All climate change policies necessitate some costs of implementation, that is costs of changes to existing rules and regulations, making sure that the necessary infrastructure is available, training and educating those who are to implement the policy as well those affected by the measures, etc. Unfortunately, such costs are not fully covered in conventional cost analyses. Implementation costs in this context are meant to reflect the more permanent institutional aspects of putting a programme into place and are different to those costs conventionally considered as transaction costs. The latter, by definition, are temporary transition costs. Considerable work needs to be done to quantify the institutional and other costs of programmes, so that the reported figures are a better representation of the true costs that will be incurred if the programmes considered in Chapter 6 are actually implemented. This section discusses the issues of implementation and the associated costs further.

Several economic and technical studies suggest that there is a large potential for climate change mitigation with no cost or very low cost (see the review on mitigation costing studies given in Chapters 8 and 9 of this report). Low mitigation costs, for example, may result from energy-efficiency improvements relating to end-use savings, as well as from the introduction of more efficient supply technologies. There is also potential for the introduction of renewable energy technologies with low costs, such as wind turbines, biomass combustion, and solar water-heating systems. The implementation of such low-cost options in many cases implies that a number of current institutional failures and market barriers exist and that policies should be implemented to correct these.

Following this, mitigation cost assessment, in addition to the direct costs of the programmes, should consider implementations costs that arise in the following areas:

• financial market conditions;
  
• institutional and human capacities;
  
• information requirements;
  
• market size and opportunities for technology gain and learning; and
  
• economic incentives needed (grants, subsidies, and taxes).

Only some of these implementation conditions can be included in the formal cost assessment carried out for individual mitigation options. It is generally more complicated to design implementation programmes targeted to many individual actors (e.g., a demand-side management (DSM) scheme or a tradable carbon permits scheme) than those with centralized project planning (e.g., large-scale power sector changes). In this context it is important to distinguish between marginal and non-marginal projects, since the latter may well induce significant price effects.

Implementation policies can be separated into small “marginal” efforts (which create an incentive to change specific behaviour or introduce new technologies), and more general policy efforts, like economic instruments or general educational programmes (which work by changing the general market conditions and the capability of the actors).

Whether an implementation policy is “marginal” or “general” depends on the general market conditions, as well as on the whole design of policy instruments targeted towards climate change mitigation. Given a “general” environment in which energy and financial markets are efficient, competitive, and have little government intervention, and in which the institutional context is perceived as favourable for climate change mitigation programmes, the implementation policies need only take the form of information programmes, energy auditing, and other specific regulation efforts. However, if energy prices are heavily subsidized and financial markets are very limited, the implementation policy may require general price reforms, specific grants, and other institutional changes.

Implementation policies of the “marginal” sort can be integrated relatively easily into project or sector-level mitigation assessment. Implementation assessment includes the costs of different kinds of programmes for information, training, institution strengthening, and the introduction of technical standards. The most difficult part of such an assessment relates to the behaviour of the target groups. A detailed amount of information is needed on the behaviour of specific actors, including households and private companies, to design the most effective policy options.

It is difficult to integrate general implementation policies, like price changes, into specific project and sector assessments. For a DSM programme in the commercial lighting sector, implementation costs include information and training programmes, institutional capacity building, and sometimes also “costs” of changing the market conditions (prices and taxes). The costs of general changes in market prices and tax systems can only be assessed at the economy-wide level. The introduction of energy or carbon taxes or the removal of subsidies can cause significant structural effects that, again, change energy demand and technology choice. Thus, the proper full analysis of the implementation costs necessitates an economy-wide analysis that involves, for example, the use of computable general equilibrium (CGE) models and intersectoral macroeconomic models.

To a limited extent, such feedbacks can be integrated into a project- or sector-level mitigation-cost assessment by the use of shadow prices. These shadow prices reflect underlying social valuations of the use of different goods and services by different agents. By estimating them in a suitable manner some of the implementation costs, such as changes in government income or expenditure, or the higher value of foreign exchange, can be captured in the cost analysis. Importantly, however, implementation costs assessed using shadow prices do not pick up factors such as quantitative or physical constraints on the use and allocation of some resources, particularly financial ones.

A framework to assess implementation costs thus includes the costs of project or policy design, institutional and human capacity costs (management and training), information costs, and monitoring costs. The costs of resources involved should, in each case, be based on economic opportunity costs.

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