7.3.2 Importance of Baselines
18.104.22.168 Development Patterns and Baseline Scenario Alternatives
The baseline case, which by definition gives the emissions of GHGs in the absence
of the climate change interventions being considered, is critical to the assessment
of the costs of climate change mitigation. This is because the definition of
the baseline scenario determines the potential for future GHG emissions reduction,
as well as the costs of implementing these reduction policies. The baseline
scenario also has a number of important implicit assumptions about future economic
policies at the macroeconomic and sectoral levels, including sectoral structure,
resource intensity, prices and thereby technology choice.
Macroeconomic issues that are particularly relevant to developing countries
(such as instability of output, constrained capital, and foreign exchange) similarly
have important implications on GHG emissions through impacts on energy sector
investments and energy-intensive production sectors. These assumptions have
important implications for the efficiency of policy instruments applied to climate
change mitigation strategies and thereby for implementation costs, which are
discussed in Section 7.2.3.
Economic policies have a number of direct and indirect impacts on GHG emitting
sectors. It is generally expected that successful economic policies generate
increased growth and the emissions intensity of the economy then depends on
the mix of products produced as well as on the efficiency with which they are
produced. Economic policies in some cases can imply a more efficient use of
resources, which means that the GHG emission intensity per unit of economic
output decreases. The tendency to increase GHG emissions alongside economic
growth is expected to be particularly strong in countries that presently
have low energy consumption. The challenge is to pursue a development pattern
in which economic development is achieved alongside relatively low GHG emissions
and other environmental impacts.
Many macroeconomic and sectoral policies have important consequences for future
GHG emissions through the impacts on sectoral structure, resource intensity,
prices, and thereby technology choice. Macroeconomic issues like constrained
capital and foreign exchange can lead to low investments in the energy sector,
to major energy-intensive production sectors, or to the high utilization of
pollution-intensive domestic fuels. In the same way, uncertainty or macroeconomic
instability has a tendency to slow down investments because of the risk perceptions
of foreign and national investors, and because of high interest rates.
As noted, GHG emissions are interlinked with general economic development patterns
and economic policies. These policies have an influence both on the baseline
as well as on the effectiveness of the mitigation options, and thereby on GHG
emission levels. It is useful to decompose the GHG emission/GDP
intensity factor into subcomponents that explain the implicit resource components
behind the GHG emissions. One way to achieve this for the energy sector is based
on the so-called Kaya identity (Kaya, 1989):
The first component of the identity, GHG emissions per energy unit, reflects
the GHG emission intensity of energy consumption, which again reflects natural
resource endowment and relative prices of the different energy sources. The
second factor (energy consumption per GDP unit) reflects both the weight of
energy-intensive processes in GDP and the efficiency of the resources used.
The same approach can be used to assess GHG emission intensities of other sectors,
such as agriculture, forestry, waste management, and industry.
Development may follow different paths in countries according to socioeconomic
conditions, resources, national policies and priorities, and institutional issues.
For instance, a rapidly growing economy develops a different composition of
capital stock and energy use pattern compared with a slowly growing country.
A nation following development policies that emphasize greater investments in
infrastructure, such as efficient rail transport, renewable energy technologies,
and energy efficiency improvements, exhibits a low GHG emission trajectory.
However, a nation with substantial coal resources, scarce capital, and a low
level of trade can be pushed towards a development path with high emissions.