Does It Pay Off Alone? The Economic Reality of Decarbonization and the New Role of VCM
The study (.PDF) “Does Unilateral Decarbonization Pay for Itself?” (Bilal & Känzig, 2025) sheds new light on the old dilemma of whether major economies – particularly the US and EU – can benefit economically from unilateral decarbonization, meaning significant reduction of their greenhouse gas emissions without cooperation from other countries.
By analyzing economic damages caused by global temperature change, the authors conclude that decarbonization is justified not just morally but economically – even when pursued unilaterally.
Background: Old Consensus, New Perspective, Adaptation vs. Decarbonization
There are two approaches to combat climate change effects:
- adaptation,
- or emission reduction (decarbonization).
International cooperation often stumbles on the classic free-rider problem: one country bears the cost of reduction while everyone enjoys the benefits.
This is why the prevailing view long held that only collective action can be economically viable, not unilateral measures. Bilal and Känzig challenge this view using new global temperature-based economic damage estimates.
Methodology and Model
The study uses a theoretical framework to examine:
- how global temperature affects a country’s economic welfare,
- and the cost of decarbonization for that country.
They work with two key concepts:
- Marginal abatement cost (MAC): The economic cost of reducing 1 ton of CO₂.
- Domestic cost of carbon (DCC): The economic damage caused by 1 ton of CO₂ domestically.
Based on these, they estimate the decarbonization potential of the US and EU – without international cooperation.
Key Findings
1. Significant Domestic Damages
A single 1°C increase in global temperature could lead to over 10% GDP decline in the US and EU.
- Domestic carbon cost:
- US: 226 USD/ton CO₂
- EU: 216 USD/ton CO₂
These are ten times higher than traditional local temperature-based estimates.
2. Marginal Abatement Costs
- Many sectors can already be partially decarbonized at low cost (e.g., power generation, transport).
- Costs rise steeply toward full decarbonization (e.g., direct air capture: >240 USD/ton).
3. It Pays Off Unilaterally
Where marginal benefit = marginal cost:
- US: 86% economic decarbonization is the rational target
- EU: 84% economic decarbonization can be optimized
This far exceeds what previous models suggested (~30%).
Unilateral Decarbonization – See: Page 5 Figure
Notes: Marginal abatement cost curve and domestic costs of carbon for the United States and European Union. Solid black lines: unilaterally optimal decarbonization under global temperature damages. Dashed black lines: unilaterally optimal decarbonization under local temperature damages. Dotted black line: unilateral decarbonization absent any damages. US: United States. EU: European Union.
The figure shows decarbonization sectors and their associated cost levels. Black lines indicate different optimal levels – based on global vs. local damages. Clearly, the optimum calculated from global damages is significantly higher.
The New Role of VCM (Voluntary Carbon Market)
A Tool for Independent Decarbonization
The study proves: some countries benefit from emission reductions even out of self-interest. Here’s how the VCM helps:
- Provides cost-effective, flexible solutions,
- Offers non-governmental, market-based incentives,
- Supports Net Zero and ESG goals.
Decentralized Complement to National Strategies
VCM helps where domestic emission reductions are expensive or politically challenging:
- Provides cross-border cost efficiency,
- Facilitates project financing (e.g., reforestation, agricultural carbon sequestration).
What Would “Optimal” Carbon Credit Prices Be?
According to the study:
| Region | Based on Local Damages | Based on Global Damages | Discounted for 2024–2050 |
|---|---|---|---|
| US | 22 USD / tCO₂ | 226 USD / tCO₂ | 182 USD / tCO₂ |
| EU | 28 USD / tCO₂ | 216 USD / tCO₂ | 174 USD / tCO₂ |
Conclusion
The optimal VCM price should:
- not be lower than domestic carbon cost (DCC),
- not exceed domestic abatement cost (MAC),
→ A 100–200 USD/tCO₂ range would be rational.
Current Challenges of VCM
Problems
- Current average prices: 5–30 USD/tCO₂
- This distorts the market: cheap “compensation”, less actual reduction.
Recommendations
- Introduce premium pricing for credible projects (NBS+, durability, MRV).
- Implement regional price floors – e.g., 100 USD/tCO₂ in the EU.
- The study suggests the global social cost of carbon is: 1367 USD/tCO₂ (!)
Strategic Implications
- VCM could become the “second engine” of decarbonization – alongside government policy.
- Raising awareness (e.g., DCC estimates) could give VCM new legitimacy.
- Carbon credits aren’t charity but risk management – an investment in avoiding climate damages.
This study may open a new era in carbon market thinking. Decarbonization is not just a collective moral duty but a rational national interest – and VCM could be the market-based implementation of this economic logic.
References
- Bilal, A. & Känzig, D. (2025): Does Unilateral Decarbonization Pay for Itself? AEA Papers and Proceedings.
- Bilal, A. & Känzig, D. (2024): The Macroeconomic Impact of Climate Change: Global versus Local Temperature, NBER WP 32450.
- Dell et al. (2012), Burke et al. (2015), Nath et al. (2022)
