The Costs and Ancillary9 Benefits of Mitigation Actions
11. Estimates of cost and benefits of mitigation actions
differ because of (i) how welfare is measured, (ii) the scope and methodology
of the analysis, and (iii) the underlying assumptions built into the analysis.
As a result, estimated costs and benefits may not reflect the actual costs and
benefits of implementing mitigation actions. With respect to (i) and (ii),
costs and benefits estimates, inter alia, depend on revenue recycling,
and whether and how the following are considered: implementation and transaction
cost, distributional impacts, multiple gases, land-use change options, benefits
of avoided climate change, ancillary benefits, no regrets opportunities10
and valuation of externalities and non-market impacts. Assumptions include,
- Demographic change, the rate and structure of economic growth; increases
in personal mobility, technological innovation such as improvements in energy
efficiency and the availability of low-cost energy sources, flexibility of
capital investments and labour markets, prices, fiscal distortions in the
no-policy (baseline) scenario.
- The level and timing of the mitigation target.
- Assumptions regarding implementation measures, e.g. the extent of emissions
trading, the Clean Development Mechanism (CDM) and Joint Implementation (JI),
regulation, and voluntary agreements 11
and the associated transaction costs.
- Discount rates: the long time scales make discounting assumptions critical
and there is still no consensus on appropriate long-term rates, though the
literature shows increasing attention to rates that decline over time and
hence give more weight to benefits that occur in the long term. These discount
rates should be distinguished from the higher rates that private agents generally
use in market transactions.
(Sections 7.2, 7.3,
12. Some sources of greenhouse gas emissions can be limited
at no or negative net social cost to the extent that policies can exploit no
regrets opportunities (Sections 7.3.4, 9.2.1):
- Market imperfections. Reduction of existing market or institutional
failures and other barriers that impede adoption of cost-effective emission
reduction measures, can lower private costs compared to current practice.
This can also reduce private costs overall.
- Ancillary benefits. Climate change mitigation measures will have
effects on other societal issues. For example, reducing carbon emissions in
many cases will result in the simultaneous reduction in local and regional
air pollution. It is likely that mitigation strategies will also affect transportation,
agriculture, land-use practices and waste management and will have an impact
on other issues of social concern, such as employment, and energy security.
However, not all of the effects will be positive; careful policy selection
and design can better ensure positive effects and minimize negative impacts.
In some cases, the magnitude of ancillary benefits of mitigation may be comparable
to the costs of the mitigating measures, adding to the no regrets potential,
although estimates are difficult to make and vary widely (Sections 7.3.3,
- Double dividend. Instruments (such as taxes or auctioned permits)
provide revenues to the government. If used to finance reductions in existing
distortionary taxes ("revenue recycling"), these revenues reduce
the economic cost of achieving greenhouse gas reductions. The magnitude of
this offset depends on the existing tax structure, type of tax cuts, labour
market conditions, and method of recycling. Under some circumstances, it is
possible that the economic benefits may exceed the costs of mitigation (Sections
13. The cost estimates for Annex B countries to implement
the Kyoto Protocol vary between studies and regions as indicated in Paragraph
11, and depend strongly upon the assumptions regarding the use of the Kyoto
mechanisms, and their interactions with domestic measures. The great majority
of global studies reporting and comparing these costs use international energy-economic
models. Nine of these studies suggest the following GDP impacts 12
(Sections 7.3.5, 8.3.1,
Annex II countries13
: In the absence of emissions trading between Annex B countries14,
the majority of global studies show reductions in projected GDP of about 0.2%
to 2% in 2010 for different Annex II regions. With full emissions trading between
Annex B countries, the estimated reductions in 2010 are between 0.1% and 1.1%
of projected GDP15.
These studies encompass a wide range of assumptions as listed in Paragraph 11.
Models whose results are reported in this paragraph assume full use of emissions
trading without transaction cost. Results for cases that do not allow Annex
B trading assume full domestic trading within each region. Models do not include
sinks or non-CO2 greenhouse gases. They do not include the CDM, negative
cost options, ancillary benefits, or targeted revenue recycling.
For all regions costs are also influenced by the following factors:
- Constraints on the use of Annex B trading, high transaction costs in implementing
the mechanisms, and inefficient domestic implementation could raise costs.
- Inclusion in domestic policy and measures of the no regrets possibilities10
identified in Paragraph 12, use of the CDM, sinks,
and inclusion of non-CO2 greenhouse gases, could lower costs. Costs
for individual countries can vary more widely.
The models show that the Kyoto mechanisms are important in controlling risks
of high costs in given countries, and thus can complement domestic policy mechanisms.
Similarly, they can minimize risks of inequitable international impacts and
help to level marginal costs. The global modelling studies reported above show
national marginal costs to meet the Kyoto targets from about US$20/tC up to
US$600/tC without trading, and a range from about US$15/tC up to US$150/tC with
Annex B trading. The cost reductions from these mechanisms may depend on the
details of implementation, including the compatibility of domestic and international
mechanisms, constraints, and transaction costs.
This reflects opportunities for energy efficiency improvements not
available to Annex II countries. Under assumptions of drastic energy efficiency
improvement and/or continuing economic recessions in some countries, the assigned
amounts may exceed projected emissions in the first commitment period. In this
case, models show increased GDP due to revenues from trading assigned amounts.
However, for some economies in transition, implementing the Kyoto Protocol will
have similar impact on GDP as for Annex II countries.
14. Cost-effectiveness studies with a century timescale
estimate that the costs of stabilizing CO2 concentrations in the
atmosphere increase as the concentration stabilization level declines. Different
baselines can have a strong influence on absolute costs. While there is
a moderate increase in the costs when passing from a 750ppmv to a 550ppmv concentration
stabilization level, there is a larger increase in costs passing from 550ppmv
to 450ppmv unless the emissions in the baseline scenario are very low. These
results, however, do not incorporate carbon sequestration, gases other than
CO2 and did not examine the possible effect of more ambitious targets
on induced technological change 16.
Costs associated with each concentration level depend on numerous factors including
the rate of discount, distribution of emission reductions over time, policies
and measures employed, and particularly the choice of the baseline scenario:
for scenarios characterized by a focus on local and regional sustainable development
for example, total costs of stabilizing at a particular level are significantly
lower than for other scenarios17
15. Under any greenhouse gas mitigation effort, the economic
costs and benefits are distributed unevenly between sectors; to a varying degree,
the costs of mitigation actions could be reduced by appropriate policies.
In general, it is easier to identify activities, which stand to suffer economic
costs compared to those which may benefit, and the economic costs are more immediate,
more concentrated and more certain. Under mitigation policies, coal, possibly
oil and gas, and certain energy-intensive sectors, such as steel production,
are most likely to suffer an economic disadvantage. Other industries including
renewable energy industries and services can be expected to benefit in the long
term from price changes and the availability of financial and other resources
that would otherwise have been devoted to carbon-intensive sectors. Policies
such as the removal of subsidies from fossil fuels may increase total societal
benefits through gains in economic efficiency, while use of the Kyoto mechanisms
could be expected to reduce the net economic cost of meeting Annex B targets.
Other types of policies, for example exempting carbon-intensive industries,
redistribute the costs but increase total societal costs at the same time. Most
studies show that the distributional effects of a carbon tax can have negative
income effects on low-income groups unless the tax revenues are used directly
or indirectly to compensate such effects (Section 9.2.1).
16. Emission constraints in Annex I countries have well
established, albeit varied "spillover" effects 18
on non-Annex I countries (Sections 8.3.2, 9.3).
- Oil-exporting, non-Annex I countries: Analyses report costs differently,
including, inter alia, reductions in projected GDP and reductions in projected
oil revenues 19.
The study reporting the lowest costs shows reductions of 0.2% of projected
GDP with no emissions trading, and less than 0.05% of projected GDP with Annex
B emissions trading in 2010 20.
The study reporting the highest costs shows reductions of 25% of projected
oil revenues with no emissions trading, and 13% of projected oil revenues
with Annex B emissions trading in 2010. These studies do not consider policies
and measures 21
other than Annex B emissions trading, that could lessen the impact on non-Annex
I, oil-exporting countries, and therefore tend to overstate both the costs
to these countries and overall costs.
The effects on these countries can be further reduced by removal of subsidies
for fossil fuels, energy tax restructuring according to carbon content, increased
use of natural gas, and diversification of the economies of non-Annex I, oil-exporting
- Other non-Annex I countries: They may be adversely affected by reductions
in demand for their exports to OECD nations and by the price increase of those
carbon-intensive and other products they continue to import. These countries
may benefit from the reduction in fuel prices, increased exports of carbon-intensive
products and the transfer of environmentally sound technologies and know-how.
The net balance for a given country depends on which of these factors dominates.
Because of these complexities, the breakdown of winners and losers remains
- Carbon leakage 22.
The possible relocation of some carbon-intensive industries to non-Annex I
countries and wider impacts on trade flows in response to changing prices
may lead to leakage in the order of 5%-20% (Section 220.127.116.11).
Exemptions, for example for energy-intensive industries, make the higher model
estimates for carbon leakage unlikely, but would raise aggregate costs. The
transfer of environmentally sound technologies and know-how, not included
in models, may lead to lower leakage and especially on the longer term may
more than offset the leakage.