Marginal Abatement Cost vs Social Cost of Carbon
Marginal Abatement Cost and Social Cost of Carbon are two Environmental Economics concepts in AP Economics that students often mix up. Marginal abatement cost is the cost of reducing pollution by one additional unit, and it typically rises as more pollution is cut. The social cost of carbon is an estimate of the total dollar damage caused by emitting one more ton of carbon dioxide, expressed in present value. Here is how they compare side by side.
Cheap reductions (efficiency tweaks) are made first, so the marginal abatement cost curve slopes upward as a firm pushes to eliminate ever-harder units of emissions. The efficient level of pollution control is where marginal abatement cost equals the marginal benefit (or marginal damage avoided) of cleaning up. The concept underpins why a carbon price or cap-and-trade system minimizes total cleanup cost: firms abate up to the point where their marginal abatement cost equals the permit price.
Analysts build the number in steps: a climate model projects how one extra ton changes atmospheric carbon and temperature, a damage function converts those physical changes into dollar losses from things like lower crop yields, flooding and heat, and a discount rate collapses damages spread over future decades into a single present value. The result is a marginal external cost, so the textbook corrective tax on carbon is a per ton tax equal to it. Estimates vary widely, because the discount rate, the damage function and the treatment of low probability catastrophes are all contested, and a lower discount rate raises the number sharply. Do not confuse it with the price of a carbon permit, which comes from a market under a cap rather than from damage estimates.
Marginal Abatement Cost vs Social Cost of Carbon: The Two Numbers That Set the Target
| Marginal Abatement Cost | Social Cost of Carbon | |
|---|---|---|
| What it measures | The cost of cutting one more ton of emissions | The damage done by emitting one more ton |
| Who bears it | The firm or household doing the cutting | Society at large, including people not yet born |
| How it moves as more is cut | Rises, because the cheapest cuts get taken first | Unmoved by any single firm's decision, since it is damage per ton |
| Where the number comes from | Engineering costs and market prices for equipment and fuel | Damage modeling, discounted back to a present value |
| What it is most sensitive to | Technology and the price of energy | The discount rate and the assumed damage from warming |
| What it tells a policymaker | Which cuts to make first | How much cutting is worth doing at all |
| Role in setting a tax | Determines how firms respond to the tax | Sets the level the tax should aim at |
Abate while the next ton costs less than the damage it avoids
The two numbers meet in one decision rule, so it helps to see them working together. Take an illustrative social cost of carbon of $60 a ton, chosen for round arithmetic and not offered as the accepted estimate, since published figures vary widely. A firm has three blocks of abatement available: 100 tons it can cut at $20 a ton by resealing its buildings, another 100 at $50 by changing a process, and a third 100 at $90 by replacing a working boiler. The first block avoids $60 of damage per ton at a cost of $20, a gain of $40 a ton, or $4,000. The second still clears the bar, at $10 a ton, or $1,000. The third would spend $90 to avoid $60 of harm, destroying $30 a ton, so it should not be done. The firm should cut 200 tons for a net gain to society of $5,000, and that is what abating until marginal abatement cost equals the social cost of carbon means in practice. A /glossary/carbon-tax of $60 a ton produces the same answer without anyone being told what to do, because the firm compares the tax with its own costs and stops at the same block.
The two numbers are estimated in completely different ways
Abatement costs come from things you can look up. An insulation contractor quotes a price, an electricity tariff is published, a boiler has a lifespan, and the estimate can be checked against what firms actually do. The social cost of carbon comes from a chain of models running from emissions to concentrations to temperature to physical damage to a money value, and then back to the present through a discount rate. That last step does most of the work. Take $1,000 of damage arriving 50 years from now. Discount it at 3 percent and it is worth about $228 today; discount it at 7 percent and it is worth about $34. One assumption, changed by four percentage points, cuts the answer to roughly a seventh, and the choice of rate is partly an ethical judgment about how much weight to give people who are not yet born. Two honest economists can therefore report very different figures, which is why the social cost of carbon is best treated as a contested range rather than a fact, and why some prefer to fix a quantity target and let the price emerge, as described at /glossary/cap-and-trade.
Frequently asked questions
What does it mean when marginal abatement cost equals the social cost of carbon?
It marks the efficient level of emissions, because up to that point each ton cut costs less than the damage it prevents, and past it each ton cut costs more. Cutting further would destroy value even though it would reduce emissions.
Why is the social cost of carbon so uncertain?
Because it depends on a long chain of estimates, and the discount rate applied to damage decades away changes the answer by several times on its own. Reasonable people also disagree about how much future damage a given amount of warming causes and how to value harm that is not traded in any market.
Do abatement costs rise or fall as a firm cuts more emissions?
Marginal abatement cost normally rises, because a firm takes its cheapest opportunities first and is left with progressively more expensive ones. Over longer periods better technology can push the whole curve down, which lowers the cost of any given target.
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