7.3.4.2 No Regrets Options
Figure 7.3: Trade-off between emissions reduction and economic activity. |
No regrets options are by definition GHG emissions reduction
options that have negative net costs, because they generate direct or indirect
benefits that are large enough to offset the costs of implementing the options.
The costs and benefits included in the assessment, in principle, are all internal
and external impacts of the options. External costs arise when markets fail
to provide a link between those who create the “externality and those affected
by it; more generally, when property rights for the relevant resources are not
well defined. External costs can relate to environmental side-impacts, and distortions
in markets for labour, land, energy resources, and various other areas. By convention,
the benefits in an assessment of GHG emissions reduction costs do not include
the impacts associated with avoided climate change damages. A broader definition
could include the idea that a no regrets policy would, in hindsight, not preclude
(e.g., by introducing lock-in effects or irreversibilities) even more beneficial
outcomes, but this is not taken up in the mitigation literature. The no regret
concept has, in practice, been used differently in costing studies, and has
in most cases not included all the external costs and implementation costs associated
with a given policy strategy.
The discussion of “no regrets” potential has triggered an extensive
debate, which is particularly well covered in the SAR (IPCC 1996a, Chapters
8 and 9). The debate is summarized rather simply in graphical form in Figure
7.3.
Figure 7.3 illustrates the production frontier (F) of
an economy that shows the trade-off between economic activity (Q) and emissions
reduction (E). Each point on the curve shows the maximum level of emissions
reduction for a given level of economic activity. The economy is producing composite
goods, namely an aggregation of all goods and services Q and environmental quality
E, which here represent GHG emissions. Given such an assumption it is possible
to construct a curve F(Q,E) that represents the trade-off between Q and E. For
a given economy at a given time, each point on F shows the maximum size of the
economy for each level of GHG emissions, and therefore it shows the loss in
economic output measured by Q associated with reductions in GHG emissions level
E. If the economy is at a level below F then it is possible to increase the
total production of Q and/or E. If O is taken as the starting point of the economy
in Figure 7.3 then all movements in the “triangle”
OO¢O¢¢ increase environmental quality E and/or economic output
Q, but do not decrease either of these goods. Movements to positions outside
this “triangle” imply a decrease in both economic activity Q and environmental
quality E, or a trade-off in which one of these two goods decreases.
In estimating the costs, the crucial question is where the baseline scenario
is located with respect to the efficient production frontier of the economy
F. If the chosen baseline scenario assumes that the economy is located on the
frontier, as in the efficient baseline case, there is a direct trade-off between
economic activity and emissions reduction. Increased emissions reduction moves
the economy along the frontier to the right. Economic activity is reduced and
the costs of mitigation increase. If the economy is below the frontier, at a
point such as O, there is a potential for combined GHG emissions reduction policies
and improvements of the efficiency of resource use, implying a number of benefits
associated with the policy.
Returning to the implications for the cost of climate change mitigation, it
can be concluded that the no regrets issue reflects specific assumptions about
the working and efficiency of the economy, especially the existence and stability
of a social welfare function, based on a social cost concept. Importantly, the
aggregate production frontier is uncertain, as it is dependent on the distribution
of resources and is changed by technological development. Since it also involves
the weighting of different goods and services by market valuations to form an
aggregate, it is also affected by personal and social preferences that influence
those valuations.
The critical question is how climate change mitigation policies can contribute
to efficient and equitable development of the economy.
In this way it can be argued that the existence of a no regret potential implies:
- that market and institutions do not behave perfectly, because of market
imperfections such as lack of information, distorted price signals, lack of
competition, and/or institutional failures related to inadequate regulation,
inadequate delineation of property rights, distortion-inducing fiscal systems,
and limited financial markets;
- that it is possible to identify and implement policies that can correct
these market and institutional failures without incurring costs larger than
the benefits gained; and
- that a policy decision is made to eliminate selectively those failures that
give rise to increased GHG emissions.
In other words, the existence of market and institutional failures that give
rise to a no regrets potential is a necessary, but not a sufficient, condition
for the potential implementation of these options. The actual implementation
also requires the development of a policy strategy that is complex and comprehensive
enough to address these market and institutional failures and barriers.
The costs that actually face private agents are different from the social costs,
and therefore the market potential (as defined in Chapter
5) may be very different from the potential based on social costs. This
implies that the actual implementation of no regrets options requires that it
be possible to introduce policies that “narrow the gap” between the
market potential and a potential estimated on the basis of social costs. Cameron
et al. (1999) give a systematic overview of market failures and market
barriers important to the implementation of no regrets options.
Returning to the implications for climate change mitigation cost, it can be
concluded that the no regrets issues reflect specific assumptions about the
location of the economy in relation to the efficient production frontier. Bottom-up
studies have (in most cases on the basis of a specific assessment of production
practices in main GHG emitting sectors, such as the energy sector) assumed that
the economy in the baseline case operates below the optimal frontier and that
mitigation policies imply an increased efficiency of technologies. The costs
of implementing mitigation policies are then partly offset by direct and indirect
benefits, which sometimes are large enough to generate a negative cost result.
Top-down approaches, however, assume that the economy is efficient in the baseline
case and mitigation policies therefore always imply a trade-off with other goods
and thereby have a positive cost.
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