Climate Change 2001:
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7.2 Analytical Approaches

Cost assessment is an input into one or more rules for decision-making, including cost-benefit analysis (CBA), cost-effectiveness analysis (CEA), and multi-attribute analysis. The analytical approaches differ primarily by how the objectives of the decision-making framework are selected, specified, and valued. Some objectives in mitigation policies can be specified in economic units (e.g., costs and benefits measured in monetary units), and some in physical units (e.g., the amount of pollutants dispersed in tonnes of CO2). In practice, however, the challenge is in developing a consistent and comprehensive definition of every important impact to be measured.

7.2.1 Co-Benefits and Costs and Ancillary Benefits and Costs

The literature uses a number of terms to depict the associated benefits and costs that arise in conjunction with GHG mitigation policies. These include co-benefits, ancillary benefits, side benefits, secondary benefits, collateral benefits, and associated benefits. In the current discussion, the term "co-benefits" refers to the non-climate benefits of GHG mitigation policies that are explicitly incorporated into the initial creation of mitigation policies. Thus, the term co-benefits reflects that most policies designed to address GHG mitigation also have other, often at least equally important, rationales involved at the inception of these policies (e.g., related to objectives of development, sustainability, and equity). In contrast, the term ancillary benefits connotes those secondary or side effects of climate change mitigation policies on problems that arise subsequent to any proposed GHG mitigation policies.

Policies aimed at mitigating GHGs, as stated earlier, can yield other social benefits and costs (here called ancillary or co- benefits and costs), and a number of empirical studies have made a preliminary attempt to assess these impacts. It is apparent that the actual magnitude of the ancillary benefits or co-benefits assessed critically depends on the scenario structure of the analysis, in particular on the assumptions about policy management in the baseline case. This implies that whether a particular impact is included or not depends on the primary objective of the programme. Moreover, something that is seen as a GHG reduction programme from an international perspective may be seen, from a national perspective, as one in which local pollutants and GHGs are equally important.

7.2.2 Implementation Costs

All climate change policies necessitate some costs of implementation, that is costs of changes to existing rules and regulations, making sure that the necessary infrastructure is available, training and educating those who are to implement the policy as well those affected by the measures, etc. Unfortunately, such costs are not fully covered in conventional cost analyses. Implementation costs in this context are meant to reflect the more permanent institutional aspects of putting a programme into place and are different to those costs conventionally considered as transaction costs. The latter, by definition, are temporary costs. Considerable work needs to be done to quantify the institutional and other costs of programmes, so that the reported figures are a better representation of the true costs that will be incurred if programmes are actually implemented.

7.2.3 Discounting

There are broadly two approaches to discounting-an ethical or prescriptive approach based on what rates of discount should be applied, and a descriptive approach based on what rates of discount people (savers as well as investors) actually apply in their day-to-day decisions. For mitigation analysis, the country must base its decisions at least partly on discount rates that reflect the opportunity cost of capital. Rates that range from 4% to 6% would probably be justified in developed countries. The rate could be 10-12% or even higher in developing countries. It is more of a challenge to argue that climate change mitigation projects should face different rates, unless the mitigation project is of very long duration. The literature shows increasing attention to rates that decline over time and hence give more weight to benefits that occur in the long term. Note that these rates do not reflect private rates of return, which typically must be greater to justify a project, at around 10-25%.

7.2.4 Adaptation and Mitigation Costs and the Link Between Them

While most people appreciate that adaptation choices affect the costs of mitigation, this obvious point is often not addressed in climate policymaking. Policy is fragmented - with mitigation being seen as addressing climate change and adaptation seen as a means of reacting to natural hazards. Usually mitigation and adaptation are modelled separately as a necessary simplification to gain traction on an immense and complex issue. As a consequence, the costs of risk reduction action are frequently estimated separately, and therefore each measure is potentially biased. This realization suggests that more attention to the interaction of mitigation and adaptation, and its empirical ramification, is worthwhile, though uncertainty about the nature and timing of impacts, including surprises, will constrain the extent to which the associated costs can be fully internalized.

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