Costs
This Section details the cost calculation in GAINS and the various assumptions underlying such computations.
The cost evaluation in GAINS attempts to quantify the values to society of diverting resources to reduce emissions in Europe. In practice, these values are approximated by estimating costs at the production level rather than at the consumption one. Therefore, any mark-ups charged over production costs by manufacturers or dealers do not represent actual resource uses and are ignored. Any taxes added to production costs are similarly ignored as subsidies as they are transfers and not resource costs.
Furthermore, a central assumption in the cost calculation is the existence of a free international market for (abatement) equipment that is accessible to all countries at the same conditions.
Some of the parameters are considered common to all countries. These include technology specific data, such as removal efficiencies, unit investment costs, and non-labor operating and maintenance costs. However, local circumstances lead to justifiable differences in the actual costs at which a given technology removes pollution at different sources. Country-specific parameters considered in the cost calculation routine include, inter alia, labor costs, energy prices, size distributions of plants, plant utilization, fuel quality, animal fodder prices, paper collection rates, composting rates, the state of technological development, and the extent to which emission control measures are already applied.
Overall net expenditures for emission controls can be divided into Investments; Operating and Maintenance costs (OM); and Cost-savings. Out of these three components presented next, the annual costs per unit of activity level can finally be derived.
Investments
The investments include the fixed capital costs associatied with the control option.
Such capital investments are annualized according to the following equation:
where:
\(I^{an}\) |
Annual capital investment |
\(lt\) |
Technology-specific lifetime of the installation |
\(q\) |
Discount rate |
The discount rate q depends on the considered application: whereas a rate of 4%/year would be used for cost-effectiveness analyses from a social planners perspective, rates typically ranging between 10-20%/year would rather be used when exploring the perspectives of profit-oriented private investors.
Operating and Maintenance costs (OM)
OM costs include all variable costs associated with a control measure. These are typically composed of material, energy and labor costs for operation of the pollution control equipement, as well as costs for operating installations for recovery and utilization or flaring of gas, or for separating and collecting waste.
The annual OM costs are derived as follows:
where:
\(L\) |
Annual labor costs |
\(M\) |
Annual material and energy costs |
\(a_L\) |
Share of annual labor costs in the total OM costs |
\(a_M\) |
Share of annual material and energy costs in the total OM costs |
While material costs are not assumed to vary between countries, labor costs are country-specific.
Cost-savings
Cost-savings primarily emerge from the sale of by-products (e.g. gypsum, compost), reduced energy demand (e.g. with more efficient appliances), reduced losses (e.g. from leakages) and other productivity increases. Avoided costs for waste disposal when waste is recycled or composted are also included as cost-savings.
Using these 3 elements constituting the overall net expenditures, the annual costs per unit of activity level, i.e. the so-called unit costs of abatement (ca) can be computed:
where:
\(i, k, m\) |
Region, activity type, abatement measure, respectively |
\(OM^{fix}\) |
Fixed operating and maintenance costs |
\(OM^{var}\) |
Variable operating and maintenance costs |
\(S_{i,k,m}\) |
Cost-savings for activity k in country i after application of control measure m |
\(A_{i,k}\) |
Activity level of type k (e.g., coal consumption in power plants) in country i |