Chapters 8 and 9 of Second Assessment Report (SAR) (IPCC, 1996) reviewed the literature on costs of greenhouse gas (GHG) mitigation prior to 1995. At that period, the debate was dominated by the differences in results from “bottom-up” (B-U) models and “top-down” (T-D) models. The former contain more details of technology and physical flows of energy, and the latter give more consideration to linkages between a given sector and a set of measures and macroeconomic parameters like gross domestic product (GDP) and final household consumption.

B-U models showed that energy efficiency gains of 10%–30% above baseline trends could be realized at negative to zero net costs over the next two or three decades. However, the costs of stabilizing emissions at 1990 levels reported by T-D analysis for Organization for Economic Co-operation and Development (OECD) countries were less optimistic, in the range –0.5% to 2% of GDP. SAR devoted much effort to explain the reasons for these differences and their meaning for policymakers. B-U models identify negative-cost mitigation potentials because of the difference between the best available techniques and those currently in use; the key question is then the extent to which market imperfections that inhibit access to these potentials can be removed cost-effectively by policy initiatives. T-D analyses focus on the overall macroeconomic effect of new incentive structures, such as carbon taxes or subsidies for energy efficiency; their results reflect a judgement on the capacity of non-price policies (market reforms, information, capacity building) to enhance the effectiveness of such signals to decarbonize the economy. The lesson is that, for a given abatement target, the content of the policy mix (carbon tax, carbon-energy tax, or auctioned emissions trading system) is as important as the assumptions regarding technology.

A second lesson of SAR is that, for both B-U and T-D models, the differences in cost assessment usually result from differences in the definition of baseline scenarios and in the time frame within which a given abatement target has to be met. Less often, they result from divergences in the costs of achieving this target from the same baseline scenario. This, in turn, relates to:

• the structural features of the scenario (assumptions about population, the rate and structure of economic growth, consumption patterns, and technology development paths); and
  
• its level of suboptimality (higher efficiency in the baseline scenario results in higher mitigation-costs estimates for a given target, while the existence of market failure, which enhances GHG emissions, or of fiscal distortions provides a possibility for economic and environmental double dividends).

The third lesson is that some of the determinants of costs are beyond the field of energy and environmental policy stricto sensu. This is why SAR emphasizes the importance of developing multiple baseline scenarios to support policymaking. This issue of the multiplicity of baseline scenarios is specifically important for the developing countries and countries with economies in transition. These regions were underinvestigated compared with the number of studies available for OECD countries.

Since SAR, the most important advance is the treatment of new topics related to linkages between national policies and the international framework of these policies in the context of the pre-Kyoto and post-Kyoto negotiation process. Of specific interest is the articulation between international emissions trading systems and domestic policies (taxes, domestic emissions trading, and standards). This link has been made in national models and global models that provide a description of relationships among various regions of the world. Some models represent solely GHG emissions trading, while others also incorporate energy flows, trade of other goods, and capital flows. In this context, while SAR discussed only the carbon leakage between abating and non-abating economies, an increasing number of studies have captured spillover effects (see Box 8.1) such as those triggered by trade effects and the modification of the capital flows.

A second evolution is the emergence of studies on the local and regional ancillary benefits of climate policies.

The third evolution is the development of studies on various abatement pathways towards given long-run concentration targets and on rules for emissions quota allocation among countries. These approaches, more dynamic in nature, capture the consequences of various abatement timetables on the behaviour of carbon prices and on the sharing of the overall burden among countries. They provide basic information about the equity of various designs of climate policies.

This chapter covers studies on global assessments of the net cost of GHG mitigation policies irrespective of the avoided costs of climate change: total mitigation expenditure, and welfare gains or losses resulting from the economic feedbacks of mitigation policies and from their environmental co-benefits.

A specific effort has been devoted to ensure a balanced representation of global models and national models. Global models incorporate linkages between regions and countries; they cannot, however, represent very precisely the specific characteristics of each country, such as differences in national fiscal policies, in regional arrangements, and in socioeconomic constraints. Results from these models are widely diffused within the scientific community through publications in international journals, but are less utilized by national policymakers. The second type of study uses models the scope of which is limited to within the national frame. Results of such studies are more frequently reported in local languages and are more reflective of national debates and the specifics of the country in question. They incorporate linkages with the rest of the world economy, although in a more simplistic manner than the global models.

The results of these studies group into three large clusters. Section 8.2 reviews the studies that entail near-to-mid term impacts of domestic mitigation policies on factors such as GDP, welfare, income distribution, and social and environmental co-benefits at the local and national levels. Section 8.3 contains the results of mitigation studies that examine the interface between these domestic policies and the international context: international trade regimes, and spillover effects of the implementation of mitigation measures by a country or a block of nations on other countries. Section 8.4 reviews studies that focus on social, environmental, and economic impacts of alternate pathways to meet a range of concentration stabilization pathways beyond the Kyoto Protocol. They encompass a longer time horizon and do not incorporate details of macro economic policies, but highlight the question of technological change over the long run and the consequences of various sets of national targets.

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