since those are surprisingly inexpensive and possibly even profitable, we would see a very low price for carbon permits in early stages.  According to this graph, only if we were looking at massive scale carbon cutbacks would we see the price of permits rise substantially. 

This is similar to what we saw with the sulfur dioxide cap and trade system.  In the early years, power producers found that it was easier-than-thought to reduce SO2 emissions, resulting in lower than expected permit prices and significant banking of permits.  If the grpah is true, we might anticipate something similar with a carbon cap and trade.  Easy pickin's in early years, low permit prices and time to adapt. 

Comments

[odograph]

I try to remind people of those things on the left side ... those that save us money. Efficient appliances must be one of those money-saving bars as well.

So in terms of "low hanging fruit" I think a lot might just be education. Climate concerns, combined with the rational expectation of higher energy prices, argue that people should get moving, now.

[joshua corning]

Odo...look at the chart again

sugarcane biofuel is on the left part of the chart....

Read ethonol.

[odograph]

I have no problem with commercial (unsubsidized) cane ethanol on existing agricultural lands. Is that enough caveats?

Maybe I should say "organic" too ;-)

[Peter Griffith]

If I read this graph correctly, the width of each bar along the x axis must be the variance in their estimate of the abatement potential of each action/technology.

Insulation more than pays for itself, but has very little abatement potential. It can be done, saving money that can be used for other more productive economic activity, but will have little impact on the carbon emissions problem.

Carbon capture and storage in retrofitted coal-fired power stations is expensive, but can potentially offset huge amounts of emissions.

This dichotomy is important!

Why are many of of the blocks not labeled? What do those blocks correspond to? Does anyone have the original source for this graphic?

[joshua corning]

Insulation more than pays for itself, but has very little abatement potential. It can be done, saving money that can be used for other more productive economic activity, but will have little impact on the carbon emissions problem.

Huh?!?!

How does using less energy to heat or cool your home not impact (lower) carbon emissions?

Is this a common perception among warmers?

You guys do understand that using less electricity in most parts of the country (we have hyrdo-electric where i am from) means less CO2.

I have no problem with commercial (unsubsidized) cane ethanol on existing agricultural lands. Is that enough caveats?

Not according to Dano...it is my understanding that using gasoline (farming) to grow stuff to later turn into ethanol is a net energy loss game.

[Peter Griffith]

The original Vattenfall document that the figure in The Economist was based on can be downloaded from

http://www.vattenfall.com/www/ccc/ccc/577730downl/index.jsp

It does buttress my previous observation (which joshua misinterprets), namely, that the "low hanging fruit" do not have nearly enough abatement potential. We're going to have to do expensive things, too.

[odograph]

I hadn't been paying attention to the label on that axis, thanks Peter.

So of the left-hand things, "water heating" has the biggest potential ... interesting.

[peter Griffith]

No, I think it means water heating has a relatively larger range in their estimate of abatement potential. "Fuel-efficient vehicles" and "sugar cane biofuels" still have more absolute abatement potential.

[odograph]

Are my eyes not good? Actually I know my eyes are not good ...

The horizontal axis is abatement potential. The vertical is cost (or savings).

It looks to my eye like the dark bar for water heating is wider (more abatement) than any other single item on the left side.

That said, "Fuel-efficient vehicles" plus "sugar cane biofuels" looks bigger ;-)

[Peter Griffith]

I *think* the graph is read like this:
"insulation improvements [I presume they mean in NEW construction] could abate about 0.25 GT CO2/year at a savings of 150 euro per ton CO2"
"water heating could abate somewhere between 2 to 3 GT CO2/year at a savings of 50 euro per ton CO2"
"sugar-cane biofuel could abate somewhere between 5 to 5.5 GT CO2/year at a savings of 40 euro per ton CO2".
"Forestation could abate between 14.5 to 17.5 GT CO2/year at a cost of 25 euro per ton CO2"

And so forth.

[odograph]

Oh, I think it works differently. I think the width of the bar is the payback for that one specific item, and then the ... 26 gigatons is what you get if you do each and every one of them.

That makes it scary, because presumably we need to work into the expensive to get to our goal.

Not that I remember how many gigatons we need right now.

[joshua corning]

Peter is reading it wrong.

Other wise this would be the worst graph made ever...

ie a graph you would find in an econ book at Umass or UC Berkley rather then the Economist.

It would be fun to learn why Peter thinks that they made any thickness to the different CO2 reducing items...wouldn't they just be points on a line?

[joshua corning]

Not that I remember how many gigatons we need right now.

22

[joshua corning]

opps..

27.5 in total world CO2 emissions.

http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions

[joshua corning]

Industrial emissions fell by 1.2 percent in 2006. Since 2004 emissions attributable to the industrial sector have fallen by almost 4 percent despite growth in industrial output.

hmmm..

Something tells me we are looking at a non-problem

hey Jon and Tim why didn't you guys ever talk about this:

http://www.terradaily.com/reports/US_Carbon_Dioxide_Emissions_Fell_In_2006_999.html

[joshua corning]

To me that says there must be a reason the market is failing to allocate these resources properly.

Lots of old homes out there......and lots of good light bulbs and good light fixtures...all of which would have to upgraded to see CO2 reductions...

also it would generate CO2 to do those upgrades.

THE MARKET IS WORKING and a lack of instantaneous results in not an indicator of market failure.

[peter Griffith]

Thanks, odograph and Joshua! You're absolutely right, the graph has to be cummulative, left to right. So indeed, water heating is one of the larger abatements in the "pays for itself" category.

This figure puzzled me ever since I saw it in The Economist; maybe it's from ECON 101, but then, I never took ECON 101. ;>

[mateosf]

This is great as an economic excercise, but the problem in domestic carbon markets - at least in the US - is that most utillities hate efficiency. Why? It lowers their profits.

More than half of the electricity-related carbon in the US could be eliminated if utility profits weren't directly tied to generation. They have aperverse incentive to generate more - using, of course, the lowest (current) cost fuel, which is coal - in order to keep shareholders happy.

Profit decoupling is the answer, but to get there you need to stage a coup against the neanderthals who control most of America's utilities. Good luck.

Absent that, yeah, cap and trade will help, but you'll still end up with utilities that will ignore the rules - as they have for SO2. Don't believe all of the hype, we've reduced SOx and NOx less than advertised.

[odograph]

I think the reason Southern California Edison works hard on efficiency is that their profits have been decoupled from gross sales.

[joshua corning]

Profit decoupling is the answer, but to get there you need to stage a coup against the neanderthals who control most of America's utilities. Good luck.

So...we take away the profit in generating electricity...

Didn't China do that with food production a little while back and 20 million people ended up starving to death.

I am sorry...markets encourage efficiency...both in generating power and selling it.

I would also like to point out that the market has been manipulated heavenly by government policy.

One example is the creation of PUDs using public funds and huge government projects (Bonneville dams, Tennessee power authority) that subsidized the the infrastructure costs of electricity. This has removed the incentives for customers to conserve electricity.

Another example is the clean air act which gave a pass to old generating facilities and put heavy restrictions on the construction of new facilities. Government policy rewarded old dirty factories and power plants by removing more cleaner more efficient competitors from the market.

[zoop]

"More than half of the electricity-related carbon in the US could be eliminated if utility profits weren't directly tied to generation. They have aperverse incentive to generate more - using, of course, the lowest (current) cost fuel, which is coal - in order to keep shareholders happy."

I don't understand the big deal here. There are externalities that need be internalized with regard to burning coal. Why not simply propose a carbon tax, rather than concluding that energy markets are somehow inherently defective due to the "perverse" nature of the profit incentive?

[Thomas]

"To me that says there must be a reason the market is failing to allocate these resources properly."

Yeah, people are stupid. Most people have not taken Economics 101 and they do not make very economically rational decisions about their economy. Even companies don't make good decisions lots of times. Electricity is for many seen as an unavoidable expense which is ignored when they buy new electric appliances.

[Ben]

Actually, other interpretations of the graph.

First of all, if so much of the graph is already negative cost. Then either the graph is wrong or some market failure is preventing them from being adopted. But shifting something from -$50 / ton CO2 to -$60/ton CO2 is unlikely to do much if you didn't do it when the cost was already negative $50.

Either the benefits aren't as large as people believe. (There are costs to switching to energy efficient light bulbs and appliance, e.g. lower quality), or there are market failures (e.g. people don't care about energy saving) that a cap and trade will do nothing to fix.

[odograph]

It is my observation Benjamin, that businesses move faster to those kind of "left side" savings. Consumers, lazy, or concerned with image, are slower.

Is that a market failure? Or are we going to do the "alternate utility" yadda yadda?

Is a Hummer a good status investment? Are incandescent bulbs seductive mood lighting?

[joshua corning]

Are incandescent bulbs seductive mood lighting?

the old ones still have to burn out before you replace them. And many fixtures do not allow for the new ones.

Also incandescent bulbs give pretty good efficiency during the winter when not only do they provide light but help heat your home.

Because of their location and almost perfect conversion of energy that is not used for lighting is turned to heat energy...might even be better then your furnace.

Where is gmoke when you need him.

note: you have to have a functioning thermostat for this to really work.