Climate Change 2001:
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8.9 The Costs of Meeting a Range of Stabilization Targets

Cost-effectiveness studies with a century timescale estimate that the costs of stabilizing CO2 concentrations in the atmosphere increase as the concentration stabilization level declines. Different baselines can have a strong influence on absolute costs. While there is a moderate increase in the costs when passing from a 750ppmv to a 550ppmv concentration stabilization level, there is a larger increase in costs passing from 550ppmv to 450ppmv unless the emissions in the baseline scenario are very low. These results, however, do not incorporate carbon sequestration and gases other than CO2, and did not examine the possible effect of more ambitious targets on induced technological change29. In particular, the choice of the reference scenario has a strong influence. Recent studies using the IPCC SRES reference scenarios as baselines against which to analyze stabilization clearly show that the average reduction in projected GDP in most of the stabilization scenarios reviewed here is under 3% of the baseline value (the maximum reduction across all the stabilization scenarios reached 6.1% in a given year). At the same time, some scenarios (especially in the A1T group) showed an increase in GDP compared to the baseline because of apparent positive economic feedbacks of technology development and transfer. The GDP reduction (averaged across storylines and stabilization levels) is lowest in 2020 (1%), reaches a maximum in 2050 (1.5%), and declines by 2100 (1.3%). However, in the scenario groups with the highest baseline emissions (A2 and A1FI), the size of the GDP reduction increases throughout the modelling period. Due to their relatively small scale when compared to absolute GDP levels, GDP reductions in the post-SRES stabilization scenarios do not lead to significant declines in GDP growth rates over this century. For example, the annual 1990-2100 GDP growth rate across all the stabilization scenarios was reduced on average by only 0.003% per year, with a maximum reduction reaching 0.06% per year.

The concentration of CO2 in the atmosphere is determined more by cumulative rather than by year-by-year emissions. That is, a particular concentration target can be reached through a variety of emissions pathways. A number of studies suggest that the choice of emissions pathway can be as important as the target itself in determining overall mitigation costs. The studies fall into two categories: those that assume that the target is known and those that characterize the issue as one of decision making under uncertainty.

For studies that assume that the target is known, the issue is one of identifying the least-cost mitigation pathway for achieving the prescribed target. Here the choice of pathway can be seen as a carbon budget problem. This problem has been so far addressed in terms of CO2 only and very limited treatment has been given to non-CO2 GHGs. A concentration target defines an allowable amount of carbon to be emitted into the atmosphere between now and the date at which the target is to be achieved. The issue is how best to allocate the carbon budget over time.

Most studies that have attempted to identify the least-cost pathway for meeting a particular target conclude that such as pathway tends to depart gradually from the model's baseline in the early years with more rapid reductions later on. There are several reasons why this is so. A gradual near-term transition from the world's present energy system minimizes premature retirement of existing capital stock, provides time for technology development, and avoids premature lock-in to early versions of rapidly developing low-emission technology. On the other hand, more aggressive near-term action would decrease environmental risks associated with rapid climatic changes, stimulate more rapid deployment of existing low-emission technologies (see also Section 8.10), provide strong near-term incentives to future technological changes that may help to avoid lock-in to carbon intensive technologies, and allow for later tightening of targets should that be deemed desirable in light of evolving scientific understanding.

It should also be noted that the lower the concentration target, the smaller the carbon budget, and hence the earlier the departure from the baseline. However, even with higher concentration targets, the more gradual transition from the baseline does not negate the need for early action. All stabilization targets require future capital stock to be less carbon-intensive. This has immediate implications for near-term investment decisions. New supply options typically take many years to enter into the marketplace. An immediate and sustained commitment to R&D is required if low-carbon low-cost substitutes are to be available when needed.

The above addresses the issue of mitigation costs. It is also important to examine the environmental impacts of choosing one emission pathway over another. This is because different emission pathways imply not only different emission reduction costs, but also different benefits in terms of avoided environmental impacts (see Section 10).

The assumption that the target is known with certainty is, of course, an oversimplification. Fortunately, the UNFCCC recognizes the dynamic nature of the decision problem. It calls for periodic reviews "in light of the best scientific information on climate change and its impacts." Such a sequential decision making process aims to identify short-term hedging strategies in the face of long-term uncertainties. The relevant question is not "what is the best course of action for the next hundred years" but rather "what is the best course for the near-term given the long-term uncertainties."

Several studies have attempted to identify the optimal near-term hedging strategy based on the uncertainty regarding the long-term objective. These studies find that the desirable amount of hedging depends upon one's assessment of the stakes, the odds, and the cost of mitigation. The risk premium - the amount that society is willing to pay to avoid risk - ultimately is a political decision that differs among countries.

8.10 The Issue of Induced Technological Change

Most models used to assess the costs of meeting a particular mitigation objective tend to oversimplify the process of technical change. Typically, the rate of technical change is assumed to be independent of the level of emissions control. Such change is referred to as autonomous. In recent years, the issue of induced technical change has received increased attention. Some argue that such change might substantially lower and perhaps even eliminate the costs of CO2 abatement policies. Others are much less sanguine about the impact of induced technical change.

Recent research suggests that the effect on timing depends on the source of technological change. When the channel for technological change is R&D, the induced technological change makes it preferable to concentrate more abatement efforts in the future. The reason is that technological change lowers the costs of future abatement relative to current abatement, making it more cost-effective to place more emphasis on future abatement. But, when the channel for technological change is learning-by-doing, the presence of induced technological change has an ambiguous impact on the optimal timing of abatement. On the one hand, induced technical change makes future abatement less costly, which suggests emphasizing future abatement efforts. On the other hand, there is an added value to current abatement because such abatement contributes to experience or learning and helps reduce the costs of future abatement. Which of these two effects dominates depends on the particular nature of the technologies and cost functions.

Certain social practices may resist or enhance technological change. Therefore, public awareness-raising and education may help encourage social change to an environment favourable for technological innovation and diffusion. This represents an area for further research.

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