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On the problem of optimizing through least cost per unit, when costs are negative: Implications for cost curves and the definition of economic efficiency
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Sustainability and Industrial Dynamics.ORCID iD: 0000-0001-7028-0624
2016 (English)In: Energy, ISSN 0360-5442, E-ISSN 1873-6785, Vol. 114, 1155-1163 p.Article in journal (Refereed) Published
Abstract [en]

For society and industry alike, efficient allocation of resources is crucial. Numerous tools are available that in different ways rank available options and actions under the aim to minimize costs or maximize profit. One common definition of economic efficiency is least cost per unit supplied. A definition that becomes problematic if cost take negative values. One model, where negative costs are not uncommon, is expert based/bottom up [marginal abatement] cost curves. This model is used in many contexts for understanding the impact of economic policy as well as optimizing amongst potential actions. Within this context attention has been turned towards the ranking problem when costs are negative.

This article contributes by widening the discussion on the ranking problem from the MACC context to the general definition of least cost per unit supplied. Further it discuss why a proposed solution to the ranking problem, Pareto optimization, is not a good solution when available options are interdependent. This has particular consequences for the context of energy systems, where strong interdependencies between available options and actions are common. The third contribution is a proposed solution to solve the ranking problem and thus how to define economic efficient when costs are negative.

Place, publisher, year, edition, pages
Elsevier, 2016. Vol. 114, 1155-1163 p.
Keyword [en]
Economic efficiency; Marginal abatement cost cruves, investment optimization, policy analysis
National Category
Business Administration Economics Energy Engineering
Research subject
Industrial Engineering and Management
Identifiers
URN: urn:nbn:se:kth:diva-194168DOI: 10.1016/j.energy.2016.08.089ISI: 000387194800094ScopusID: 2-s2.0-84989927823OAI: oai:DiVA.org:kth-194168DiVA: diva2:1038397
Projects
Investments in energy efficiency and climate change abatement: revising marginal cost curves as an optimization model
Funder
Swedish Energy Agency, 35894-1
Note

The Swedish Energy Agency (35894-1) provided the funding for this project through the project ‘Investments in energy efficiency and climate change abatement: revising marginal cost curves as an optimization model’. The article is based on parts of the PhD Thesis ‘Investments, system dynamics, energy management, and policy: a solution to the metric problem of bottom up supply curves’ from the Royal Institute of Technology (KTH). QC 20161019.

Available from: 2016-10-18 Created: 2016-10-18 Last updated: 2017-01-10Bibliographically approved

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