7.3.5 Cost Implications of Alternative GHG Emission Reduction Options and
For a wide variety of options, the costs of mitigation depend on what regulatory
framework is adopted by national governments to reduce GHGs. In general, the
more flexibility the framework allows, the lower the costs of achieving a given
reduction. A stringent, inflexible carbon-mitigation policy induces greater
economic burden than a loose, flexible policy. More flexibility and more trading
partners can reduce costs. The opposite is expected with inflexible rules and
few trading partners.
Flexibility can be measured as the ability to reduce carbon emissions at the
lowest cost, either domestically or internationally, including when and
where flexibilitywhich assumes a world emissions budget could be
spent optimally over space and time to capture all potential intra- and intertemporal
efficiencies. Providing a firm or nation with more flexibility to reach a given
target and timetable also reduces costs.
The details as to how flexibility is achieved matter. Many advocates prefer
emissions trading over carbon taxes because the quantity of carbon flowing into
the atmosphere is fixed, thereby shifting risk from the environment to the economy
in the form of price uncertainty. However, some suggestions on the design of
emissions trading create relatively high transaction costs that would limit
the cost savings of a trading system. Furthermore, the key issue of how the
emissions rights should be allocated has yet to be resolved (IPCC, 1996a; Jepma
and Munasinghe, 1998).
Another source of flexibility is to include carbon sinks in the policy framework.
Recall that a carbon sink is a process that destroys or absorbs GHGs, such as
the absorption of atmospheric carbon dioxide by terrestrial (e.g., trees) and
oceanic biota. The main anthropogenic sink is tree planting and other forest
management actions. Soils and other types of vegetation also provide a potential
sink. It is estimated that forests around the world contain roughly about 1,146GtC
in their vegetation and soil, with about twice as much in soil as in vegetation
(See IPCC, 2000c). For the USA, forests are an important terrestrial sink, given
that they cover about 750 million acres (about 300 million hectares). Land use
changes in the USA have increased the uptake of carbon to an estimated 200MtCeq.
A few studies found that carbon sequestration through sinks could cost as little
as US$25/tonne C in the USA for 150MtCeq (Stavins, 1999). But serious uncertainties
remain about how to measure and account for estimates of net carbon. For example,
how forest management activities affect soil carbon is unknown, and since forest
soils contain over 50% of the total stored forest carbon in the USA, this difference
can have a significant impact on estimates. And some researchers have shown
that sinks are not as effective as predicted when the interaction of forest
reserves and the timber market is accounted for. The more land that is set aside
for carbon sinks, the quicker the cycle of harvesting on other forestland, and
the less total net carbon sequestration. Some fear that these ambiguities about
sinks could divert attention from first-order priorities to second-order technicalities
(Jacoby et al., 1998).
To sum up, flexibility in the regulatory framework can play a major role in
reducing the costs of GHG emissions reduction. The extent to which particular
instruments can be adopted, however, depends on resolving serious political
differences as to how the burden of emissions reduction should be shared, between
developed countries themselves, and between both developed and developing countries.
It is important also not to underestimate the costs of implementing changes
in regulatory policy (see Section 7.2.3), especially in
developing countries. For some of the practical problems in using flexible instruments
in such countries, see Seroa da Motta et al. (1999).