Working Group III: Mitigation

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8.2 Impacts of Domestic Policies

Evaluation of the economic impacts of domestic mitigation policies can no longer be made independently of the linkages between these policies and the international framework. However, it is important to disentangle the mechanisms that are themselves independent of the international regimes from those specifically driven by the interplay between these regimes and domestic policies. In addition, the existence of an international framework does not rule out the importance of domestic policies for addressing the specific problems of each country.

This section basically relies on national studies, including integrated economic regions such as the European Union (EU), but it also reports the results of multiregional studies for the concerned countries or region.

Table 8.1: List of the models referred to in this chapter
Model Region Reference
ABARE-GTEM USA/EU/Japan/CANZ In Weyant, 1999
ADAM Denmark Andersen et al., 1998
in: Weyant, 1999
Japan Kainuma et al., 1999; Kainuma et al., 2000
China Jiang et al., 1998
CETA USA/EU/Japan/CANZ In: Weyant, 1999
E3-ME UK/EU/World Barker 1997, 1998a, 1998b, 1998c, 1999
ELEPHANT Denmark Danish Economic Council, 1997; Hauch, 1999
ECOSMEC Denmark Gørtz et al., 1999
ERIS   Kypreos et al, 2000
G-Cubed USA/EU/Japan/CANZ In: Weyant, 1999
GEM-E3 EU Capros et al., 1999cvv
GEM-E3 Sweden Nilsson, 1999
GemWTrap France/World Bernard and Vielle, 1999a, 1999b, 1999c
GESMEC Denmark Frandsen et al., 1995
GRAPE USA/EU/Japan/CANZ In: Weyant, 1999
IMACLIM France Hourcade et al., 2000a
IPSEP EU Krause et al., 1999
ISTUM Canada Jaccard et al., 1996; Bailie et al., 1998
Kypreos and Barreto, 1999
Canada Loulou and Kanudia, 1998, 1999a and 1999b; Loulou et al., 2000
Ontario (Canada) Loulou and Lavigne, 1996
Quebec, Ontario, Alberta Kanudia and Loulou, 1998b; Kanudia and Loulou, 1998a; Loulou et al., 1998
Canada, USA, India Kanudia and Loulou, 1998b
EU Gielen, 1999; Seebregts et al., 1999a, 1999b; Ybema et al., 1999
Italy Contaldi and Tosato, 1999
Japan Sato et al., 1999
India Shukla, 1996
Kypreos, 1998
USA Interagency Analytical Team, 1997
MARKAL-MATTER EU Gielen et al., 1999b, 1999c
Gielen et al., 1999a; Kram, 1999a. 1999b
Belgium, Germany, Netherlands, Switzerland Bahn et al., 1998
Switzerland, Colombia Bahn et al., 1999a
Denmark, Norway, Sweden Larsson et al., 1998
Denmark, Norway, Sweden, Finland Unger and Alm, 1999
MARKAL Stochastic Quebec Kanudia and Loulou, 1998a
Netherlands Ybema et al., 1998
Switzerland Bahn et al., 1996
MEGERES France Beaumais and Schubert, 1994
MERGE3 USA/EU/Japan/CANZ In: Weyant, 1999
MESSAGE World Messner, 1995
MISO and IKARUS Germany Jochem, 1998
MIT-EPPA USA/EU/Japan/CANZ In: Weyant, 1999
MobiDK Denmark Jensen, 1998
MS-MRT USA/EU/Japan/CANZ In: Weyant, 1999
MSG Norway Brendemoen and Vennemo, 1994
MSG-EE Norway Glomsrød et al., 1992; Alfsen et al., 1995; Aasness et al., 1996; Johnsen et al., 1996
MSG-6 Norway Bye, 2000
MSG and MODAG Norway Aaserud, 1996
NEMS + E-E USA Brown et al., 1998; Koomey et al., 1998; Kydes, 1999
Oxford USA/EU/Japan/CANZ In: Weyant, 1999
POLES USA, Canada, FSU, Japan, EU,Australia, New Zealand Criqui and Kouvaritakis, 1997; Criqui et al., 1999
PRIMES Western Europe Capros et al., 1999a
RICE USA/EU/Japan/CANZ In: Weyant, 1999
SGM USA/EU/Japan/CANZ In: Weyant, 1999v
SPIT UK Symons et al., 1994
SPIT Ireland O’Donoghue, 1997
WorldScan USA/EU/Japan/CANZ In: Weyant, 1999

CANZ: Other OECD countries (Canada, Australia, and New Zealand);
FSU: Former Soviet Union.


8.2.1 Gross Aggregated Expenditures in Greenhouse Gas Abatements in Technology-rich Models

In technology-rich B-U models and approaches, the cost of mitigation is constructed from the aggregation of technological and fuel costs. These include investments, operation and maintenance costs, and fuel procurement, but also included (and this is a recent trend) are revenues and costs from imports and exports, and changes in consumer surplus that result from mitigation actions. In all the studies, it is customary to report the mitigation cost as the incremental cost of some policy scenario relative to that of a baseline scenario. The total cost of mitigation is usually presented as a total net present value (NPV) using a social discount rate selected exogenously (the NPV may be further transformed into an annualized equivalent). Many (but not all) report also the marginal cost of GHG abatement (in US$/tonne of CO2-equivalent), which is the cost of the last tonne of GHG reduced. Chapter 7 discusses cost concepts and discount rates in more depth.

Current B-U analysis can be grouped in three categories:

  • Engineering economics calculations performed technology-by-technology (Krause, 1995; LEAP (1995), Von Hippel and Granada (1993); UNEP, 1994a; Brown et al., 1998; Conniffe et al., 1997). The costs and reductions from the large number of actions are aggregated into whole-economy totals in these studies. Each technology (or other action on energy demand) is assessed independently via an accounting of its costs and savings (investment costs, operational and maintenance cost, fuel costs or savings, and emissions savings). Once these elements are estimated, a unit cost (per tonne of GHG reduction) is computed for each action. The unit costs are then sorted in ascending order, and thus the actions are ordered from least expensive to the most expensive, per tonne of abatement, to create a cost curve. This approach requires a very careful examination of the interactions between the various actions on the cost curve: it is often the case that the cost and GHG reduction attached to an action depends on those of other actions in the same economy. Although the simpler interactions are easily accounted for by careful analysis, there exist many other instances in which complex, multi-measure interactions are very difficult to evaluate without the help of a more complex model that captures the system’s effects. As an example, consider simultaneously: (a) changing the mix of electricity generation, (b) increasing interprovincial trade of electricity, and (c) implementing actions to conserve electricity in several end-use sectors. As each of these three actions has an impact on the desirability and penetration of each other action, such a combination requires many iterations that assess the three types of action separately, before an accurate assessment of the full portfolio can be obtained.
  • Integrated partial equilibrium models that facilitate the integration of multiple GHG reduction options and the aggregation of costs. To achieve this, the majority of B-U studies use the whole energy system (MARKAL, MARKAL-MACRO, MARKAL-MATTER, EFOM, MESSAGE, NEMS, PRIMES1). These models have the advantage of simultaneously computing the prices of energy and of end-use demand as an integral part of their routine. They are based on least-cost algorithms and/or equilibrium computation routines similar to those used in T-D approaches. They increasingly cover both the supply and demand sides, and include mechanisms to make economic demands responsive to the changing prices induced by carbon policies. Furthermore, many implementations of these models are multiregional, and represent explicitly the trading of energy forms and of some energy intensive materials.
  • Simulations models (based on models such as ISTUM) that take into account the behaviour of economic agents when different from pure least cost. To accomplish this, economic agents (firms, consumers) are allowed to make investment decisions that are not guided solely by technical costs, but also by considerations of convenience, preference, and so on. Such models deviate from least-cost ones, and so they tend to produce larger abatement costs than least-cost models, all things being equal otherwise.

The boundaries between these three categories is somewhat blurred. For instance, NEMS and PRIMES do include behavioural treatment of some sectors, and MARKAL models use special penetration constraints to limit the penetration of new technologies in those sectors in which resistance to change has been empirically observed. Conversely, ISTUM has recently been enhanced to allow the iterative computation of a partial equilibrium (the new model is named CIMS).

Several studies go further: they are based on partial equilibrium models in which energy service demands are sensitive to prices. Therefore, even the quantities of energy services may increase or decrease in carbon scenarios, relative to the base case. For these models report not only the direct technical costs, but also the loss or gain in consumer surplus because of altered demands for energy services. The results of this new generation of partial equilibrium B-U models tend to be closer than those of other B-U models to the results of the general equilibrium T-D models, which are also discussed in this chapter. Loulou and Kanudia (1999) argue that, by making demands endogenous in B-U models, most of the side-effects of policy scenarios on the economy at large are captured. When a partial equilibrium model is used, the cost reported is the net loss of social surplus (NLSS), defined as the sum of losses of producers and consumers surpluses (see Chapter 7).

As is apparent from the results presented below, considerable variations exist in the reported costs of GHG abatement. Some of these differences result from the inclusion/exclusion of certain types of cost in the studies (e.g., hidden costs and welfare losses), others from the methodologies used to aggregate the costs, others from the feedback between end-use demand and prices, and still others from genuine differences between the energy systems of the countries under study. However, the most significant cause of cost variations seems to lie not only (see also Chapter 9) in methodological differences, but in the differences in assumptions. Finally, although most recent B-U results consider the abatement of a fairly complete basket of GHG emissions from all energy-related sources, a few essentially focus on CO2 abatement only and/or on selected sectors, such as power generation. In this chapter, only results are reported that have sufficient scope to qualify as GHG abatement costs in most or all sectors of an economy.

To facilitate the exposition of the various results, the rest of this subsection is divided into four parts, as follows:

  • studies that assume a large potential for efficiency gains, even in the absence of a carbon price;
  • other B-U studies for Annex I countries or regions;
  • Annex I studies that account for trade effects; and
  • studies devoted to non-Annex I countries.

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