What Is an Abatement Cost?

An abatement cost is a cost borne by firms when they are required to remove and/or reduce undesirable nuisances or negative byproducts created during production.

As businesses shift towards pursuing environmental, social, and governance (ESG) means, abatement costs play a large role in discouraging companies from leniency on their environmental, greenhouse gas emissions. Specifically, abatement costs are there as "fines" for companies that either fail to innovate in creating greener production cycles or fail to account for potential problems and end up damaging the environment. The most common scenario in which abatement costs are applied is for pollution and oil spills, whether accidental or intentional.

Key Takeaways

  • Abatement costs are the costs associated with removing negative byproducts created during production.
  • Abatement costs are commonly incurred for things like cleaning up pollution after a spill and are levied by governments seeking to mitigate negative environmental impacts.

Understanding Abatement Costs

Abatement costs can have a very negative impact against company earnings, and also decrease the positivity of a company's public image as consumers are demanding greener practices. Especially for certain industries, abatement costs can significantly impact a company. For example, when an industrial company is required by the U.S. Environmental Protection Agency (EPA) to clean up pollution accumulated by a company’s manufacturing, mining, processing, or waste discharge site, abatement costs will undoubtedly be involved.

When talking about abatement fees, the term "marginal abatement cost" also refers to the marginal benefit to achieve an efficient reduction of pollution. Calculating the marginal abatement cost curve, also known as the MAC curve or MACC, is a process that involves mapping out the cost-effectiveness of greenhouse gas emissions reductions, for example weighing a company's toxic waste against initiatives it may fund in reforestation. 

Example of a Pollution Abatement Cost

A 200-mile portion of the Hudson River in New York is currently classified by the EPA as one of the largest Superfund sites in the country. During a 30-year period ending in 1977, when the EPA banned the production of polychlorinated biphenyls (PCBs), it is estimated that approximately 1.3 million pounds of PCBs were discharged into the Hudson River from two General Electric (GE) capacitor manufacturing plants located in the towns of Fort Edward and Hudson Falls, New York.

Under a 2006 consent decree with the EPA, GE was held responsible for the entire 197-mile Superfund site but specifically required to clean up 40 miles of the upper river. Remediation dredging started in 2009 and ended in 2015 with the company claiming it invested $1.7 billion on the cleanup. In December 2016, GE requested a certificate of completion from the EPA. The EPA sent a letter to GE in January 2018 noting its decision of completion would be delayed until its five-year review of the cleanup is finalized, hopefully by year-end. Depending on the EPA’s review, GE may be required to perform additional dredging that could significantly boost its total pollution abatement costs associated with the Hudson River cleanup.