2.4.3.1 Definitions of barriers, opportunities and potentials

The terms used in this assessment are those used in the Third Assessment Report (TAR). However, the precise definitions are revised and explanations for the revisions are given in the footnotes.

A ‘barrier’ to mitigation potential is any obstacle to reaching a potential that can be overcome by policies and measures. (From this point onwards, ‘policies’ will be assumed to include policies, measures, programmes and portfolios of policies.) An ‘opportunity’ is the application of technologies or policies^[15] to reduce costs and barriers, find new potentials and increase existing ones. Potentials, barriers and opportunities all tend to be context-specific and vary across localities and over time.

‘Market potential’ indicates the amount of GHG mitigation that might be expected to occur under forecast market conditions, including policies and measures in place at the time.^[16] It is based on private unit costs and discount rates, as they appear in the base year and as they are expected to change in the absence of any additional policies and measures. In other words, as in the TAR, market potential is the conventional assessment of the mitigation potential at current market price, with all barriers, hidden costs, etc. in place. The baseline is usually historical emissions or model projections, assuming zero social cost of carbon and no additional mitigation policies. However, if action is taken to improve the functioning of the markets, to reduce barriers and create opportunities (e.g. policies of market transformation to raise standards of energy efficiency via labelling), then mitigation potentials will become higher.

In order to bring in social costs, and to show clearly that this potential includes both market and non-market costs, ‘economic potential’ is defined as the potential for cost-effective GHG mitigation when non-market social costs and benefits are included with market costs and benefits in assessing the options^[17] for particular levels of carbon prices in US$/tCO₂ and US$/tC-eq. (as affected by mitigation policies) and when using social discount rates instead of private ones. This includes externalities (i.e. non-market costs and benefits such as environmental co-benefits). Note that estimates of economic potential do not normally assume that the underlying structure of consumer preferences has changed. This is the proper theoretical definition of the economic potential, however, as used in most studies, it is the amount of GHG mitigation that is cost-effective for a given carbon price, based on social cost pricing and discount rates (including energy savings but without most externalities), and this is also the case for the studies that were reported in the TAR (IPCC, 2001, Chapters 3, 8 and 9).

There is also a technical potential and a physical potential that, by definition, are not dependent on policies.

The ‘technical potential’ is the amount by which it is possible to reduce greenhouse gas emissions or improve energy efficiency by implementing a technology or practice that has already been demonstrated. There is no specific reference to costs here, only to ‘practical constraints’, although in some cases implicit economic considerations are taken into account. Finally the ‘physical potential’ is the theoretical (thermodynamic) and sometimes, in practice, rather uncertain upper limit to mitigation, which also relies on the development of new technologies.

A number of key assumptions are used to calculate potentials. Some of the major ones are related to:

• Transformation of economic flows to net present values (NVP) or levelised costs. It is consistent here to use the financial rate of return in the discounting of private costs, and a social discount rate in social cost calculations
• Treatment of GHG emission reductions that occur at different points in time. Some studies add quantitative units of GHG reductions over the lifetime of the policy, and others apply discount rates to arrive at net present values of carbon reductions.

The implementation of climate change mitigation policies will involve the use of various economic instruments, information efforts, technical standards, and other policies and measures. Such policy efforts will all have impacts on consumer preferences and taste as well as on technological innovations. The policy efforts (in the short term) can be considered as an implementation cost, and can also be considered as such in the longer term, if transactions costs of policies are successfully reduced, implying that market and social- and economic potentials are increased at a given unit cost.