Would anyone ditch fruits and vegetables and only eat noodles or bread if they found out it’s the cheapest diet? Not even the most carb-loving person would do this. By the same token, our climate investments shouldn’t solely be directed to activities with the lowest cost per tonne of carbon reduced. A nuanced approach is needed.
Across Canada, governments invest billions of dollars in climate action to slash emissions, reduce air pollution, and achieve our provincial, national and international climate targets. As resources are limited, the pressing question is where public dollars should go.
A common answer tends to be: let’s prioritize measures with the lowest cost per tonne for emissions reductions. While the cost per tonne of emissions reduced is a key metric, we need a sophisticated approach that accurately accounts for cost per tonne and that combines it with other criteria to make smart climate investments.
First, cost per tonne calculations need to consider the carbon impacts over the entire lifetime of an investment. Where possible, a full life-cycle assessment should be undertaken, including the embedded emissions of infrastructure investment (for example from the use of concrete). We also need to consider the net cost per tonne as many emissions reduction measures create long-term financial benefits. We should always understand the full financial picture, with “marginal cost of abatement curves” (first adapted to climate solutions by McKinsey & Co.) as a handy tool. The modelling for the TransformTO climate plan incorporated these cost of abatement curves for the various examined low-carbon measures for Toronto.
Second, we need a more nuanced approach to prioritizing public investment decisions that looks beyond just one metric. To hit our climate targets we need to make smart, strategic climate investments that consider a range of factors, not just the lowest cost per tonne.
For example, the following criteria should also be considered:
Co-benefits potential: Many emissions reduction measures create multiple benefits, including improved public health, local job creation, and improved mobility for residents. These co-benefits offer value that extends far beyond carbon reduction alone. For example, public transit generally doesn’t offer the lowest cost per tonne, but delivers many other desirable public policy outcomes such as reduced congestion, increased workforce productivity, and improved health and air quality. Consideration of the multiple benefits associated with low-carbon actions also helps steering public dollars towards durable, long-term investments.
Leveraging potential: Ironically, a singular focus on the lowest cost per tonne can actually lead governments to make investments that make little sense. That’s because low cost per tonne actions generally have a strong business case without incentives or subsidies. There is little value in incentivizing investments that are almost certain to occur with or without public support, for example the switch from incandescent to LED lighting that’s already well underway. If public funding is dedicated to projects with low costs per tonne, it should be done in a manner that leverages and ‘crowds in’ other sources of capital to achieve emissions reductions faster. For instance, public funding for energy efficiency retrofits should be focused on measures beyond what consumers or commercial investors commonly consider a viable return on investment, e.g. for exterior cladding that has payback periods of over ten years.
Catalyzing potential: Although many emissions reduction measures are not currently low-cost, strategic investment could demonstrate, de-risk and move them to scale. In short: it’s worth investing in what may not be cost-effective today, but has the potential to be down the road. For example, rebates being offered by governments around the world for electric vehicles (EVs) may seem expensive on a cost per tonne basis. But they are intended to be temporary, transforming markets by creating the economies of scale that are quickly driving EV prices down to a point where they will be cost-competitive without a rebate.
Wise investment of public funds in climate action requires a nuanced and strategic approach. It might be counter-intuitive, but governments should avoid focusing exclusively on investing in carbon reductions at the lowest cost per tonne, and focus instead on making smart investments in a low-carbon future. Understanding cost per tonne is essential, but decision-makers need to consider other goals such as creating multiple benefits, leveraging private investment, and catalyzing the transformation to a low-carbon economy.