Working Group III: Mitigation

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7.4.2 Income and Other Macroeconomic Effects Macroeconomic Indicators

Major programmes of mitigation or adaptation, particularly those that involve the use of instruments such as energy and carbon taxes, cause changes in the values of key macroeconomic variables. These include growth in GDP, employment, external account balance, and the rate of inflation. As part of the decision-making process, information on all these variables should be provided. Changes in GDP, however, have a special role in the analysis. As noted in Section 7.2.2, under certain circumstances GDP is a valid welfare measure of the value of the goods and services produced in an economy. In so far as this is the case, changes in GDP in real terms (i.e., adjusting for price changes) are also a valid measure of the costs of any mitigation policy. The major qualification is that prices should reflect social costs and that all activities that affect welfare should be included. To the extent that this is not the case a change in GDP is not an accurate measure of the costs of a programme. One common reason for divergence between GDP and welfare is the presence of external effects. Another is the failure to account for the economic value of leisure or household work. The macroeconomic models referred to in Section 7.6, and analyzed in detail in Chapter 8, do not report the costs of market-based programmes for GHG reduction at the microeconomic level, but do so in terms of conventional GDP.14

It must be recognized that the full set of adjustments to GDP measures needed to obtain a correct welfare measure of the costs is difficult to compute. If the policies have ancillary benefits and/or co-benefits, then the overall costs of the measures are less than any fall in GDP. This adjustment can be made (using the methods discussed in Section 7.2.3) to the GDP measure if the data on the ancillary benefits are collected. Other adjustments relate to changes in distributional effects and the shadow pricing of goods and services for which prices do not reflect social costs. Without a detailed microlevel analysis of which sectors are affected, however, these corrections are not possible. Hence it has to be recognized that GDP changes are less accurate as measures of the true costs of mitigation programmes, and that the use of multi-attribute and other similar analyses is even more important for the assessment of such programmes.

Several authors suggest the inclusion of more comprehensive welfare measures in macroeconomic studies to give a better reflection of social costs. The United Nations Commission for Sustainable Development (UNCSD) has developed a system for Green GDP accounting and a list of sustainable development indicators that can be used to include part of the social cost aspects in GDP measures (UNCSD, 1999). The indicators cover social, economic, environmental, and institutional DES aspects. A study by Håkonsen and Mathiesen (1997), based on a CGE model, assessed large differences in welfare implications of three mitigation policy cases, namely:

  • case A, in which carbon tax revenue is recycled lump-sum to the household;
  • case B, in which carbon tax revenue substitutes labour taxes; and
  • case C, in which the model includes ancillary benefits related to local air pollution and the transport sector.

Sen (1999) presents a broader perspective on economic development and emphasizes that economic welfare is not the primary goal of development, but is rather an instrument to achieve the primary goal to enhance human freedom. Freedom, at the same time, is instrumental in achieving development. The studies should consider a broad range of development issues including impacts on economic opportunities, political freedoms, social facilities, transparency guarantees, and protective security.

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