Working Group III: Mitigation

Other reports in this collection Net Economic Costs under Lump-sum Recycling

The simplest way to simulate the recycling of a carbon tax or of auctioned permits is through a lump-sum transfer. Such recycling does not correspond to any likely policy in the real world. However, these modelling experiments provide a useful benchmark to which other forms of recycling can be compared. In addition, they allow an easy intercountry comparison of the impacts of emissions constraint before the impacts of the many types of possible recycling policies are considered.

The comparative study carried out by the Energy Modeling Forum (EMF, Stanford University) is very useful in this respect: EMF-16 (1999) examined the costs of compliance with the Kyoto Protocol as calculated by more than a dozen modelling teams in the USA, Australia, Japan, and Europe (Table 8.4). Most of the models used are general equilibrium models. While not strictly comparable to the marginal technical abatement costs reported in Section 8.2.1, the magnitude of the carbon tax used in these models is determined again by the difference between the costs of marginal source of supply (including conservation) with and without the target. As in the B-U models, this parameter depends in turn on such factors as the size of the necessary emissions reductions, assumptions about the cost and availability of carbon-based and carbon-free technologies, the fossil fuel resource base, and short- and long-term price elasticity. Also important is the choice of base year: a model that provides 3 years to adapt to a constraint beginning in 2010 shows higher marginal abatement costs than one that provides 8 years.

Figure 8.4: Incremental cost (US$/tC) by regions.

Figures 8.4-a to 8.4-d show the incremental cost of reducing a ton of carbon for alternative levels of CO2 reductions in the USA, OECD Europe, Japan, and Other OECD countries (CANZ) when all reductions are made domestically. Note there are two differences with the B-U studies:
  • these numerical experiments do not consider negative cost abatement potentials and presume that if an action is economically justifiable in its own right, it will be undertaken independent of climate-related concerns; and
  • because they incorporate demand elasticity and multiple macroeconomic feedback, these marginal cost curves do not behave as those found in the B-U studies.

A first conclusion that could be drawn from Table 8.4 is that no strict correlations occur between the necessary carbon tax to reach a certain emission target and the GDP loss faced by a country. While the carbon tax in Japan is systematically higher than that for the USA, most studies conclude lower GDP losses in Japan than in the USA. In general, the carbon taxes are highest in OECD Europe and Japan, while the GDP losses are highest in the USA and Other OECD countries. This absence of strict correlation between marginal taxes and GDP losses is explained by the pre-existing energy supply, the structural economic features, and the pre-existing fiscal system. For instance, if a country relies more on renewable energy, and is specialized in low carbon-intensive industry, the impact of a given level of carbon tax will be lower. However, as the burden of emission reductions falls only on a few sectors, the carbon tax for a given target will be higher.

Table 8.4: Energy Modelling Forum Results: carbon tax and GDP losses in 2010 with lump-sum recycling (in 1990 US$)
  Carbon tax in 2010 GDP losses in 2010 (%)
ABARE-GTEM 322 665 645 425   1.96 0.94 0.72 1.96
AIM 153 198 234 147   0.45 0.31 0.25 0.59
CETA 168         1.93      
G-Cubed 76 227 97 157   0.42 1.50 0.57 1.83
GRAPE   204 304       0.81 0.19  
MERGE3 264 218 500 250   1.06 0.99 0.80 2.02
MIT-EPPA 193 276 501 247          
MS-MRT 236 179 402 213   1.88 0.63 1.20 1.83
Oxford 410 966 1074     1.78 2.08 1.88  
RICE 132 159 251 145   0.94 0.55 0.78 0.96
SGM 188 407 357 201          
WorldScan 85 20 122 46          
Source: Weyant (1999). The carbon tax required (either explicitly or implicitly) and the resultant GDP losses are calculated to comply with the prescribed limits under the Kyoto Protocol for four regions under a no trading case: the USA, OECD Europe (OECD-E), Japan, and Canada, Australia, and New Zealand (CANZ).


A second observation from this comparison is that the lump-sum recycling of tax revenue never gives a strong double dividend, which is in accordance with theory and is confirmed by country studies. This is the case in particular for Denmark (Frandsen et al., 1995; Jensen, 1998; Gørtz et al., 1999), France (Bernard and Vielle, 1999a), Finland (Jerkkola et al., 1993; Nilsson, 1999), and Norway (Brendemoen and Vennemo, 1994; Johnsen et al., 1996; Håkonsen and Mathiesen, 1997). These studies demonstrate welfare losses of the same order of magnitude as those of global models, ranging from 0.14% to 1.2% for various levels of emissions abatement ranging from 15% to 25% over a 10-year time period. Only a very few studies conclude to some strong form of double-dividend but do not explain the contradiction between this result and lessons from analytical works.

Other reports in this collection

IPCC Homepage