The marginal abatement cost function with secondary waste markets

Abstract

We generalize the marginal abatement cost function concept by adding a secondary market option for the firm's emissions. From that baseline, we analyze the conditions under which the secondary market will lie dormant and strategies for efficiently activating them. We feature two contexts that are of increasing interest in the engineering and energy literatures but that are under-discussed in the economics literature: waste heat utilization from processes such as computer data centers and energy production from CO₂ emission feedstock via artificial photosynthesis. Our main result is that the secondary market price for waste residuals can reduce uncontrolled emissions in the absence of an emission price instrument such as a tax. If an emission tax is already in place, we show that secondary waste market revenue reduces the efficient tax—and under certain conditions can completely replace the tax. Moreover, our model provides microeconomic support for evolutionary ecological economics perspectives and Circular Economy perspectives on how markets can be tuned to ‘waste’ less waste via policies that strengthen secondary market development.