10.1.4.2 Cost-effectiveness Analysis
Figure 10.3: Relationship between present discounted costs for stabilizing
the concentration of carbon dioxide in the atmosphere at alternative levels
from two studies. Costs are discounted at 5%/yr over the time period 1990
to 2100. Sources: Manne and Richels (1997) and Edmonds et al. (1997). |
There is an increased interest in cost-minimizing paths
that lead to alternative, stable steady-state concentrations of GHGs in the
atmosphere. This interest stems from the objective of the UNFCCC–to stabilize
the concentration of GHGs. Work has focused primarily on the problem of stabilizing
the concentration of CO2. The focus on CO2 reflects the
importance placed on this gas by the Intergovernmental Panel on Climate Change
Working Group I (IPCC WGI) and the distinctive characteristic of CO2.
As CO2 does not have an atmospheric sink, the net emissions to the
atmosphere must eventually decline indefinitely to maintain any steady-state
concentration (IPCC, 1996a). In contrast, GHGs such as CH4 and N2O,
with atmospheric sinks, have steady-state concentrations associated with steady-state
emissions. Cost-effective paths depend on many factors including reference emissions,
technical options for emissions limitation, the timing and rate of change of
the availability of options, the discount rate, and assumed control mechanisms
and their efficiency. The analysis conducted to date generally does not take
into account that long-term emissions mitigation must take place against a background
of climate change that affects both the nature and composition of economic activity
and the carbon cycle.
Both Manne and Richels (1997) and Edmonds et al. (1997) examined the relationship
between steady-state concentrations of CO2 and associated minimum
costs. Both papers computed the minimum cost of honouring a concentration ceiling.
All cost calculations assumed that all activities throughout the world pursued
emissions mitigation based on a common marginal cost of carbon emissions mitigation.
While real-world implementation strategies are likely to be less efficient,
the choice of a cost-effective assumption for each period provides a unique
benchmark for comparison purposes. Several assumptions regarding cost-effectiveness
over time were examined. The two studies examined three cases:
- global emissions limited to a trajectory prescribed by IPCC (1995), labelled
WGI;
- global emissions limited to a trajectory prescribed by Wigley et al. (1996),
labelled WRE; and
- a model-determined minimum-cost emissions path.
Costs were discounted over time at 5%/yr over the period 1990 to 2100. The
results are displayed in Figure 10.3.
Costs are roughly an order of magnitude greater for concentration ceilings
of 450ppmv than for the 750ppmv ceiling between WGI, WRE, and optimal global
emissions constraints. Furthermore, costs decline sharply as the constraint
is relaxed from 450ppmv to 550ppmv. Relaxation of the constraint from 650ppmv
to 750ppmv reduces costs, but at a more modest rate. As discussed in Chapters
2, 7 and 8, it should
be noted that the total costs of stabilizing atmospheric carbon concentrations
are very dependent on the baseline scenario: for example, for scenarios focusing
on the local and regional aspects of sustainable development costs are lower
than for other scenarios.
Progress has also been made in examining the time path of the value of a tonne
of carbon when the cost of stabilizing the concentration of CO2 is
minimized. Peck and Wan (1996) demonstrated that the results of Hotelling (1931)
could be applied to the problem of minimizing the cost to stabilize the concentration
of CO2 and generalized. They show that to minimize present discounted
cost, the value of a tonne of carbon should rise at the rate of interest (discount
rate). This theorem ensures that the marginal cost of emissions mitigation across
both space and time is equal after taking into account that carbon is naturally
removed from the system. Thus, the initial marginal costs should be relatively
modest, but should rise steadily (at the rate of interest plus the rate of carbon
removal, approximately 1%/yr). The rise in marginal cost continues until it
reaches the marginal cost of a “backstop” technology, one capable
of providing effectively unlimited emissions mitigation at a constant marginal
cost.
All cost-effective policies minimize the cost of stabilization by equalizing
the marginal cost of mitigation across time and space, that is, in all regions,
across all human activities, and across all generations, except to the extent
that non-linearities, non-convexities, and corner solutions exist. The implementation
of real-world regimes to control net emissions to the atmosphere is likely to
be inefficient to some degree for a number of reasons, including, for example,
the problems of “free riding”; cheating; in some cases considerations
of fairness and equity; and monitoring, compliance, and transactions costs.
Some work has been undertaken to compare potential policy regimes with respect
to cost-effectiveness. For example, Chapter 8 shows
the difference in emissions mitigation requirements between various potential
implementations of the Kyoto Protocol and more cost-effective paths. Edmonds
and Wise (1998) examined the cost effectiveness of a strategy that sought to
minimize the costs of monitoring and verification, and premature retirement
of capital stocks, while simultaneously addressing concerns about fairness and
equity. They considered a hypothetical protocol that focused on new investments
in energy technology. They assumed that Annex I nations required new emissions
sources to be carbon-neutral after a prescribed date. Existing sources were
treated as new after a fixed period following their initial deployment. Non-Annex
I nations remained unencumbered until their incomes reached levels comparable
to those in Annex I nations. The authors concluded that the regulatory regime
could stabilize the concentration of GHGs, and that the level at which concentrations
stabilized is determined by the initial date of obligations. The hypothetical
protocol is economically inefficient, however. That is, it does not minimize
the cost of achieving a concentration limit. The authors compare the hypothetical
protocol, which uses a technology regulation to limit emissions, with an alternative
cap-and-trade regime that achieved the same emissions path. Costs in the hypothetical
protocol were approximately 30% greater than in those in the alternative cap-and-trade
regime.
Jacoby et al. (1998) also considered the problem of accession to the Kyoto
Protocol. They reject the idea that there is such a thing as inter-temporal
cost-effectiveness in the context of a century-scale problem. Rather, they begin
with the proposition that a continuous process of negotiation and re-negotiation
is required. They analyze a system of obligations based on per-capita income
that can lead to the stabilization of concentrations of GHGs.
A substantial body of work has considered the implication of technology development
and deployment on the cost of meeting alternative emissions-mitigation obligations.
This line of investigation has a long tradition extending back to, for example,
Cheng et al. (1985). These are discussed in Chapter 8.3
Recent studies, for example by Dooley et al. (1999), Edmonds and Wise (1999),
Grübler et al. (1999), PCAST (1999), Schock et al. (1999), and Weyant and
Olavson (1999), have explored the potential role of a variety of technologies
in both the near term and the longer term. The principal conclusion of this
body of investigation is that the cost of emissions mitigation depends crucially
on the ability to develop and deploy new technology. The value of successful
technology deployment appears to be large with the value depending on the magnitude
and timing of emissions mitigation and on anticipated reference scenario progress.
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