Costs, benefits, concepts including private and social cost perspectives and relationships with other decision-making frameworks

There are different ways of defining the potential for miti-gation and it is therefore important to specify what potential is meant. ‘Potential’ is used to express the degree of GHG reduction that can be achieved by a mitigation option with a given cost per tonne of carbon avoided over a given period, compared with a baseline or reference case. The measure is usually expressed as million tonnes carbon- or CO₂-equivalent emissions avoided compared with baseline emissions [2.4.3].

Market potential is the mitigation potential based on private costs and private discount rates^[6], which might be expected to occur under forecast market conditions, including policies and measures currently in place, noting that barriers limit actual uptake.

Economic potential is the amount of GHG mitigation, which takes into account social costs and benefits and social discount rates^[7] assuming that market efficiency is improved by policies and measures and barriers are removed. However, current bottom-up and top-down studies of economic potential have limitations in considering life-style choices and in including all externalities such as local air pollution.

Technical potential is the amount by which it is possible to reduce GHG emissions by implementing a technology or practice that has already been demonstrated. There is no specific reference to costs here, only to ‘practical constraints’, although implicit economic considerations are taken into account in some cases. (high agreement, much evidence) [2.4.3].

Studies of market potential can be used to inform policy makers about mitigation potential with existing policies and barriers, while studies of economic potentials show what might be achieved if appropriate new and additional policies were put into place to remove barriers and include social costs and benefits. The economic potential is therefore generally greater than the market potential.

Mitigation potential is estimated using different types of approaches. There are two broad classes – “bottom-up” and “top-down” approaches, which primarily have been used to assess the economic potential:

• Bottom-up studies are based on assessment of mitigation options, emphasizing specific technologies and regulations. They are typically sectoral studies taking the macro-economy as unchanged. Sector estimates have been aggregated, as in the TAR, to provide an estimate of global mitigation potential for this assessment.
• Top-down studies assess the economy-wide potential of mitigation options. They use globally consistent frameworks and aggregated information about mitigation options and capture macro-economic and market feedbacks.

Bottom-up studies in particular are useful for the assessment of specific policy options at sectoral level, e.g. options for improving energy efficiency, while top-down studies are useful for assessing cross-sectoral and economy-wide climate change policies, such as carbon taxes and stabilization policies. Bottom-up and top-down models have become more similar since the TAR as top-down models have incorporated more technological mitigation options (see Chapter 11) and bottom-up models have incorporated more macroeconomic and market feedbacks as well as adopting barrier analysis into their model structures.