EXECUTIVE SUMMARY

Mitigation potentials and costs from sectoral studies

The economic potentials for GHG mitigation at different costs have been reviewed for 2030 on the basis of bottom-up studies. The review confirms the Third Assessment Report (TAR) finding that there are substantial opportunities for mitigation levels of about 6 GtCO₂-eq involving net benefits (costs less than 0), with a large share being located in the buildings sector. Additional potentials are 7 GtCO₂-eq at a unit cost (carbon price) of less than 20 US$/tCO₂-eq, with the total, low-cost, potential being in the range of 9 to 18 GtCO₂-eq. The total range is estimated to be 13 to 26 GtCO₂-eq, at a cost of less than 50 US$/tCO₂-eq and 16 to 31 GtCO₂-eq at a cost of less than 100 US$/tCO₂-eq (370 US$/tC-eq). As reported in Chapter 3, these ranges are comparable with those suggested by the top-down models for these carbon prices by 2030, although there are differences in sectoral attribution (medium agreement, medium evidence).

No one sector or technology can address the entire mitigation challenge. This suggests that a diversified portfolio is required based on a variety of criteria. All the main sectors contribute to the total. In the lower-cost range, and measured according to end-use attribution,^[1] the potentials for electricity savings are largest in buildings and agriculture. When attribution is based on point of emission,^[2] energy supply makes the largest contribution (high agreement, much evidence).

These estimated ranges reflect some key sensitivities to baseline fossil fuel prices (most studies use relatively low fossil fuel prices) and discount rates. The estimates are derived from the underlying literature, in which the assumptions adopted are not usually entirely comparable and where the coverage of countries, sectors and gases is limited.

Bioenergy

These estimates assume that bioenergy options will be important for many sectors by 2030, with substantial growth potential beyond, although no complete integrated studies are available for supply-demand balances. The usefulness of these options depends on the development of biomass capacity (energy crops) in balance with investments in agricultural practices, logistic capacity, and markets, together with the commercialization of second-generation biofuel production. Sustainable biomass production and use imply the resolution of issues relating to competition for land and food, water resources, biodiversity and socio-economic impact.

Unconventional options

The aim of geo-engineering options is to remove CO₂ directly from the air, for example through ocean fertilization, or to block sunlight. However, little is known about effectiveness, costs or potential side-effects of the options. Blocking sunlight does not affect the expected escalation in atmospheric CO₂ levels, but could reduce or eliminate the associated warming. Disconnecting CO₂ concentration and global temperature in this way could induce other effects, such as the further acidification of the oceans (medium agreement, limited evidence).

Carbon prices and macro-economic costs of mitigation to 2030

Diverse evidence indicates that carbon prices in the range 20–50 US$/tCO₂ (US$75–185/tC), reached globally by 2020–2030 and sustained or increased thereafter, would deliver deep emission reductions by mid-century consistent with stabilization at around 550ppm CO₂-eq (Category III levels, see Table 3.10) if implemented in a stable and predictable fashion. Such prices would deliver these emission savings by creating incentives large enough to switch ongoing investment in the world’s electricity systems to low-carbon options, to promote additional energy efficiency, and to halt deforestation and reward afforestation.^[3] For purposes of comparison, it can be pointed out that prices in the EU ETS in 2005–2006 varied between 6 and 40 US$/tCO₂. The emission reductions will be greater (or the price levels required for a given trajectory lower in the range indicated) to the extent that carbon prices are accompanied by expanding investment in technology RD&D and targeted market-building incentives (high agreement, much evidence).

Pathways towards 650ppm CO₂-eq (Category IV levels; see Table 3.10) could be compatible with such price levels being deferred until after 2030. Studies by the International Energy Agency suggest that a mid-range pathway between Categories III and IV, which returns emissions to present levels by 2050, would require global carbon prices to rise to 25 US$/tCO₂ by 2030 and be maintained at this level along with substantial investment in low-carbon energy technologies and supply (high agreement, much evidence).

Effects of the measures on GDP or GNP by 2030 vary accordingly (and depend on many other assumptions). For the 650ppm CO₂-eq pathways requiring reductions of 20% global CO₂ or less below baseline, those modelling studies that allow for induced technological change involve lower costs than the full range of studies reported in Chapter 3, depending on policy mix and incentives for the innovation and deployment of low-carbon technologies. Costs for more stringent targets of 550 ppm CO₂-eq requiring 40% CO₂ abatement or less show an even more pronounced reduction in costs compared to the full range (high agreement, much evidence).

Mitigation costs depend critically on the baseline, the modelling approaches and the policy assumptions. Costs are lower with low-emission baselines and when the models allow technological change to accelerate as carbon prices rise. Costs are reduced with the implementation of Kyoto flexibility mechanisms over countries, gases and time. If revenues are raised from carbon taxes or emission schemes, costs are lowered if the revenues provide the opportunity to reform the tax system, or are used to encourage low-carbon technologies and remove barriers to mitigation (high agreement, much evidence).

Innovation and costs

All studies make it clear that innovation is needed to deliver currently non-commercial technologies in the long term in order to stabilize greenhouse gas concentrations (high agreement, much evidence).

A major development since the TAR has been the inclusion in many top-down models of endogenous technological change. Using different approaches, modelling studies suggest that allowing for endogenous technological change reduces carbon prices as well as GDP costs, this in comparison with those studies that largely assumed that technological change was independent of mitigation policies and action. These reductions are substantial in some studies (medium agreement, limited evidence).

Attempts to balance emission reductions equally across sectors (without trading) are likely to be more costly than an approach primarily guided by cost efficiency. Another general finding is that costs will be reduced if policies that correct the two relevant market failures are combined by incorporating the damage resulting from climate change in carbon prices, and the benefits of technological innovation in support for low-carbon innovation. An example is the recycling of revenues from tradeable permit auctions to support energy efficiency and low-carbon innovations. Low-carbon technologies can also diversify technology portfolios, thereby reducing risk (high agreement, much evidence).

Incentives and investment

The literature emphasizes the need for a range of cross-sectoral measures in addition to carbon pricing, notably in relation to regulatory and behavioural aspects of energy efficiency, innovation, and infrastructure. Addressing market and regulatory failures surrounding energy efficiency, and providing information and support programmes can increase responsiveness to price instruments and also deliver direct emission savings (high agreement, much evidence).

Innovation may be greatly accelerated by direct measures and one robust conclusion from many reviews is the need for public policy to promote a broad portfolio of research. The literature also emphasizes the need for a range of incentives that are appropriate to different stages of technology development, with multiple and mutually supporting policies that combine technology push and pull in the various stages of the ‘innovation chain’ from R&D through the various stages of commercialization and market deployment. In addition, the development of cost-effective technologies will be rewarded by well-designed carbon tax or cap and trade schemes through increased profitability and deployment. Even so, in some cases, the short-term market response to climate policies may lock in existing technologies and inhibit the adoption of more fruitful options in the longer term (high agreement, much evidence).

Mitigation is not a discrete action: investment, in higher or lower carbon options, is occurring all the time. The estimated investment required is around $20 trillion in the energy sector alone out to 2030. Many energy sector and land use investments cover several decades; buildings, urban and transport infrastructure, and some industrial equipment may influence emission patterns over the century. Emission trajectories and the potential to achieve stabilization levels, particularly in Categories A and B, will be heavily influenced by the nature of these investments. Diverse policies that deter investment in long-lived carbon-intensive infrastructure and reward low-carbon investment could maintain options for these stabilization levels at lower costs (high agreement, much evidence).

However, current measures are too uncertain and short-term to deliver much lower-carbon investment. The perceived risks involved mean that the private sector will only commit the required finance if there are incentives (from carbon pricing and other measures) that are clearer, more predictable, longer-term and more robust than provided for by current policies (high agreement, much evidence).

Spillover effects from Annex I action

Estimates of carbon leakage rates for action under Kyoto range from 5 to 20% as a result of a loss of price competitiveness, but they remain very uncertain. The potential beneficial effect of technology transfer to developing countries arising from technological development brought about by Annex I action may be substantial for energy-intensive industries. However, it has not yet been quantified reliably. As far as existing mitigation actions, such as the EU ETS, are concerned, the empirical evidence seems to indicate that competitive losses are not significant, confirming a finding in the TAR (medium agreement, limited evidence).

Perhaps one of the most important ways in which spillover from mitigation action in one region affects others is through its effect on world fossil fuel prices. When a region reduces its local fossil fuel demand as a result of mitigation policy, it will reduce world demand for that commodity and so put downward pressure on prices. Depending on the response from fossil-fuel producers, oil, gas or coal prices may fall, leading to loss of revenue for the producers, and lower costs of imports for the consumers. Nearly all modelling studies that have been reviewed indicate more pronounced adverse effects on countries with high shares of oil output in GDP than on most of the Annex I countries taking abatement action (high agreement, much evidence).

Co-benefits of mitigation action

Co-benefits of action in the form of reduced air pollution, more energy security or more rural employment offset mitigation costs. While the studies use different methodological approaches, there is general consensus for all world regions analyzed that near-term health and other benefits from GHG reductions can be substantial, both in industrialized and developing countries. However, the benefits are highly dependent on the policies, technologies and sectors chosen. In developing countries, much of the health benefit could result from improvements in the efficiency of, or switching away from, the traditional use of coal and biomass. Such near-term co-benefits of GHG control provide the opportunity for a true no-regrets GHG reduction policy in which substantial advantages accrue even if the impact of human-induced climate change itself turns out to be less than that indicated by current projections (high agreement, much evidence).

Adaptation and mitigation from a sectoral perspective

Mitigation action for bioenergy and land use for sinks are expected to have the most important implications for adaptation. There is a growing awareness of the unique contribution that synergies between mitigation and adaptation could provide for the rural poor, particularly in the least developed countries: many actions focusing on sustainable policies for managing natural resources could provide both significant adaptation benefits and mitigation benefits, mostly in the form of carbon sink enhancement (high agreement, limited evidence).