Open Modelling of the Low Emissions Economy

Moxy looks at one popular modelling tool, marginal abatement cost curves (MACCs), used by consulting firms, academics, government agencies and industry groups to illustrate the available pathways to a low emissions economy. These models need to be open, transparent and robust under changing conditions. Published models, particularly those produced by the private sector, are often created under hidden or unclear assumptions, and not accessible for closer scrutiny.

 McKinsey Marginal Abatement Cost Curve


Pressure mounts for the world's nations to transition into a low emissions economy while there continues to be a lack of consensus between all levels of society on what are the best measures for achieving this. Consulting firms are busy producing models to answer this question, using tools like the marginal abatement cost curve, also known as MACs or MACCs.

Marginal abatement cost curves (MACCs) are a popular modelling tool for showing the relationship between cost and emissions reduction using a variety of abatement measures. MACCs are now a standard tool for analysing the impacts of the Kyoto Protocol and emissions trading at the global and national level. They can take a bottom up (microeconomic) or top down (macroeconomic) approach, and have been widely used around the world to help inform environmental and energy policy decision making. They originated from analysis of production plant level modelling, then grew in application as it was believed that an economy could be treated as a large scale production plant.

The UK Committee on Climate Change describes them as a way to "provide an assessment of the level of emissions reduction which a range of measures could deliver at a given point in time, against a projected baseline level of emissions. They show how much CO2 each measure could save (the level of abatement potential) and the associated cost per tonne of CO2"1.

One of the seminal Australian examples of this is the model produced by McKinsey & Company in 2008, 'An Australian Cost Curve for Greenhouse Gas Reduction'2. Their report uses the MACC method to model the cost curve for Australia in 2020 and 2030.

McKinsey Marginal Abatement Cost Curve
Source: McKinsey & Company1

As one of the world's top management consulting firms, McKinsey & Company are respected and acknowledged as a thought leader in their fields of expertise. Their Australian model was important for the messages it carried:
  • Emissions reduction of 30% below 1990 levels by 2020, and 60% by 2030 can be achieved
  • The cost of reaching these levels is not prohibitive, estimated at an average annual gross cost of $290 AUD per household
  • Prompt action is needed from government, business and consumers to facilitate this modelled pathway
However, this model, typical of those produced by management consultancies, does not publish their knowledge in a way that allows for further analysis. The report includes a list of the references used for the assumptions and data, but the actual datasets and calculations are not provided. As well, the report is now a static publication, when in fact the modelling process needs to be dynamic to reflect variables such as changes in technology, policy and prices. As Klepper and Peterson argue, MACCs are influenced by energy prices, so "changes in energy prices resulting from different world wide abatement levels do indeed affect the national MACCs"3.

Models are extremely useful for informing strategic decision making, and also help us visualise complex data and problems. At the same time, there are recognised limitations in modelling, as Jakeman et al. summarised as:
  • "The way the problem is formulated
  • The knowledge (data, assumptions and information) at our disposal
  • The style of model invoked or built
  • The criterion of performance used to judge the success of the model
  • The rigour with which we apply the modelling process including the degree to which we evaluate
    the model’s applicability and limitations"4
Given that models are only as good as the current knowledge available, and that our body of knowledge grows and changes every day, we need to have models that are flexible and dynamic enough to reflect these limitations. Hence the need for openness and transparency in the modelling process, where every assumption and section of the model is directly linked to the data it came from, where every part of the model can be reused and adjusted as the assumptions and variables shift over time. These types of models are available, usually to governments and academics, but we need to increase that access to the wider community.

Moxy is building tools that will allow for the creation of open models like the marginal abatement cost curve, using its unique knowledge management system; combining the best in open source technology with robust modelling techniques. The Moxy Library is one of the key tools in our knowledge management system, and is now available online. Our expert system will help inform the community, allow participation of specialists and non-specialists alike with the goal of building consensus and guide the decision making process.


Sources:
  
1. "Marginal Abatement Cost Curves (MACCs)". Building a Low Carbon Economy. Committee on Climate Change. www.theccc.org.uk/reports/building-a-low-carbon-economy/mac-curves

2. Gorner, Stephen et al. An Australian Cost Curve for Greenhouse Gas Reduction. McKinsey & Company, 2008. http://www.mckinsey.com/locations/australia_newzealand/knowledge/pdf/1802_carbon.pdf

3. Klepper, Gernot and Peterson, Sonja. "Marginal Abatement Cost Curves in General Equilibrium: the Influence of World Energy Prices". Working Papers 2004.136, Fondazione Eni Enrico Mattei, 2004. http://www.feem.it/NR/rdonlyres/6EAF2F4B-B0BF-4B5F-8391-A4497E201CA2/1326/13604.pdf

4. Jakeman, A.J., Letcher, R.A. and Norton, J.P. "Ten interactive steps in model development and evaluation".
Environmental Modelling and Software 21(2006): 602-614.
 
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