Introducing the PACC: the Pragmatic Abatement Cost Curve
A must-know for any cleantech entrepreneur, investor, or policy maker
After a brief summer Musing hiatus, we’re back at it and better than ever! 🥊
Today we’re introducing the PACC — the Pragmatic Abatement Cost Curve — a new concept that is a must-know for any cleantech entrepreneur, investor, or policy maker.
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The MACC: A useful, but incomplete, exercise 🧮
If you’ve been around the cleantech & decarbonization world for a while, you’ve surely run into a Marginal Abatement Cost Curve (MACC) or two.
For those that haven’t, the MACC is a tool — first introduced in 2007 by McKinsey & Company — to help quantify and prioritize a wide range of operational actions that a given entity (company, country, …) can take to improve its carbon footprint.
In short, the MACC translates the decarbonization “bang for your buck”. Namely, what can we do, what will it cost, how much will it matter? All in graphical format!
Even for a graph-junkie like myself, this curve is a lot to take in. Here’s how to read it:
Height of bars: the cost, expressed in $ per ton of CO2 abated, tied to an action
Width of bars: the impact, expressed in tons of CO2 abated, tied to an action
A negative-bar is a “no brainer” because it actually generates value (think: improving energy efficiency leads to lower recurring costs). A positive-bar will bear some cost, and should be assessed in the context of a business. And a wide-bar is generally better than a skinnier bar from a decarbonization stand point.
With a MACC in hand, any entity can make a strategic prioritization of environmental actions — within a certain budget ($/t-CO2) and the context of its ongoing operations.
Key phrase: within a certain budget…
The PACC: A map to navigating a carbon neutral world 🌎
While generating a MACC is a useful exercise, it leaves something to be desired from a pragmatic point of view. Without knowing the “budget” for every actor across the economy, it’s hard to understand how a range of decarbonization actions will play out.
Enter the PACC — the Pragmatic Abatement Cost Curve — a curve that translates a given company or industry’s ability to pay for its decarbonization levers. This curve is the curve for answering a number of burning questions present for cleantech players:
Entrepreneurs: who will buy my product? How much would / could they pay?
Investors: what is the market for [x] kind of carbon offset? What level of exposure does my public corporation have to environmental pressure?
Policy makers: how will a carbon price be received by my constituents? Which industries can afford to pay more and help out critical economic sectors?
Without further ado, I introduce the inaugural Fortune 1000 PACC…
PACC1 (by profit pools), as of 2018
PACC (by emissions pools), as of 2018
So… another haymaker of a curve from an interpretation stand-point, let’s translate:
Height of bar = abatement budget: a company can only allocate a certain share of its operating profits to sustainability efforts (before raising prices). This budget is arrived at by dividing a company’s profit by its emissions, then multiplying by 1-3%. While 1-3% isn’t scientific, it is empirically supported.
Width of bar = sectoral impact: above I present two different curves that shed unique perspectives on the economy. The first curve sets the width of the bar as the profit pool of a given industry, and the second sets the width of the bar as the total emissions footprint of a given industry. As you can see, these two views end up looking significantly different.
A company or sector with a short bar has few dollars to put towards decarbonization. A company or sector with a tall bar can afford to pay a lot for its decarbonization. A wide bar has the most opportunity for impact, and vis a versa for a short bar.
The “so what” and a few “yes, ands” ✨
Now… why am I getting so excited about this PACC curve? Allow me to share my top 5 use-cases for the PACC alongside a few key caveats in interpreting the data.
#1: A customer-backed guide to the voluntary carbon markets 🛍️
The trends in voluntary carbon market purchasing have been exciting and overwhelming. However, it’s hard to put a number on the potential scale of these markets in both an unregulated and regulated world. PACC to the rescue!
If you multiply the ability to pay in each sector (height of bar), by the size of those sectors (width of bar), you arrive at some interesting insights:
Total imputed market size (Fortune 1000 only): ~$300Bn
Market size for premium carbon abatement (>~$100/t-CO2): ~$75Bn
Taking these numbers as wholly voluntarily contributions from a small share of the market, versus other market estimates that hit $1-2Trn by 2050… that’s not bad at all!
#2: A hunt-list for early clean technology adopters ✔️
Any early clean technology innovator is asking themselves who is going to be the first to adopt their product (be it carbon removal or a new type of electric plane) and what that early customer might be willing and/or able to pay.
Diving into each slice of this curve gives you a “hunt list” of large corporations — more likely than not that have made a carbon neutral commitment — who are high-potential, early adopters for technologies at many different price points.
And speaking of early adoption — let’s not forget the “sectoral impact” and the two different views of the PACC we’ve presented here. It’s striking that ~50% of the profit pool can afford >$200/t-CO2 actions, but only ~20% of the emissions pool can. Sadly for clean technology innovators — you’d hope those numbers were the other way around.
#3: A pragmatic-tool for policy making and carbon regulation 🧾
Fair and equitable — two important criteria for any policy making consideration.
In the context of decarbonization, this often comes down to environmental mandates (e.g., clean power shares) and carbon pricing or taxation. For a policy maker deciding how to build fair and equitable decarbonization regulations, the impact to individual sectors, consumers, and the interconnection across that ecosystem is critical.
To be clear: I’m not saying that if you’re low on the PACC you should be taxed less, but I am saying that if you’re writing policy, you should be aware of this curve.
#4: A consumers-guide to product pricing in the future 🔮
One of the many concerns sited for adopting clean technologies is a price increase on products and services — be it airline tickets or vehicles.
The PACC helps to illuminate where those price increases are likely to pop up. For example, in a world where a $50/t-CO2 carbon price was introduced, any company who’s place on the PACC was less than $50/t will likely be increasing prices to consumers to maintain a “business as usual” for its shareholders.
Consumers will then have to respond and decide — with their wallets — what they are willing to pay and which products or services may no longer make the cut.
#5: A call for all corporations to “lower the denominator” 💨
For the final takeaway, let’s get back to basics — this curve is sneaky simple — being based solely on a company’s profits, emissions, and a 1-3% adjustment factor.
While profits depend on a large amount of external factors, emissions are highly operational and can be addressed systematically. For a company to go from the left side (not well positioned) to the right side (well positioned) of the PACC, the first step is reducing your emissions footprint in any operational way possible — let’s get to it!
Before closing, as with any data, don’t forget your grains of salt in interpreting what you see. For the PACC, I’d encourage readers to remember the following:
Garbage in, garbage out — data variation: sadly, emissions and profit data for companies can be both (a) difficult to acquire, and (b) highly variable. This means that some companies do not publish enough information to be included in the curve, and some companies vary widely from year-to-year. While I did my best to adjust for this during the analysis, no curve is perfect.
Ability to pay vs. willingness to pay: Remember that just because a healthcare company could afford to pay $750/t-CO2 to decarbonize, that doesn’t mean they would, unless forced by a regulator or pressured by their customer base. Hopefully one day could and would converge, but today for most companies (other than leaders in the space like Stripe and Shopify), they aren’t the same.
An evolving landscape — regular updates required: remember that as technologies evolve, the global economy shifts, and more companies adopt low hanging MACC fruit (e.g., renewable energy procurement)… this curve will shift as well! So don’t expect this curve to look the same 5 or 10 years into the future..
I hope you enjoyed this Musing and encourage you to share this within and across your networks — translating theory to reality is a critical step in this global journey.
The amount of insights packed in the PACC (see what I did there…) are vast so don’t be surprised if you see it pop up in a future Musing or two.
Lastly, stay tuned for upcoming Musings that you may enjoy as well. Here are a few titles in the hopper that I’m particularly excited about:
Nuclear fusion: if it works, will it matter?
Bioplastics: the pragmatic-man’s recycling?
Hurry-up and wait: the state of early-stage cleantech investing
Until next time…
$/t-CO2 includes Scope 1 & Scope 2 emissions; data taken from annual company sustainability reports and Fortune’s 1000 company list of profits and revenue
Excellent piece, and great takeaways for climate entrepreneurs and investors!