Bottom-up studies indicate that substantial low-cost mitigation opportunities exist. According to bottom-up assessments (see Box 7-1) of specific technologies and sectors, half of the potential emissions reductions noted in Table 7-1 may be achieved by the year 2020 with direct benefits exceeding direct costs, and the other half at a net direct cost of up to US$100 per t C_eq (at 1998 prices). However, for reasons described below, the realized potential may be different. These cost estimates are derived using discount rates in the range of 5 to 12%, consistent with public-sector discount rates. Private internal rates of return vary greatly, and are often significantly higher, affecting the rate of adoption of these technologies by private entities. Depending on the emissions scenario, this could allow global emissions to be reduced below year 2000 levels in the period 2010-2020 at these net direct costs. Realizing these reductions involves additional implementation costs, which in some cases may be substantial, the possible need for supporting policies, increased R&D, effective technology transfer, and overcoming other barriers. The various global, regional, national, sector, and project studies assessed in the WGIII TAR have different scopes and assumptions. Studies do not exist for every sector and region.

Cost estimates using bottom-up analyses reported to date for biological mitigation vary significantly and do not consistently account for all significant components of cost. Cost estimates using bottom-up analyses reported to date for biological mitigation vary significantly from US$0.1 to about US$20 per t C in several tropical countries and from US$20 to US$100 per t C in non-tropical countries. Methods of financial analyses and carbon accounting have not been comparable. Moreover, the cost calculations do not cover, in many instances, inter alia, costs for infrastructure, appropriate discounting, monitoring, data collection and implementation costs, opportunity costs of land and maintenance, or other recurring costs, which are often excluded or overlooked. The lower end of the range is assessed to be biased downwards, but understanding and treatment of costs is improving over time. Biological mitigation options may reduce or increase non-CO₂ greenhouse gas emissions.

Projections of abatement cost of near-term policy options implemented without Annex B emissions trade for meeting a given near-term CO₂ emissions target as reported by several models¹⁵ of the global economy (top-down models) vary within regions (as shown by the brown lines in Figure 7-2a for Annex II regions and in Table 7-3a). Reasons for the differentiation among models within regions is due to varying assumptions about future GDP growth rates and changes in carbon and energy intensity (different socio-economic development paths). The same reasons also apply to differences across regions. These models assume that national policy instruments are efficient and consistent with international policy instruments. That is, they assume that reductions are made through the use of market mechanisms (e.g., cap and trade) within each region. To the extent that regions employ a mix of market mechanisms and command and control policies, costs will likely be higher. On the other hand, inclusion of carbon sinks, non-CO₂ greenhouse gases, induced technical change, ancillary benefits, or targeted revenue recycling could reduce costs.

The models used in the above study show that the Kyoto mechanisms are important in controlling risks of high costs in given countries, and thus could complement domestic policy mechanisms, and could minimize risks of inequitable international impacts. For example, the brown and blue lines in Figure 7-2b and Table 7-3b show that the national marginal costs to meet the Kyoto targets range from about US$20 up to US$600 per t C without Annex B trading, and range from about US$15 up to US$150 per t C with Annex B trading, respectively. At the time of these studies, most models did not include sinks, non-CO₂ greenhouse gases, CDM, negative cost options, ancillary benefits, or targeted revenue recycling, which will reduce estimated costs. On the other hand, these models make assumptions which underestimate costs because they assume full use of emissions trading without transaction costs, both within and among Annex B countries, and that mitigation responses would be perfectly efficient and that economies begin to adjust to the need to meet Kyoto targets between the years 1990 and 2000. The cost reductions from Annex B trading will depend on the details of implementation, including the compatibility of domestic and international mechanisms, constraints, and transaction costs. The following is indicative of the broad variation in the change in GDP reported for Annex B countries:

• For Annex II countries, the above modeling studies show reductions in GDP, compared to projected levels in the year 2010. Figure 7-2 indicates that in the absence of Annex B trading losses range from 0.2 to 2% of GDP. With Annex B trading, losses range from 0.1 to 1% of GDP. National studies, which explore a more diverse set of policy packages and take account of specific national circumstances, vary even more widely.
• For most economies in transition, GDP effects range from negligible to a several percent increase, reflecting 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.