An abatement cost is a price which a company must pay in order to address a harm which it has caused in the course of doing business. A common example is the cost associated with installing traps to capture pollutants at a factory so that they are not released into the environment. Another form of abatement cost might be the cost associated with land rehabilitation when a factory is closed. Abatement costs can increase the cost of doing business and may be passed on to consumers in the form of higher prices for products which require additional abatement.
Companies can approach abatement in two ways. One is to remove the negative byproduct of production or doing business, as for example at a hospital where biohazardous material is collected and disposed of safely. The other approach is to reduce the production of negative byproducts in the first place. Sometimes this is simply not an option; for example, a hospital cannot reduce the amount of biohazardous waste it produces because this is an integral part of the services it provides. The hospital could install a more efficient incinerator, however, so that it produces less pollution when it needs to incinerate biohazardous waste. Both choices come with an abatement cost associated with addressing the problem.
Things like pollution which is generated in the process of running a factory are known as negative externalities. In the late 20th century, an increasing number of governments began to apply pressure to companies to encourage them to reduce their negative externalities. This caused abatement costs to rise, as businesses had to develop methods for addressing the negative byproducts of doing business. In addition, some governments started levying what is sometimes known as a Pigovian tax, a tax levied on negative externalities.
Such taxes are designed to penalize companies for producing negative externalities and to reward them for reductions. For example, a company may be taxed on the amount of carbon dioxide it emits into the environment annually. If the company can reduce its production of carbon dioxide, the tax is lowered. Companies analyze their marginal abatement cost, the cost for preventing the production of one unit of a negative externality such as a ton of CO2, to determine whether it is more cost effective to reduce or to abate after the fact.
Marginal abatement cost follows a curve. In the beginning, it is usually inexpensive and easy to reduce pollutants and other negative externalities. Over time, however, it becomes more and more expensive to reduce a single unit of a negative externality. As a result, it may be more cost effective for the company to focus on removal rather than reduction.