University College London report on Marginal Abatement Cost Curves calls for caution

April 15th, 2011 by KPMG

Vincent Neate, KPMG’s European Head of Climate Change and Sustainability, said “in recent years, the Marginal Abatement Cost Curve (MACC) has become a popular tool for providing analysis of low-carbon investments and policy development. However while a useful starting point, it is not capable of providing the in depth level of insight that KPMG advises before strategic decisions are taken, so I welcome the caution expressed this week in a report by University College London (UCL) Energy Institute.

Vincent Neate, head of Climate Change & Sustainability at KPMG (©KPMG - click image to expand)

“The way a MACC is usually presented implies that as soon as the carbon price is high enough, the investments make economic sense. But this ignores many significant barriers to investment, risking an overly optimistic representation. In simple terms, the MACC only looks at a section of the supply curve whereas without also analysing the demand curve, the story is only half told.

“Basing investment decisions on anything but the most robust analysis is dangerous, which is why I prefer a more holistic economic modelling approach which better captures the realities of the low carbon investment decision.

Comprehensive analysis should include both the criteria that make investments attractive and barriers that prevent them.”

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