An overview of how the different modelling approaches address the main categories of policies is given here in preparation for a discussion of the main assumptions behind study results. The main categories of climate change mitigation options include:

1. Market oriented policies:
• taxes and subsidies;
  
• emission charges;
  
• tradable emission permits;
  
• soft loans; and
  
• market development and/or efforts to reduce transaction costs.

 

2. Technology oriented policies:
   • norms and standards;
     
   • effluent or user charges;
     
   • institutional capacity building; and
     
   • market development efforts (information, transaction cost coverage).

    

3. Voluntary policies:
• ecolabelling; and
  
• voluntary agreements.

 

4. R&D policies:
• research programmes; and
  
• innovation and demonstration.

 

5. Accompanying measures:
   • public awareness;
     
   • information distribution;
     
   • education;
     
   • transport; and
     
   • free consultancy services.

While climate policies can include elements of all four policies, most analytical approaches focus on a few of the options. Economic models, for instance, mainly assess market-oriented policies, and occasionally technology policies related to energy supply options. Engineering approaches primarily focus on supply- and demand-side technology policies. Both of these approaches have opportunities to expand their representation of R&D policies.

Table 7.3 shows the application of market-oriented, technology-oriented and voluntary climate policies in different analytical approaches. The schematic overview covers a large number of applications in global, regional, national, and local analyses. Chapters 8 and 9 of discuss the actual details and specific methods for different assessment levels. A few general conclusions on the representation of different climate policies in the analytical approaches are:

• Market-oriented policies can be examined by macroeconomic models, but only indirectly in technology-driven models through exogenous assumptions. Market descriptions, however, are often stylized representations in many macroeconomic models, which makes it difficult to address transaction costs.
  
• Technology-driven models can assess various technology-oriented policies. Exogenous assumptions on behaviour and preferences, however, need to be supplied to explain market development. This separation of technology data and market behaviour can make implementation cost-assessment difficult.
  
• It is a challenge to integrate market imperfections in CGE and partial equilibrium models, because these models tend to be structured around assumptions of efficient resource allocation. Recent work modelled labour market imperfections in such models (see, e.g., Welsch, 1996; Honkatukia, 1997; Cambridge Econometrics, 1998; European Commission, 1998).
  
• Key presumptions such as technological change, R&D policies and changes in consumer preferences are difficult to assess in both macroeconomic models and technology-driven models.

It is expected that the cost of climate change mitigation policies–all else being equal–decreases with the number of policy categories and options included in the analysis. This means that approaches that are either rich in detail (or facilitate great flexibility) in a number of policy areas can be expected to identify relatively large mitigation potentials and relatively low costs compared with approaches that only address a few instruments or options.

A number of studies have assessed climate change mitigation costs given different regimes of global flexibility mechanism.²¹ Climate change mitigation costs in these different policy regimes depend on the specific definition of the policy instrument, and on assumptions about market scale, competition, and restrictions. It is generally expected that climate change mitigation costs decrease with increasing supply of carbon-reduction projects.²² Restrictions on this supply, or market imperfections in global markets for carbon-reduction projects, have a tendency to increase the “price” of the projects (Burniaux, 1998; Mensbrugge, 1998).

Table 7.3: Application of climate change mitigation policies in different analytical approaches
	Market-oriented policies	Technology-oriented policies	Voluntary-oriented policies
Macroeconomic models
IO models Keynesian CGE	All instruments difficulties with modelling of transaction costs	CGE: Exogenous assumptions; few examples with endogenou sassumptions	Demand functions for ecological values
estimated calibrated
Technology-driven simulation and/or scenario models	Exogenous	Exogenous, learning	Qualitative assumptions
Sectoral models
Partial equilibrium	All instruments	Changes in capital stock	Exogenous demand function for ecological values
Technology-driven models	All instruments modelled through changes in capital stock	Exogenous assumptions on standards and R&D Leaning curves	Investments reflect future expectations on ecological values and policies
optimization simulation
Project assessment approaches
Cost–benefit analysis	All instruments	Exogenous technology data	Exogenous demand function for ecological values
Cost-effectiveness analyses	All instruments	Vintage models
Technology assessment	No instruments

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