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Clean Technologies and Environmental Policy

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Open Access 22-12-2022 | Original Paper

Marginal abatement costs for GHG emissions in Canada: a shadow cost approach

Authors: Samuel Gamtessa, Monika Çule

Published in: Clean Technologies and Environmental Policy | Issue 4/2023

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Abstract

This study approximates the marginal abatement costs (MACs) of reducing GHG emissions in Canada using the shadow cost approach. Utilizing industry level data, we are the first to offer Canadian estimates based on a Hyperbolic Output Distance Function (HODF) and the stochastic frontier estimation. Accounting for GHG emissions caused by energy consumption, we obtain an average shadow MAC of $130/t across 30 industries. In the GHG-intensive industries such as the electric utilities and non-conventional oil extraction, MACs are lower than the CO₂ levy of $50/t imposed by the federal government. Since these low-MACs sectors account for about 98 per cent of total GHG emissions and 94 per cent of total energy use in industries studied, the envisaged $50/t carbon levy could notionally result in a significant GHG abatement in Canada.

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Incorporating CO₂ abatement cost estimates in new investment project appraisals using shadow (notional) prices has become a common business practice. As Christopher Ragan writes in the Globe and Mail (2014) “Some firms are analyzing their potential long-term investment projects as if they were required to make [carbon levy] payments.” A Sustainable Prosperity survey of energy companies in 2013 indicated that the use of shadow carbon price in economic analysis of projects is an industry standard. The shadow price values used by energy companies ranged between $15/t and $68/t. The various methods to assign a value to the shadow price include the carbon price set by the regulators, if available, as well as signals/intended rates for future policy.

The Commission concludes that “the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40 – 80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment is in place.” Stiglitz and Stern (2017: 9).

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Since γ must be between 0 and 1, the optimization is parameterized in terms of the logit of gamma (γ), reported as lgtgamma. Similarly, since $\sigma_{s}^{2}$ must be positive, the optimization is parameterized in terms of the natural log of $\sigma_{s}^{2}$, reported as lnsigma2.

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Title: Marginal abatement costs for GHG emissions in Canada: a shadow cost approach
Authors: Samuel Gamtessa
Monika Çule
Publication date: 22-12-2022
Publisher: Springer Berlin Heidelberg
Published in: Clean Technologies and Environmental Policy / Issue 4/2023
Print ISSN: 1618-954X
Electronic ISSN: 1618-9558
DOI: https://doi.org/10.1007/s10098-022-02445-4

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