7.3 Analytical Structure and Critical Assumptions
7.3.1 System Boundaries: Project, Sector, Macroeconomic
Assessing climate change mitigation involves a comparison between a policy
case and a non-policy case, otherwise referred to as a baseline case. The two
should, as far as possible, be defined in a way that the assessment can include
all major economic and social impacts of the policies, spillovers, and leakages,
as well as GHG emission implications. In other words, the cases should be assessed
in the context of a system boundary that include all major impacts.
The system boundary can be a specific project, include one or more sectors,
or the whole economy.
The project, sector, and macroeconomic levels can be defined as follows:
- Project. A project level analysis considers a stand-alone
investment that is assumed not to have significant impacts on markets (both
demand and supply) beyond the activity itself. The activity can be the implementation
of specific technical facilities, infrastructure, demand-side regulations,
information efforts, technical standards, etc. Methodological frameworks to
assess the project level impacts include costbenefit analysis, cost-effectiveness
analysis, and lifecycle analysis.
- Sector. Sector level analysis considers sectoral policies in a partial-equilibrium
context, for which other sectors and the macroeconomic variables are assumed
to be as given. The policies can include economic instruments related to prices,
trade, and financing, specific large-scale investment projects, and demand-side
regulation efforts. Methodological frameworks for sectoral assessments include
various partial equilibrium models and technical simulation models for the
energy sector, agriculture, forestry, and the transportation sector.
- Macroeconomic. A macroeconomic analysis considers the impacts of
policies across all sectors and markets. The policies include all sorts of
economic policies, such as taxes, subsidies, monetary policies, specific investment
projects, and technology and innovation policies. Methodological frameworks
include various sorts of macroeconomic models such as general equilibrium
models, Keynesian models, and Integrated Assessment Models (IAMs), among others.
A trade-off is expected between the details in the assessment and
the complexity of the system considered. For example a project system boundary
allows a rather detailed assessment of GHG emissions and economic and social
impacts generated by a specific project or policy, but excludes sectoral and
economy-wide impacts. Conversely, an economy-wide system boundary, in principle,
allows all direct and indirect impacts to be included, but has little detail
on the impacts of implementing specific projects.
The system boundaries may be selected on the basis of the specific scope of
the study and the availability of analytical tools, such as models. Many studies
have been organized, in practice, on the basis of the scope and structure of
the modelling tools applied. For example, climate change mitigation studies
for the energy sector were frequently structured according to traditional modelling
approaches used in that sector, which are often rich in detail on technologies,
but do not include market behaviour. In contrast, macroeconomic models are often
rich in detail on market behaviour and price relationships, but do not explicitly
include major GHG emitting sources and related technologies.
Project assessment methodologies are generally very rich in detail and include
an assessment of various direct and indirect costs and benefits of the GHG reduction
policy considered. The assessments are often conducted as very data-intensive
exercises, in which various project assessment tools and expert judgements are
combined. They require rather strong technical skills of the experts in the
collection of data, to ensure consistency in the structure and results of the
A combination of different modelling approaches is required for an effective
assessment of the options. For example, detailed project assessment has been
combined with a more general analysis of sectoral impacts, and macroeconomic
carbon tax studies have been combined with the sectoral modelling of larger
technology investment programmes.