Climate Change 2001:
Working Group III: Mitigation
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The Costs and Ancillary9 Benefits of Mitigation Actions

11. Estimates of cost and benefits of mitigation actions differ because of (i) how welfare is measured, (ii) the scope and methodology of the analysis, and (iii) the underlying assumptions built into the analysis. As a result, estimated costs and benefits may not reflect the actual costs and benefits of implementing mitigation actions. With respect to (i) and (ii), costs and benefits estimates, inter alia, depend on revenue recycling, and whether and how the following are considered: implementation and transaction cost, distributional impacts, multiple gases, land-use change options, benefits of avoided climate change, ancillary benefits, no regrets opportunities10 and valuation of externalities and non-market impacts. Assumptions include, inter alia:

12. Some sources of greenhouse gas emissions can be limited at no or negative net social cost to the extent that policies can exploit no regrets opportunities (Sections 7.3.4, 9.2.1):

13. The cost estimates for Annex B countries to implement the Kyoto Protocol vary between studies and regions as indicated in Paragraph 11, and depend strongly upon the assumptions regarding the use of the Kyoto mechanisms, and their interactions with domestic measures. The great majority of global studies reporting and comparing these costs use international energy-economic models. Nine of these studies suggest the following GDP impacts 12 (Sections 7.3.5, 8.3.1, 9.2.3, 10.4.4):

Annex II countries13 : In the absence of emissions trading between Annex B countries14, the majority of global studies show reductions in projected GDP of about 0.2% to 2% in 2010 for different Annex II regions. With full emissions trading between Annex B countries, the estimated reductions in 2010 are between 0.1% and 1.1% of projected GDP15. These studies encompass a wide range of assumptions as listed in Paragraph 11. Models whose results are reported in this paragraph assume full use of emissions trading without transaction cost. Results for cases that do not allow Annex B trading assume full domestic trading within each region. Models do not include sinks or non-CO2 greenhouse gases. They do not include the CDM, negative cost options, ancillary benefits, or targeted revenue recycling.

For all regions costs are also influenced by the following factors:

The models show that the Kyoto mechanisms are important in controlling risks of high costs in given countries, and thus can complement domestic policy mechanisms. Similarly, they can minimize risks of inequitable international impacts and help to level marginal costs. The global modelling studies reported above show national marginal costs to meet the Kyoto targets from about US$20/tC up to US$600/tC without trading, and a range from about US$15/tC up to US$150/tC with Annex B trading. The cost reductions from these mechanisms may depend on the details of implementation, including the compatibility of domestic and international mechanisms, constraints, and transaction costs.

This reflects opportunities for energy efficiency improvements not available to Annex II countries. Under assumptions of drastic energy efficiency improvement and/or continuing economic recessions in some countries, the assigned amounts may exceed projected emissions in the first commitment period. In this case, models show increased GDP due to revenues from trading assigned amounts. However, for some economies in transition, implementing the Kyoto Protocol will have similar impact on GDP as for Annex II countries.

14. Cost-effectiveness studies with a century timescale estimate that the costs of stabilizing CO2 concentrations in the atmosphere increase as the concentration stabilization level declines. Different baselines can have a strong influence on absolute costs. While there is a moderate increase in the costs when passing from a 750ppmv to a 550ppmv concentration stabilization level, there is a larger increase in costs passing from 550ppmv to 450ppmv unless the emissions in the baseline scenario are very low. These results, however, do not incorporate carbon sequestration, gases other than CO2 and did not examine the possible effect of more ambitious targets on induced technological change 16. Costs associated with each concentration level depend on numerous factors including the rate of discount, distribution of emission reductions over time, policies and measures employed, and particularly the choice of the baseline scenario: for scenarios characterized by a focus on local and regional sustainable development for example, total costs of stabilizing at a particular level are significantly lower than for other scenarios17 (Sections 2.5.2, 8.4.1, 10.4.6).

15. Under any greenhouse gas mitigation effort, the economic costs and benefits are distributed unevenly between sectors; to a varying degree, the costs of mitigation actions could be reduced by appropriate policies. In general, it is easier to identify activities, which stand to suffer economic costs compared to those which may benefit, and the economic costs are more immediate, more concentrated and more certain. Under mitigation policies, coal, possibly oil and gas, and certain energy-intensive sectors, such as steel production, are most likely to suffer an economic disadvantage. Other industries including renewable energy industries and services can be expected to benefit in the long term from price changes and the availability of financial and other resources that would otherwise have been devoted to carbon-intensive sectors. Policies such as the removal of subsidies from fossil fuels may increase total societal benefits through gains in economic efficiency, while use of the Kyoto mechanisms could be expected to reduce the net economic cost of meeting Annex B targets. Other types of policies, for example exempting carbon-intensive industries, redistribute the costs but increase total societal costs at the same time. Most studies show that the distributional effects of a carbon tax can have negative income effects on low-income groups unless the tax revenues are used directly or indirectly to compensate such effects (Section 9.2.1).

16. Emission constraints in Annex I countries have well established, albeit varied “spillover” effects 18 on non-Annex I countries (Sections 8.3.2, 9.3).

The effects on these countries can be further reduced by removal of subsidies for fossil fuels, energy tax restructuring according to carbon content, increased use of natural gas, and diversification of the economies of non-Annex I, oil-exporting countries.

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