The UNFCCC (Article 2) has as its ultimate goal the “stabilisation of greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous anthropogenic interference with the climate system”¹⁴. In addition, the Convention (Article 3.3) states that “policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible costs”¹⁵. This section reports on literature on the costs of greenhouse gas mitigation policies at the national, regional, and global levels. Net welfare gains or losses are reported, including (when available) the ancillary benefits of mitigation policies. These studies employ the full range of analytical tools described in the previous chapter. These range from technologically detailed bottom-up models to more aggregate top-down models, which link the energy sector to the rest of the economy.

In technology-detailed “bottom-up” models and approaches, the cost of mitigation is derived from the aggregation of technological and fuel costs such as: investments, operation and maintenance costs, and fuel procurement, but also (and this is a recent trend) revenues and costs from import and exports.

Models can be ranked along two classification axes. First, they range from simple engineering-economics calculations effected technology-by-technology, to integrated partial equilibrium models of whole energy systems. Second, they range from the strict calculation of direct technical costs of reduction to the consideration of observed technology-adoption behaviour of markets, and of the welfare losses due to demand reductions and revenue gains and losses due to changes in trade.

This leads to contrasting two generic approaches, namely the engineering-economics approach and least-cost equilibrium modelling. In the first approach, each technology is assessed independently via an accounting of its costs and savings. Once these elements have been estimated, a unit cost can be calculated for each action, and each action can be ranked according to its costs. This approach is very useful to point out the potentials for negative cost abatements due to the ‘efficiency gap’ between the best available technologies and technologies currently in use. However, its most important limitation is that studies neglect or do not treat in a systematic way the interdependence of the various actions under examination.

Partial equilibrium least-costs models have been constructed to remedy this defect, by considering all actions simultaneously and selecting the optimal bundle of actions in all sectors and at all time periods. These more integrated studies conclude higher total costs of GHG mitigation than the strict technology by technology studies. Based on an optimization framework they give very easily interpretable results that compare an optimal response to an optimal baseline; however, their limitation is that they rarely calibrate the base year of the model to the existing non optimal situation and implicitly assume an optimal baseline. They consequently provide no information about the negative cost potentials.

Since the publication of the SAR, the bottom-up approaches have produced a wealth of new results for both Annex I and non-Annex I countries, as well as for groups of countries. Furthermore, they have extended their scope much beyond the classical computations of direct abatement costs by inclusion of demand effects and some trade effects.

However, the modelling results show considerable variations from study to study, which are explained by a number of factors, some of which reflect the widely differing conditions that prevail in the countries studied (e.g., energy endowment, economic growth, energy intensity, industrial and trade structure), and others reflect modelling assumptions and assumptions about negative cost potentials.

However, as in the SAR, there is agreement on a no regrets potential resulting from the reduction of existing market imperfections, consideration of ancillary benefits, and inclusion of double dividends. This means that some mitigation actions can be realized at negative costs. The no regrets potential results from existing market or institutional imperfections that prevent cost-effective emission reduction measures from being taken. The key question is whether such imperfections can be removed cost-effectively by policy measures.

The second important policy message is that short and medium term marginal abatement costs, which govern most of the macroeconomic impacts of climate policies, are very sensitive to uncertainty regarding baseline scenarios (rate of growth and energy intensity) and technical costs. Even with significant negative cost options, marginal costs may rise quickly beyond a certain anticipated mitigation level. This risk is far lower in models allowing for carbon trading. Over the long term this risk is reduced as technical change curbs down the slope of marginal cost curves.

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