The levelized cost of carbon: a practical,if imperfect,method to compare CO2 abatement projects*

Calculating the cost effectiveness of projects and policies with respect to reducing carbon emissions provides a simple way for local government agencies to consider the climate impacts of their actions. Yet, defining a metric for cost-effectiveness in relation to climate change is not straightforward for several reasons. In this paper, we focus primarily on dynamics, reflecting the time value of money and how the benefits of reducing carbon emissions may change over time. We define a cost-effectiveness metric called Levelized Cost of Carbon (LCC) that carefully accounts for these dynamics. We also investigate the theoretical and practical implications and limitations of using a cost-effectiveness metric as an approach to rank projects. We apply our metric to a set of transportation projects to illustrate the insights that can be gained by such a process.

Key policy insights:

• Levelized Cost of Carbon (LCC) provides a simple way for local governments to consider climate change mitigation in decision making.

• LCC is a cost-effectiveness metric that carefully accounts for the time value of money and possible changes in the value of reducing emissions through time, thus helping local governments to make better decisions.

• LCC can be used to rank projects, with some caveats, even in the absence of a specific value for the benefits of reducing GHG emissions, thus providing flexibility in the face of uncertainty and political constraints.