11.7 International spillover effects

11.7.1 The nature and importance of spillover

Spillover effects of mitigation in a cross-sectoral perspective are the effects that mitigation policies and measures in one country or group of countries have on sectors in other countries. (Inter-generational consequences, which are the effects of actions taken by the present generation on future generations, are covered in Chapter 2.) Spillover effects are an important element in the evaluation of environmental policies in economies globally linked through trade, foreign direct investment, technology transfer and information. Due to spillover effects, it is difficult to determine precisely the net mitigation potential for sectors and regions, and the effects of policies. An added complication is that the effects may be displaced over time. The measurement of the effects is also complex because effects are often indirect and secondary, although they can also accumulate to make local or regional mitigation action either ineffective or the source of global transformation. Much of the literature recognizes the existence of spillover effects. However, uncertainty and disagreement about time scale, cost, technology development, modelling approaches, policy and investment pathways lead to uncertainty about their extent and therefore the overall mitigation potentials.

The same spillover effect will be seen differently depending on the point of view adopted. Multiple differences between regions and nations imply differing, and perhaps contradictory views, about mitigation policies and their implementation. These differences emanate from the diverse and sometimes distinct natural endowments and social structures of those regions, as well as differences in the financial ability to cope with the costs that may be incurred as a result of the implementation of these policies. Methodologies that are developed for market-based industrialized economies may not be completely relevant for the economies of developing countries.

Some researchers who use general-equilibrium models (e.g. Babiker, 2005) conclude that spillover will, given certain assumptions, render mitigation action ineffective or worse if it is confined to Annex I countries. Other researchers (e.g. Grubb et al., 2002a; Sijm et al., 2004) argue that spillovers from Annex I action, implemented via induced technological change, could have substantial effects on sustainable development, with emission intensities from developing countries being a fraction of what they would be otherwise. ‘However, no global models yet exist that could credibly quantify directly the process of global diffusion of induced technological change.’ (Grubb et al., 2002b, p.303). It is important to empha- size the uncertainties in estimating spillover effects, as well as uncertainties in estimating potential mitigation costs and benefits. In the modelling of spillovers through international trade, researchers rely on different approaches (bottom-up or top-down, for example), different assumptions (perfect/imperfect or ‘Armington’ substitution) and estimates of parameters when signs and magnitudes are disputed. Many of the models used to estimate the costs of mitigation focus on substitution effects and set aside information, policy and political spillovers, as well as the induced development and diffusion of technologies.