The opportunity to mitigate GHG concentrations by removing or modifying barriers to the spread of technology may be viewed as an association between different types or categories of barriers and different concepts of the potential for GHG mitigation (Figure 5.1). Each concept of the potential represents a hypothetical projection that might be made today regarding the extent of GHG mitigation over time into the future. The bottom line, labelled “market potential” indicates the amount of GHG mitigation that might be expected to occur under forecast market conditions, with no changes in policy or implementation of measures whose primary purpose is the mitigation of GHGs.

At the other extreme, the “technical potential” describes the maximum amount of GHG mitigation achievable through technology diffusion. This is a hypothetical projection of the extent of GHG mitigation that could be achieved over time if all technically feasible technologies were used in all relevant applications, without regard to their cost or user acceptability.

By definition, it can be said that whatever physical, cultural, institutional, social, or human factors are preventing the progress from the market potential to the technical potential are “barriers” to the mitigation of GHG via technology diffusion. Since, however, the ultimate goal is to understand policy options for mitigation, it is useful to group these barriers in a way that facilitates understanding the kinds of policies that would be necessary to overcome them. As these different categories of barriers are created, there is a corresponding creation of intermediate conceptions of the potential for GHG mitigation. Starting at the bottom, it is possible to imagine addressing barriers (often referred to as “market failures”) that relate to markets, public policies and other institutions that inhibit the diffusion of technologies that are (or are projected to be) cost-effective for users without reference to any GHG benefits they may generate. Amelioration of this class of market and institutional imperfections would increase GHG mitigation towards the level that is labelled as the “economic potential”. The economic potential represents the level of GHG mitigation that could be achieved if all technologies that are cost-effective from consumers’ point of view were implemented. Because economic potential is evaluated from the consumer’s point of view, cost-effectiveness would be evaluated using market prices and the private rate of time discounting, and also take into account consumers’ preferences regarding the acceptability of the technologies’ performance characteristics.³

Of course, elimination of all of these market and institutional barriers would not produce technology diffusion at the level of the technical potential. The remaining barriers, which define the gap between economic potential and technical potential, are usefully placed in two groups separated by a socioeconomic potential. The first group consists of barriers derived from people’s preferences and other social and cultural barriers to the diffusion of new technology. That is, even if market and institutional barriers are removed, some GHG-mitigating technologies may not be widely used simply because people do not like them, are too poor to afford them, or because existing social and cultural forces operate against their acceptance. If, in addition to overcoming market and institutional barriers, this second group of barriers could be overcome, the “socioeconomic potential” would be achieved. Thus, the socioeconomic potential represents the level of GHG mitigation that would be achieved if all technologies that are cost effective (on the basis of a social rather than a private rate of discount) are implemented, without regard to existing concerns about their performance characteristics, and without regard to social and cultural obstacles to their use.

Finally, even if all market, institutional, social, and cultural barriers were removed, some technologies might not be widely used simply because they are too expensive. That is, the definition of socioeconomic potential includes the requirement that technologies be cost-effective. Elimination of this requirement would therefore allow a progression to the level of “technical potential”, the maximum technologically feasible extent of GHG mitigation through technology diffusion.

An issue arises as to how to treat the relative environmental costs of different technologies within this framework. Because the purpose of the exercise is ultimately to identify opportunities for global climate change policies, the technology potentials are defined without regard to GHG impacts. Costs and benefits associated with other environmental impacts would be part of the cost-effectiveness calculation underlying economic potential only insofar as existing environmental regulations or policies internalize these effects and thereby impose them on consumers. Broader impacts might be ignored by consumers, and hence not enter into the determination of economic potential, but they would be incorporated into a social cost-effectiveness calculation. Thus, to the extent that other environmental benefits make certain technologies socially cost-effective, even if they are not cost-effective from a consumer’s point of view, the GHG benefits of diffusion of such technologies would be incorporated in the socioeconomic potential.

The technical potential can be illustrated with reference to the fuel cell as a power source for private vehicles. Current fuel cell technology, making use of hydrogen manufactured from natural gas, can offer GHG emission reductions of around 50%-60% relative to conventional vehicles. This gives some indication of the current technical potential for mitigation. It is imaginable that in the future, fuel cell vehicles using hydrogen or other fuels from non-fossil sources would have even lower GHG emissions, on a full fuel cycle basis (Michaelis, 1997c). Thus, the technical potential of fuel cells for GHG mitigation is significant, and is expected to improve over time, as shown in Figure 5.1, through scientific discovery and technological development. However, the Energy Technology Support Unit (ETSU, 1994) notes numerous challenges that would have to be overcome before such vehicles could enter widespread use and offer more substantial emission reductions. In other words, the current market potential is very small at best. The large gap between the market and technical potentials (at the present time) can be understood in terms of specific barriers. Some of these relate to technology performance and cost, while others have to do with fitting non-fossil fuels into the existing infrastructure. The need to improve the cost and performance of the technology would represent barriers separating the technical and socioeconomic potentials. To the extent that the diffusion of cost-effective fuel cells is or will be limited by rigidities in the existing infrastructure, these could be considered barriers separating the economic and socioeconomic potentials for this technology.

The economic potential can be similarly illustrated, for example, with reference to energy conservation opportunities in buildings. Engineering-based analysis in the United States and other countries indicates that measures such as replacing tungsten filament bulbs with compact fluorescent lamps (CFLs), insulating hot water tanks, and introducing more energy-efficient refrigerators, could reduce residential electricity by about 40% and deliver a net saving to consumers (IPCC, 1996). To the extent that achievement of these savings is limited by market and institutional imperfections (such as imperfect information or misplaced incentives), the savings they offer represent the economic potential of these technologies. But even if all of these imperfections were corrected, these technologies would not be used in all possible applications. Some people will not use them because they find them inferior on aesthetic or performance grounds. Other potential users will judge that the high private discount rates they believe are appropriate to this kind of investment render the savings too small to justify the high up-front cost. If, in addition to overcoming market and institutional imperfections, these aspects of consumer preferences were ignored, the socioeconomic potential could then be identified. Finally, even this level of GHG mitigation is smaller than the technical potential, as illustrated in Figure 5.1, because many technologies that are available, such as rooftop solar photovoltaic electricity supplies, would not pay for themselves in energy savings even at the social discount rate.

Table 5.1 begins with the baseline level of GHG mitigation that could be achieved without policy intervention (market potential), and then examines in more detail the nature of the barriers and opportunities that are encountered as greater mitigation is pursued, i.e., move towards the technical potential in Figure 5.1. Identification of the nature of the barriers and opportunities that separate each of the levels is necessary in order to formulate policy responses to overcome the barriers. The barriers to the achievement of economic potential are market and other institutional failures in the markets for technology, and government policies that distort these markets. These include market failures related to information and capital markets, subsidies for energy use. and trade barriers that inhibit the import of energy-efficient technologies. In principle, policies can be designed to address each of these market or government failures.

Table 5.1: Taxonomy of barriers and opportunities
Source of barrier and/or opportunity	Examples of market and/or institutional imperfections and opportunitiesa	Examples of social & cultural barriers and opportunities
Prices	Missing markets (market creation) Distorted prices (rationalization of prices)
Financing	Financial market imperfections (sector reform or restructuring of economy) Constraints of official development assistance (ODA) (removing tied aid and/or better targeting of ODA)	Long time and high transaction costs for small projects (pooling of projects)
Trade and environment	Tariffs on imported equipment and restrictive regulations (rationalization of customs tariffs)
Market structure and functioning		Circumstances requiring rapid payback (fuel subsides) Weaknesses of suppliers in market research (form associations to support market research)
Institutional frameworks	Transactions costs Inadequate property rights (improve land tenure) Misplaced incentives Distorted incentives	Institutional structure and design (restructuring of firms) National policy styles (shifting balance of authority) Lack of effective regulatory agencies (informal regulation)
Information provision	Public goods nature of information (increase public associations) Adoption externality (build demonstration projects)
Social, cultural, and behavioural norms and aspirations		Inadequate consideration of human motivations and goals in climate mitigation (modify social behaviour) Individual habits (targeted advertising)
a: Remarks in parenthesis indicate opportunities, e.g., missing markets denote an opportunity for the creation of markets.

Identification of the opportunities to achieve economic potential is important, because removal of these barriers in a cost-effective way would be desirable even if global climate change (GCC) were not a policy concern. That is, if policies can be devised to overcome market and institutional barriers to the use of cost-effective technologies with desirable performance characteristics, consumers would be better off even before any consideration of GCC benefits. The barriers to the achievement of socioeconomic potential include social and cultural constraints, as well as economic forces that cannot be characterized as imperfections of markets or of other institutions. Policies to mitigate the market and institutional imperfections separating market and economic potential constitute “no regrets” policies, i.e., policies that societies would not regret implementing no matter what is learned later about the severity of the GCC problem.

The barriers to the achievement of socioeconomic potential include social and cultural constraints, as well as economic forces that cannot be characterized as imperfections of markets or of other institutions. Other barriers to socioeconomic potential relate to consumer preferences, including attitudes towards uncertainty. Uncertainty about whether estimates of new technologies and cost savings will actually come to pass limits the adoption of new technologies; such hesitation in the face of uncertainty is completely rational given the irreversible nature of many energy-conservation investments (Hassett and Metcalf, 1993, 1994). Even putting aside the effects of uncertainty, private decision makers may utilize discount rates to assess the value of future energy savings that are significantly higher than the discount rates applied in the engineering-economic calculations to indicate that particular technologies are cost-effective. Such higher discount rates make the energy savings less valuable and, hence, may lead to a conclusion that the technologies are not cost-effective for a particular user.

Socioeconomic potential also recognizes that the economic feasibility of particular technologies is constrained by social structures and cultural forces; it is possible to consider changing those structures because of GCC objectives. For example, if the land-use and transportation systems of the USA could be radically transformed, the potential for improvement of energy efficiency in the transportation sector would be much greater than anything that could be achieved taking those structures as given (see Section 5.4 below). Hence, part of the gap between the economic and socioeconomic potential represents the savings that could result from changes in the structure of such systems.

The last set of barriers to achieving technical potential relate to the cost and performance of the technologies. These can be improved upon by solving scientific and technological problems, so policies to overcome this category of barriers could be aimed at fostering the research and development (R&D) process, either in the public or private sectors. In addition, because production costs typically fall as experience with a particular technology accumulates, policies that foster adoption of new technologies can, over time, produce cost reductions and performance improvements. The effect of such improvements would be to make the technologies more cost-effective and consumer-favoured, thus moving both the economic and socioeconomic potentials towards the level of the technical potential.

Figure 5.1 provides illustrative examples of the barriers that separate one potential from another. Actions to overcome these barriers need not necessarily take place in the order of the potentials. R&D could take place to approach the technical potential at the same time that institutional and subsidy reforms are being carried out to approach the socioeconomic and economic potentials respectively. While the figure denotes a hierarchy in terms of the potentials, there is no hierarchy in the interventions that might be pursued to overcome the barriers. Furthermore, an intervention may overcome more than one barrier that need not be in a hierarchical order either, e.g., the provision of information could address all categories of barriers.

Because some interventions may be more effective than others, the gaps between the various potentials are likely to be reduced to varying degrees as well. Thus, the gap between the socioeconomic and economic potential may completely disappear, and yet that between the economic and market potential may remain in place. This indicates that while the market potential has moved up, it still could be improved by removing what economists refer to as market failures.

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