A new study from Columbia University puts forward a levelized cost of carbon abatement (LCCA) as a good way for investors and companies to compare technologies and policies that reduce emissions.
“Policymakers should recognize that one size doesn’t fit all,” Julio Friedmann, lead author of the paper from Columbia’s Center on Global Energy Policy, said in a webinar on Monday. “One technology may not be the best bet, or one action may not be the best pathway. You may need to do different things in different states to get the maximum CO2 reduction at the lowest cost.”
Two bankers, a global energy expert and a corporate carbon strategist joined a panel to discuss the merits of LCCA as a tool to measure how much CO2 can be reduced by a specific capital investment or policy, calculating costs on the basis of dollars per tons of emissions reduced.
Previous marginal or levelized cost methodologies often failed to consider the specific contexts that determine the real, all-in costs of a policy and the real, all-in impacts on emissions, according to the authors.
“One example we ran is the investment tax credit [ITC], which is having a big impact on getting solar panels built, and that’s terrific,” Friedmann said. “It turns out that the value of the ITC was pretty different in different places. In California, $70/ton was the value; in New Jersey, it cost $105/ton; in Texas it was $31/ton — so a bargain in Texas, but not so much in New Jersey and Massachusetts.”
This approach also lets policymakers figure out who pays, he said. The ITC is generally viewed as a reduction in cost to the ratepayer, which is true. It also represents an increase in cost to the tax code, because it’s money coming out of the U.S. Treasury.
“The most important thing to think through is what is being displaced; that’s the hardest thing to get your brain around,” Friedmann said. “When anyone does this analysis, including us, we rarely end up with a point result; we usually end up for one issue with a table in order to explain how these things actually interact.” For example, if a clean energy source in India displaces a nuclear plant, that’s not as appealing compared to displacing the burning of biomass, he said.
Policy Signals
The Climate Leadership and Community Protection Act signed by Gov. Andrew Cuomo last year requires the Department of Environmental Conservation to establish a value of carbon, based on either abatement or damage cost estimates, for use by state agencies. New York’s policy sways the national debate because not only does the state have some of the most ambitious clean energy goals in the country — net zero by 2040 — but is arguably farther along the policy road to implementing a price on carbon emissions.
“We set ourselves a goal of being net zero by 2050, then things that might not have seemed possible on the outset suddenly become feasible,” said Jules Kortenhorst, CEO of the Rocky Mountain Institute.
“Integration happens; venture capital funding for new technologies gets rolled out; entrepreneurs roll up their sleeves and do things that were deemed impossible; and I think even in this exciting methodology, that is still an area that we haven’t captured yet,” he said. “What is the value of breakthrough innovation when we set ourselves a very ambitious goal and thereby start driving to net zero by the middle of the century?”
Moderator Akshat Rathi of Bloomberg News said that regulations can make what seems to be economically sensible actually happen. He asked how they can help a large bank, for example, align its investment portfolio with the goals of the 2015 Paris Agreement on climate change.
“We know that we need better data,” said Marisa Buchanan, managing director and head of sustainability at JPMorgan Chase, which earlier this month announced it would align its financing to meet the Paris goal of net-zero greenhouse gas emissions by 2050. “We know that we need to increase the comprehensiveness of that data, and we need it to come from a broader swath of companies out there.”
JPMorgan works with a lot of big companies, she said, but also wants to extend the emissions reporting effort to medium-sized companies.
“We need long-term policy signals that are really focused on pricing carbon, in many cases, but also looking for other opportunities to reduce emissions,” Buchanan said. “We know that a price on carbon is really critical, but it’s also only one tool in the toolbox. … It’s important to think about the types of policy signals that are most effective, depending upon the sector or industry you are targeting.”
When making its Paris commitment, the bank targeted its activities in oil and gas, automotive manufacturing and electric power, but the business community cannot address climate challenge on its own, she said.
“We really need support and leadership from our policymakers, here in the U.S. as well as globally.” The new study “is going to be critical to informing that policy conversation,” Buchanan said.
Abatement Strategies
Elizabeth Willmott, carbon lead at Microsoft, referred to the “tapestry” of different strategies that optimize carbon removal and agreed on the importance of the new study.
Microsoft executives’ commitment to reduce and remove carbon emissions is supported by an internal carbon fee, in practice since 2012 and expanded to include all of the company’s value chain, Willmott said.
“What’s really important for us, being a data science and computer science company, is being able to have this crucial data to compare and contrast strategies, so that when we’re making these decisions, we’re not simply throwing money at the next bright, shiny thing,” Willmott said. “That’s why I think the levelized cost of carbon abatement is really a fantastic example of a way to drive good behavioral change and smart economics as a result of any company or government commitment to making swift reductions.”
Rathi asked how Microsoft would spur innovation in carbon removal.
“We see a clear need for a swift and profound abatement in greenhouse gas emissions, and we see policies that are effective on the surface that have little real impact, and so we need to take a holistic view on pricing carbon,” Willmott said. “From Microsoft’s perspective, when we even breathe a word of higher carbon removal costs internally, our internal business stakeholders interpret that as a carbon fee increase on the horizon two to five years out.”
Using carbon removal for its own sake and as a price incentive creates a virtuous cycle, she said.
Asked what Microsoft’s internal carbon fee is per ton, Willmott said that when the company first established it in 2012, it was based on the budget needed to invest in renewable energy, as well as on carbon offsets at the time.
“But that wasn’t driving change, so we increased it two years ago to $15/ton, which was the point at which we knew our internal colleagues would be able to pay for their own renewable energy,” Willmott said.
The firm established that price as an incentive for its Scope 1 and 2 emissions, and it has driven the change desired, she said.
Scientists classify carbon emissions in three categories, or “scopes,” with Scope 1 emissions being direct emissions; Scope 2 meaning indirect emissions from power or heat production; and Scope 3 referring to indirect emissions from all other activities.
“Now with our Scope 3 carbon fee, which was instituted just this last January, we’re starting lower because the data quality is poor … [and] we’re starting to do the hard work of figuring out what the cost will be and is for this different Scope 3 category so we can then set the fee to be more of an appropriate incentive in just the way the LCAA talks about,” Wilmott said. “I’m not sure this is public, but you’ll all be the first to know our exciting Microsoft internal workings here: It’s about $5/ton.”
Arjun Murti, senior adviser at Warburg Pincus, said investors are trying to assess where a particular project lies on the cost curve and what is the market for it.
The crucial value of the new study is in its ability to help investors and policymakers understand the public policy implications of a given project.
“Is it going to have support over the long run? Does it actually enhance the societal goals, something that investors are now incorporating more explicitly in their analysis,” Murti said.
The private sector needs to act, and the investment bankers need to send price signals, RMI’s Kortenhorst said: “Capital is flowing away from the old companies who don’t see the writing on the wall.”