6. Costs of mitigation

The big question for public policy: how expensive will it be to do something about the problem? This complex topic has several subtopics, including:

No-regrets options — How much can be done for zero net cost? Why hasn’t it been done already?
Job creation — How do the jobs created by climate policy compare to the jobs lost, in numbers, skill levels, and locations?
Endogenous technology and path dependence — How do the costs of new low-carbon technologies change as we spend money on them and gain experience? What does this imply for long-term cost predictions?

Climate modelling with endogenous technical change: Stochastic learning and optimal greenhouse gas abatement in the PAGE2002 model
Stephan Alberth and Chris Hope
Energy Policy (2007) 335(3): 1795-1807.
This paper looks at the impact of ETC on the costs and benefits of different abatement strategies using a modified version of the PAGE2002 model. For most standard abatement paths there would be an initial “learning investment” required that would substantially reduce the unit costs of CO₂ abatement as compared to a business as usual scenario. Furthermore, optimising an abatement program where ETC has been included leads to an increase in cost uncertainty during the period of widespread CO₂ abatements due to our lack of knowledge of the learning investments involved. Finally, the inclusion of ETC leads to a slightly deferred optimised abatement path followed by a rapid abatement program. Together, the results draw attention to the possibilities of 'uncovering uncertainty' through proactive abatements. ‘Learning about learning’ could become an important consideration for any plan to optimise future abatements.

The costs of Kyoto for the U.S. economy
Terry Barker and Paul Ekins
The Energy Journal (2004) 25(3): 53.
The high costs for the U.S. economy of mitigating climate change have been cited by the Bush administration as one of the reasons for rejecting U.S. ratification of the Kyoto Protocol. A range of cost estimates are assessed in the IPCC s third report (2001), but they are hedged with so many qualifications that it is not easy to reach useful conclusions. This paper organises some of the quantitative information on costs of greenhouse gas mitigation for the U.S. published before the US rejection of Kyoto. The aim is to put them in a wider context, e.g., allowing for non-climate benefits, and to draw conclusions that are robust in the face of the uncertainties. Important lessons can be drawn for how costs can be reduced in any future international commitment by the US to reduce emissions. Provided policies are expected, gradual and well designed (e.g., through auctioned Annex I tradable permits with revenues used to reduce burdensome tax rates) the net costs for the U.S. of mitigation are likely to be insignificant, that is within the range +/-1% of GDP.

Achieving the G8 50% target: Modelling induced and accelerated technological change using the macro-econometric model E3MG
Terry Barker, S. Serban Scrieciu and Tim Foxon
Climate Policy (2008) Special Issue 8: S30-S45.
This article assesses the feasibility of a 50% reduction in CO₂ emissions by 2050 using a large-scale Post Keynesian simulation model of the global energy–environment–economy system. The main policy to achieve the target is a carbon price rising to $100/tCO₂ by 2050, attained through auctioned CO₂ permits for the energy sector, and carbon taxes for the rest of the economy. This policy induces technological change. However, this price is insufficient, and global CO₂ would be only about 15% below 2000 levels by 2050. In order to achieve the target, additional policies have been modelled in a portfolio, with the auction and tax revenues partly recycled to support investment in low-GHG technologies in energy, manufacturing and transportation, and ‘no-regrets’ options for buildings. This direct support supplements the effects of the increases in carbon prices, so that the accelerated adoption of new technologies leads to lower unit costs. In addition the $100/tCO₂ price is reached earlier, by 2030, strengthening the price signal. In a low-carbon society, as modelled, GDP is slightly above the baseline as a consequence of more rapid development induced by more investment and increased technological change .

Market failures and barriers as a basis for clean energy policies
Marilyn A. Brown
Energy Policy (2001) 29(14): 1197-207.
This paper provides compelling evidence that large-scale market failures and barriers prevent consumers in the United States from obtaining energy services at least cost. Assessments of numerous energy policies and programs suggest that public interventions can overcome many of these market obstacles. By articulating these barriers and reviewing the literature on ways of addressing them, this paper provides a strong justification for the policy portfolios that define the “Scenarios for a Clean Energy Future,” a study conducted by five National Laboratories.

Measuring the value of induced technological change
Reyer Gerlagh
Energy Policy (2007) 35: 5287–5297.
In this paper, we analyze the value of induced technological change (ITC) for cutting the costs of reaching climate stabilization targets using techniques from the tax burden literature. ITC increases the elasticity of emissions with respect to carbon prices, and thereby decreases the burden of an enforced emission reduction. Under ITC, emission abatement may generate a positive learning dividend when the social value of the induced change in learning exceeds its costs. A numerical analysis with two models (one focusing on energy savings, the other focusing on energy transition) suggests that both the decreased carbon tax burden and the learning dividend gain can be substantial, compared to the costs of abatement without ITC.

Technology policy and world greenhouse gas emissions in the AMIGA Modeling System
D.A. Hanson and J.A. Laitner
Energy Journal (2006) Special Issue Multi-Greenhouse Gas Mitigation and Climate Policy: 355-372.
This article examines the interaction between technology policy and its impact on the full basket of worldwide greenhouse emissions over the 21st century. The heart of the analysis is the Argonne National Laboratory's AMIGA Modeling System, a technology rich, general equilibrium model that (depending on data availability) characterizes as many as 200 sectors of the regional economies. We suggest in this paper that technologies and technology policies exist which could reduce carbon emissions enough to achieve stabilization targets at relatively modest costs given the size of the world economy. This can be accomplished largely through harnessing market forces and creating incentives with the use of efficient prices on greenhouse gas emissions, combined with complementary programs and policies to reduce market failures and to promote new technology improvements and investments.

Global economic implications of alternative climate policy strategies
Claudia Kemfert
Environmental Science & Policy (2002) 5: 367–384.
This paper investigates the economic implications of climate change policies, particularly the impacts of clean development mechanisms (CDM), joint implementation (JI) and emissions trading, with a world integrated assessment model. Of special interest in this context are welfare spill-over and competitiveness effects, multi-gas policies, and the impacts of sink inclusion. We furthermore examine the global economic impacts of the USA’s non-cooperative, free rider position resulting from its recent, isolated climate policy. Both CDM and JI improve economic development in host countries and increase the market share of new applied technologies. Decomposition of welfare effects demonstrates that the competitiveness effect (including spill-over effects from trade) has the greatest importance. Climatic effects will have a significant impact within the next 50 years, will cause considerable welfare losses to world regions and will intensify if leading polluters like the USA do not reduce their emissions.

Impact assessment of emissions stabilization scenarios with and without induced technological change
Claudia Kemfert and Truong Truong
Energy Policy (2007) 35: 5337–5345.
This paper investigates the quantitative economic impacts of emissions stabilization scenarios with and without induced technological change (ITC). Model results show that ITC due to increased investment in R&D reduces compliance costs. Although R&D expenditures compete with other investment expenditures, increased R&D also improves energy efficiency, which substantially lowers abatement costs. Without ITC, emissions targets are primarily reached by declines in production, resulting in overall welfare losses. With ITC, emissions mitigation results in fewer production and GDP cutbacks.

Cutting carbon emissions at a profit - Part I | Part II
Florentin Krause, Stephen J. DeCanio, J. Andrew Hoerner and Paul Baer
Part I: Contemporary Economic Policy (2002) 20(4): 339-365.
Part II: Contemporary Economic Policy (2003) 21(1): 90-105.
This article identifies and corrects shortcomings in the available modeling studies on the costs of the Kyoto Protocol for the U.S. Each of the best-known studies omits one or several of four major cost-reducing policy options, resulting in cost estimates that are far too pessimistic. Integrated evaluation of all major cost-cutting policy options — a national carbon cap and trading program, productivity-enhancing market reforms and technology programs, recycling of permit auction revenues into tax cuts, and integration with international emissions trading — shows that the least-cost strategy for mitigation would produce annual net output gains reaching 0.9% of GDP by 2020. Part I presents national estimates; Part II examines impacts on competitiveness and employment in specific economic sectors.

Safe climate policy is affordable — 12 reasons
Jeroen C.J.M. van den Bergh
Climatic Change (2010) 101(3-4): 339-385.
There is a widespread sense that a sufficiently stringent climate mitigation policy, that is, a considerable reduction of greenhouse gas emissions to avoid extreme climate change, will come with very high economic costs for society. This is supported by many cost-benefit analyses (CBA) and policy cost assessments of climate policy. All of these, nevertheless, are based on debatable assumptions. This paper will argue instead that safe climate policy is not excessively expensive and is indeed cheaper than suggested by most current studies. To this end, climate CBA and policy cost assessments are critically evaluated, and as a replacement twelve complementary perspectives on the cost of climate policy are offered.

Comparison of top-down and bottom-up estimates of sectoral and regional greenhouse gas emission reduction potentials
Detlef P. van Vuuren, Monique Hoogwijk, Terry Barker, Keywan Riahi, Stefan Boeters, Jean Chateau, Serban Scrieciu, Jasper van Vliet, Toshihiko Masui, Kornelis Blok, Eliane Blomen and Tom Kram
Energy Policy (2009) 37(12): 5125-5139.
The Fourth Assessment Report of IPCC reports that greenhouse gas emissions can be reduced by about 30–50% in 2030 at costs below 100 US$/tCO₂ based on an assessment of both bottom-up and top-down studies. Here, we have looked in more detail into the outcomes of specific models and also analyzed the economic potentials at the sectoral and regional level. At the aggregated level, the findings of the IPCC report are confirmed. However, substantial differences are found at the sectoral level. At the same time, there seems to be no systematic difference in the reduction potential reported by top-down and bottom-up approaches. The largest reduction potential as a response to carbon prices exists in the energy supply sector. Reduction potential in the building sector may carry relatively low costs. Although uncertainties are considerable, the modeling results and the bottom-up analyses all suggest that at the global level around 50% of greenhouse gas emissions may be reduced at carbon price (costs) below 100$/tCO₂-eq — but with a wide range of 30–60%. At a carbon price (costs) less than 20$/tCO₂-eq, still 10–35% of emissions may be abated. The variation of results is higher at low carbon-price levels than at high levels.