Working Group III: Mitigation

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Executive Summary

Policies adopted to mitigate global warming will have implications for specific sectors, such as the coal industry, the oil and gas industry, electricity, manufacturing, transportation and households. A sectoral assessment helps to put the costs in perspective, to identify the potential losers, and the extent and location of the losses, as well as to identify the sectors that may benefit. However, it is worth noting that the available literature to make this assessment is limited: there are few comprehensive studies of the sectoral effects of mitigation, compared with those on the macro gross domestic product (GDP) effects, and they tend to be for Annex B countries and regions.

There is a fundamental problem for mitigation policies. It is well established that, compared to the situation for potential gainers, the potential sectoral losers are easier to identify, and their losses are likely to be more immediate, more concentrated, and more certain. The potential sectoral gainers (apart from the renewables sector and perhaps the natural gas sector) can only expect a small, diffused, and rather uncertain gain, spread over a long period. Indeed many of those who may gain do not exist, being future generations and industries yet to develop.

It is also well established that the overall effects on GDP of mitigation policies and measures, whether positive or negative, conceal large differences between sectors. In general, the energy intensity and the carbon intensity of the economies will decline. The coal and perhaps the oil industries are expected to lose substantial proportions of output relative to those in the reference scenarios, but other sectors may increase their outputs yet by much smaller proportions. Energy-intensive sectors, such as heavy chemicals, iron and steel, and mineral products, will face higher costs, accelerated technical or organizational change, or loss of output (again relative to the reference scenario) depending on their energy use and the policies adopted for mitigation. Other industries, including renewables and services, can be expected to benefit in the long term from the availability of financial and other resources that would otherwise have been taken up in fossil fuel production. They may also benefit from reductions in tax burdens, if taxes are used for mitigation, and the revenues recycled as reductions in employer or corporate or other taxes.

Within this broad picture, certain sectors will be substantially affected by mitigation. The coal industry, producing the most carbon-intensive of products, faces almost inevitable decline in the long term relative to the baseline projection. However, technologies still under development, such as carbon dioxide (CO2) sequestration from coal-burning plants and in-situ gasification, could play a future role in maintaining the output of coal whilst reducing CO2 and other emissions. The oil industry also faces a potential relative decline, although this may be moderated by (1) lack of substitutes for oil in transportation and (2) substitution away from solid fuels towards liquid fuels in electricity generation. Modelling studies suggest that mitigation policies may have the least impact on oil, the most impact on coal, with the impact on gas somewhere between; these findings are established but incomplete. The high variation across studies for the effects of mitigation on gas demand is associated with the importance of its availability in different locations, its specific demand patterns, and the potential for gas to replace coal in power generation.

Particularly large effects on the coal sector are expected from policies such as the removal of fossil fuel subsidies or the restructuring of energy taxes so as to tax the carbon content rather than the energy content of fuels. It is a well-established finding that removal of the subsidies would result in substantial reductions in greenhouse gas (GHG) emissions, as well as stimulating economic growth. However, the effects in specific countries depend heavily on the type of subsidy removed and the commercial viability of alternative energy sources, including imported coal; and there may be adverse distributional effects.

There is a wide range of estimates for the impact of implementation of the Kyoto Protocol on the oil market using global models and stylized policies. All studies show net growth in both oil production and revenue to at least 2020 with or without mitigation. They show that implementation leads to a fall in oil-exporting countries’ revenues, GDP, income or welfare, but significantly less impact on the real price of oil than has resulted from market fluctuations over the past 30 years. Of the studies surveyed, the largest fall in the Organization of Petroleum Exporting Countries (OPEC) revenues is a 25% reduction in 2010 below the baseline projection, assuming no permit trading and implying a 17% fall in oil prices; the reduction in OPEC revenues becomes just over 7% with Annex B trading.

However, the studies typically do not consider some or all of the following factors that could lessen the impact on oil production and trade. They usually do not include policies and measures for non-CO2 GHGs or non-energy sources of GHGs, offsets from sinks, and actions under the Kyoto Protocol related to funding, insurance, and the transfer of technology. In addition, the studies typically do not include other policies and effects that can reduce the total cost of mitigation, such as the use of tax revenues to reduce tax burdens, ancillary environmental benefits of reductions in fossil fuel use, and induced technical change from mitigation policies. As a result, the studies may tend to overstate the overall costs of achieving Kyoto targets.

The very likely direct costs for fossil fuel consumption are accompanied by very likely environmental and public health benefits associated with a reduction in the extraction and burning of the fuels. These benefits come from a reduction in the damages caused by these activities, especially the reduction in the emissions of pollutants that are associated with combustion, such as sulphur dioxide (SO2), nitrogen oxides (NOx), carbon monoxide (CO) and other chemicals, and particulate matter. This will improve local and regional air and water quality, and thereby lessen damage to human, animal and plant health and the ecosystem. If all the pollutants associated with GHG emissions are removed by new technologies or end-of-pipe abatement (for example, flue gas desulphurization on a power station combined with removal of all other non-GHG pollutants), then this ancillary benefit will no longer exist. But removal of all pollutants is limited at present and it is expensive, especially for small-scale emissions from dwellings and cars.

Industries concerned directly with mitigation are likely to benefit from action. These include renewable electricity, producers of mitigation equipment (incorporating energy- and carbon-saving technologies), agriculture and forestry producing energy crops, research services producing energy and carbon-saving research and development (R&D). The extent and nature of the benefits will vary with the policies followed. Some mitigation policies can lead to overall economic benefits, implying that the gains from many sectors will outweigh the losses for coal and other fossil fuels, and energy-intensive industries. In contrast, other less well-designed policies can lead to overall losses.

These results come from different approaches and models. A proper interpretation of the results requires an understanding of the methods adopted and the underlying assumptions of the models and studies. Large differences in results can arise from the use of different reference scenarios or baselines. The characteristics of the baseline can also markedly affect the quantitative results of modelling mitigation policy. For example, if air quality is assumed to be satisfactory in the baseline, then the potential for air-quality ancillary benefits in any GHG mitigation scenario is ruled out by assumption. Even with similar or the same baseline assumptions, the studies yield different results. As regards the costs of mitigation, these differences appear to be largely a result of different approaches and assumptions, with the most important being the type of model adopted. Bottom-up engineering models assuming new technological opportunities tend to show benefits from mitigation. Top-down, general equilibrium models appear to show lower costs than top-down, time-series econometric models. The main assumptions leading to lower costs in the models are that:

  • new flexible instruments, such as emission trading and joint implementation, are adopted;
  • evenues from taxes or permit sales are returned to the economy by reducing burdensome taxes; and
  • anacillary benefits, especially from reduced air pollution, are included in the results.

Finally, long-term technological progress and diffusion are largely given in the top-down models; different assumptions or a more integrated, dynamic treatment could have major effects on the results.

It is worth placing the task faced by mitigation policy in an historical perspective. CO2 emissions have tended to grow more slowly than GDP in a number of countries over the last 40 years. The reasons for such trends vary but include:

  • a shift away from coal and oil and towards nuclear and gas as the source of energy;
  • improvements in energy efficiency by industry and households; and
  • service and information-based economic activity.

These trends will be encouraged and strengthened by mitigation policies.

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