For a wide variety of options, the costs of mitigation depend on what regulatory framework is adopted by national governments to reduce GHGs. In general, the more flexibility the framework allows, the lower the costs of achieving a given reduction. A stringent, inflexible carbon-mitigation policy induces greater economic burden than a loose, flexible policy. More flexibility and more trading partners can reduce costs. The opposite is expected with inflexible rules and few trading partners.

Flexibility can be measured as the ability to reduce carbon emissions at the lowest cost, either domestically or internationally, including “when and where” flexibility—which assumes a world emissions budget could be spent optimally over space and time to capture all potential intra- and intertemporal efficiencies. Providing a firm or nation with more flexibility to reach a given target and timetable also reduces costs.

The details as to how flexibility is achieved matter. Many advocates prefer emissions trading over carbon taxes because the quantity of carbon flowing into the atmosphere is fixed, thereby shifting risk from the environment to the economy in the form of price uncertainty. However, some suggestions on the design of emissions trading create relatively high transaction costs that would limit the cost savings of a trading system. Furthermore, the key issue of how the emissions rights should be allocated has yet to be resolved (IPCC, 1996a; Jepma and Munasinghe, 1998).

Another source of flexibility is to include carbon sinks in the policy framework. Recall that a carbon sink is a process that destroys or absorbs GHGs, such as the absorption of atmospheric carbon dioxide by terrestrial (e.g., trees) and oceanic biota. The main anthropogenic sink is tree planting and other forest management actions. Soils and other types of vegetation also provide a potential sink. It is estimated that forests around the world contain roughly about 1,146GtC in their vegetation and soil, with about twice as much in soil as in vegetation (See IPCC, 2000c). For the USA, forests are an important terrestrial sink, given that they cover about 750 million acres (about 300 million hectares). Land use changes in the USA have increased the uptake of carbon to an estimated 200MtCeq.

A few studies found that carbon sequestration through sinks could cost as little as US$25/tonne C in the USA for 150MtCeq (Stavins, 1999). But serious uncertainties remain about how to measure and account for estimates of net carbon. For example, how forest management activities affect soil carbon is unknown, and since forest soils contain over 50% of the total stored forest carbon in the USA, this difference can have a significant impact on estimates. And some researchers have shown that sinks are not as effective as predicted when the interaction of forest reserves and the timber market is accounted for. The more land that is set aside for carbon sinks, the quicker the cycle of harvesting on other forestland, and the less total net carbon sequestration. Some fear that these ambiguities about sinks could divert attention from first-order priorities to second-order technicalities (Jacoby et al., 1998).

To sum up, flexibility in the regulatory framework can play a major role in reducing the costs of GHG emissions reduction. The extent to which particular instruments can be adopted, however, depends on resolving serious political differences as to how the burden of emissions reduction should be shared, between developed countries themselves, and between both developed and developing countries. It is important also not to underestimate the costs of implementing changes in regulatory policy (see Section 7.2.3), especially in developing countries. For some of the practical problems in using flexible instruments in such countries, see Seroa da Motta et al. (1999).

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