Technological change across sectors

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 may lead to substantial reductions in carbon prices as well as GDP costs, compared with most of the models in use at the time of the TAR (when technological change was assumed to be included in the baseline and largely independent of mitigation policies and action). Studies without induced technological change show that carbon prices rising to 20 to 80 US$/tCO₂-eq by 2030 and 30 to 155 US$/tCO₂-eq by 2050 are consistent with stabilization at around 550 ppm CO₂-eq by 2100. For the same stabilization level, studies since TAR that take into account induced technological change lower these price ranges to 5 to 65 US$/tCO₂eq in 2030 and 15 to 130 US$/tCO₂-eq in 2050. The degree to which costs are reduced hinges critically on the assumptions about the returns from climate change mitigation R&D expenditures, spill-overs between sectors and regions, crowding-out of other R&D, and, in models including learning-by-doing, learning rates (high agreement, much evidence) [11.5].

Major technological shifts like carbon capture and storage, advanced renewables, advanced nuclear and hydrogen require a long transition as learning-by-doing accumulates and markets expand. Improvement of end-use efficiency therefore offers more important opportunities in the short term. This is illustrated by the relatively high share of the buildings and industry sector in the 2030 potentials (Table TS.17). Other options and sectors may play a more significant role in the second half of the century (see Chapter 3) (high agreement, much evidence) [11.6].

Spill-over effects from mitigation in Annex I countries on Non-Annex I countries

Spill-over effects of mitigation from a cross-sectoral perspective are the effects of mitigation policies and measures in one country or group of countries on sectors in other countries. One aspect of spill-over is so-called ‘carbon leakage’: the increase in CO₂ emissions outside the countries taking domestic measures divided by the emission reductions within these countries. The simple indicator of carbon leakage does not cover the complexity and range of effects, which include changes in the pattern and magnitude of global emissions. Modelling studies provide wide-ranging outcomes on carbon leakages depending on their assumptions regarding returns to scale, behaviour in the energy-intensive industry, trade elasticities and other factors. As in the TAR, the estimates of carbon leakage from implementation of the Kyoto Protocol are generally in the range of 5–20% by 2010. Empirical studies on the energy-intensive industries with exemptions under the EU Emission Trading Scheme (ETS) highlight that transport costs, local market conditions, product variety and incomplete information favour local production, and conclude that carbon leakage is unlikely to be substantial (medium agreement, medium evidence) [11.7].

Effects of existing mitigation actions on competitiveness have been studied. The empirical evidence seems to indicate that losses of competitiveness in countries implementing Kyoto are not significant, confirming a finding in the TAR. 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, but has not so far been quantified in a reliable manner (medium agreement, low evidence) [11.7].

Perhaps one of the most important ways in which spill-overs from mitigation actions in one region affect others is through the effect on world fossil fuel prices. When a region reduces its fossil fuel demand because of mitigation policy, it will reduce the world demand for that commodity and so put downward pressure on the prices. Depending on the response of the fossil fuel producers, oil, gas or coal prices may fall, leading to loss of revenues by the producers, and lower costs of imports for the consumers. As in the TAR, nearly all modelling studies that have been reviewed show more pronounced adverse effects on oil-producing countries than on most Annex I countries that are taking the abatement measures. Oil-price protection strategies may limit income losses in the oil-producing countries (high agreement, limited evidence) [11.7].