The United Nations Framework Convention on Climate Change (UNFCCC) has as its
ultimate goal the stabilization of greenhouse gas concentrations in the
atmosphere at a level that will prevent dangerous anthropogenic interference
with the climate system. Whereas mitigation costs play only a secondary
role in establishing the target, they play a more important role in determining
how the target is to be achieved. UNFCCC states that policies and measures
to deal with climate change should be cost-effective so as to ensure global
benefits at the lowest possible costs. This chapter examines the literature
on the costs of greenhouse gas mitigation policies at the national, regional,
and global levels. The net welfare gains or losses are reported, including (when
available) the ancillary benefits of mitigation policies. These studies employ
the full range of analytical tools described in Chapter
7, from the technologically rich bottom-up models to more aggregate top-down
models, which link the energy sector to the rest of the economy.
Models can also be distinguished through their level of geographical disaggregation.
Global models, which divide the world into a limited number of regions, can
provide important insights with regard to international emissions trade, capital
flows, trade patterns, and the implications of alternative international regimes
regarding contributions to mitigation by various regions of the globe. National
models are more appropriate for examining the effectiveness of alternative fiscal
policies in offsetting mitigation costs, the short-term effects of macro shocks
on employment and inflation, and the implications of domestic burden-sharing
rules for various sectors of the economy.
To cope with their wide range of diversity, the studies are grouped into three
categories. The first two focus on the near-to-medium term. In one of these,
the focus is exclusively on domestic policies. In the other, the domestic/international
interface is explored. The third category focuses on the long-term goals of
climate policy and explores cost-effective implementation strategies. That is,
what is the least-cost emission reduction pathway for accomplishing a prescribed
goal? The major conclusions are summarized below.
For any class of models, the emissions baseline is critically important in
determining mitigation costs. It defines the size of the reduction required
for meeting a particular target. The growth rate in carbon dioxide (CO2)
emissions is determined by:
- growth rate in gross domestic product (GDP);
- decline rate of energy use per unit of output, which depends on structural
change in the economy and on technological development; and
- decline rate of CO2 emissions per unit of energy use.
Much of the difference in cost projections can be explained by differences
in these key variables.
Economic studies vary widely in their estimate of mitigation costs (both across
and within countries). These differences can be traced to assumptions about
economic growth, the cost and availability of existing and new technologies
(both on the supply and demand side of the energy sector), resource endowments,
the extent of no regrets options and the choice of policy instruments.
Virtually all analysts agree on the existence of no regrets options.
Such options are typically assumed to be included in the reference (no policy)
scenario by economic modellers. Even so, the overwhelming majority of emission
baselines show that emissions continue to rise well into the future. This suggests
that zero cost options are insufficient to reduce emissions in the absence of
Mitigation costs to meet a prescribed target will be lower if the tax revenues
(or revenues from auctioned permits) are used to reduce existing distortionary
taxes (the so-called double dividend). The preferred policy depends
on the existing tax structure. Most European studies find that cutting payroll
taxes is more efficient than other types of recycling. A significant number
of these studies conclude that, within some range of abatement targets, the
net costs of mitigation policies can be close to zero and even slightly negative.
Conversely, in the USA, studies suggest that reducing taxes on capital is more
efficient, but few models report negative costs.
Policies aimed at mitigating greenhouse gases can have positive and negative
side effects (or ancillary benefits and costs, not taking into account benefits
of avoided climate change) on society. Although this report overall emphasizes
co-benefits of climate policies with other policies (to reflect the reality
in many regions that measures are taken with multiple objectives rather than
climate mitigation alone), the literature that focuses on climate mitigation
uses the term ancillary benefits of specific climate mitigation
measures. In spite of recent progress in methods development, it remains very
challenging to develop quantitative estimates of the ancillary effects, benefits
and costs of GHG mitigation policies. Despite these difficulties, in the short
term, ancillary benefits of GHG policies under some circumstances can be a significant
fraction of private (direct) mitigation costs. 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. The exact magnitude, scale and
scope of these ancillary benefits and costs will vary with local geographical
and baseline conditions. In some circumstances, where baseline conditions involve
relatively low carbon emissions and population density, benefits may be low.
For the studies reviewed here, the biggest share of the ancillary benefits is
related to public health.
Mitigation costs are highly dependent on assumptions about trade in emission
permits. Cost estimates are lowest when there would be full global trading.
That is, when reductions are made where it is least expensive to do so regardless
of their geographical location. Costs increase as the size of the emissions
market contracts. In the case of Annex B trading only, the availability of excess
assigned amount units in Russia and Ukraine can be critical in lowering the
overall mitigation costs. Carbon trade provides some means for hedging against
uncertainties regarding emissions baselines and abatement costs. It also
reduces the consequences of an inequitable allocation of assigned amounts.
It has long been recognized that international trade in emission quota can
reduce mitigation costs. This will occur when countries with high domestic marginal
abatement costs purchase emission quotas from countries with low marginal abatement
costs. This is often referred to as where flexibility. That is,
allowing reductions to take place where it is cheapest to do so regardless of
geographical location. It is important to note that where the reductions take
place is independent upon who pays for the reductions. The chapter discusses
the cost reductions from emission trading for Annex B and full global trading
compared to a no-trading case. All of the models show significant gains as the
size of the trading market is expanded. The difference among models is due in
part to differences in their baseline, the cost and availability of low-cost
substitutes on both the supply and demand sides of the energy sector, and the
treatment of short-term macro shocks. In general, all calculated gross costs
for the non-trading case are below 2% of GDP (which is assumed to have increased
significantly in the period considered) and in most cases below 1%. Annex-B
trading would generally decrease these costs to well below 1 % of GDP for OECD
regions. The extent to which domestic policies relying on revenue recycling
instruments can lower these figures is conditional upon the articulation of
these policies and the design of trading systems.
Emissions constraints in Annex I countries are likely to have so-called spillover
effects on non Annex B countries. For example, Annex I emissions reductions
result in lower oil demand, which in turn leads to a decline in the international
price of oil. As a response, non-Annex I countries may increase their oil imports
and emit more than they would otherwise. Oil-importing non-Annex I countries
may benefit, whereas oil exporters may experience a decline in revenue.
A second example of spillover effects involves the location of carbon-intensive
industries. A constraint on Annex I emissions reduces their competitiveness
in the international marketplace. Recent studies suggest that there will be
some industrial relocation abroad, with non-Annex I countries benefitting at
the expense of Annex I countries. However, non-Annex I countries may be adversely
affected by the decline in exports likely to accompany a decrease in economic
activity in Annex I countries.
The cost estimates of stabilizing atmospheric CO2 concentrations
depend upon the concentration stabilization target, the emissions pathway to
stabilization and the baseline scenario assumed. Unfortunately, the target is
likely to remain the subject of intense scientific and political debate for
some time. What is needed is a decision-making approach that explicitly incorporates
this type of uncertainty and its sequential resolution over time. The desirable
amount of hedging in the near term depends upon ones assessment of the
stakes, the odds, and the costs of policy intervention. The risk premiumthe
amount that society is willing to pay to reduce riskis ultimately a political
decision that differs among countries.
The concentration of CO2 in the atmosphere is determined more by
cumulative rather than year-by-year emissions. A number of studies suggest that
the choice of emissions pathway can be as important as the target itself in
determining overall mitigation costs. A gradual near-term transition from the
worlds present energy system minimizes premature retirement of existing
capital stock, provides time for technology development, and avoids premature
lock-in to early versions of rapidly developing low-emission technology. On
the other hand, more aggressive near-term action would decrease
environmental risks associated with rapid climatic changes, stimulate more rapid
deployment of existing low-emission technologies, provide strong near-term incentives
to future technological changes that may help to avoid lock-in to carbon intensive
technologies, and allow for later tightening of targets should that be deemed
desirable in light of evolving scientific understanding.