A thread that runs through much of the discussion of costs is that of uncertainty.
The whole exercise of estimating mitigation costs is confounded by imprecise
information about baselines, and the costs of mitigation and adaptation measures
(especially future costs). It is critical that such uncertainties be recognized
and conveyed to the policymakers in the most effective manner possible.
As discussed above, uncertainty about baselines is best dealt with by taking
more than one baseline and reporting cost estimates for multiple baselines.
Hence costs should not be given as single values, but as ranges based on the
full set of plausible baselines.
Technological uncertainty is another key area. As noted in Section
22.214.171.124, the autonomous rate of improvement in the energy-to-GDP ratio that
underlies almost all models of climate economics is a clear example of an exogenous
parameter currently subject to uncertainty. This is not easy to overcome by
endogenizing technical change, as practical models currently available have
difficulties in dealing with endogenous technical change. Thus, the way firms
develop new technologies is probably an issue surrounded by a greater uncertainty
than uncertainty on the consumer side. There is a moderate degree of consensus
in the literature on these issues. As with baselines, a scenario approach is
essential and results have to be reported for both optimistic and
pessimistic development paths.
Taking a different approach, the way consumers adopt existing lower carbon
technologies and firms develop new ones can be viewed as key sources of uncertainty
in costing methodologies. These assumptions are crucial, as different valuations
are likely to affect the conclusions. However, the ways in which guidance and
information about these two crucial issues are provided are radically different.
Two different options are available from the consumer side. First, energy oriented
macroeconometric models can provide a price elasticity to show how changes in
the fuel mix are driven by relative prices. No specific direction of technological
change can be derived from this class of model. However, differences in the
results in terms of different energy structures (and different carbon impacts)
could easily emerge. Second, engineering studies can provide some indications
about available lower energy technologies to show the impact on energy demand
and carbon emissions. Hence, from the point of view of uncertainty there is
no a priori reason to choose between bottom-up and top-down models.
Finally there are uncertainties in the estimated costs as well as in the estimation
of the ancillary benefits and/or co-benefits. As the literature on potential
ancillary benefits is continues to develop, current estimates of the net social
impacts of various mitigation policies are necessarily incomplete. Private cost
figures are generally more certain than the external ones, but some imprecision
remains. As with baselines, a scenario approach is recommended, with estimates
prepared for a low value, a mid value, and a high
value. Uncertainty about the external costs is well recognized. As with
the private costs, again a scenario approach that gives a range from low, through
mid, to high values is recommended. In both cases the scenario approach provides
a sensitivity analysis for the costing exercise.
In the crosscutting paper on uncertainty (Moss and Schneider, 2000), a number
of scales are proposed to assess the level of imprecision in the reported impacts,
costs, etc. One that has frequently been used for costing exercises is the three-point
scale that seeks to evaluate the degree of confidence in a particular result
using a scale of: low, medium, and high confidence levels. This has been expanded
to a five-point scale, which asks the researcher to select one of the following:
- very high confidence (over 95% certain);
- high confidence (67%95% certain);
- medium confidence (33%67% certain);
- low confidence (5%33% certain); and
- very low confidence (below 5% certain).
This has not been applied to cost estimates, but it would useful to establish
whether it could be applied and, if so, whether it would provide policymakers
with better guidance as to the reliability of the results.