The baseline case, which by definition gives the emissions of GHGs in the absence of the climate change interventions being considered, is critical to the assessment of the costs of climate change mitigation. This is because the definition of the baseline scenario determines the potential for future GHG emissions reduction, as well as the costs of implementing these reduction policies. The baseline scenario also has a number of important implicit assumptions about future economic policies at the macroeconomic and sectoral levels, including sectoral structure, resource intensity, prices and thereby technology choice.
Macroeconomic issues that are particularly relevant to developing countries (such as instability of output, constrained capital, and foreign exchange) similarly have important implications on GHG emissions through impacts on energy sector investments and energy-intensive production sectors. These assumptions have important implications for the efficiency of policy instruments applied to climate change mitigation strategies and thereby for implementation costs, which are discussed in Section 7.2.3.
Economic policies have a number of direct and indirect impacts on GHG emitting sectors. It is generally expected that successful economic policies generate increased growth and the emissions intensity of the economy then depends on the mix of products produced as well as on the efficiency with which they are produced. Economic policies in some cases can imply a more efficient use of resources, which means that the GHG emission intensity per unit of economic output decreases. The tendency to increase GHG emissions alongside economic growth is expected to be particularly strong in countries that presently have low energy consumption. The challenge is to pursue a development pattern in which economic development is achieved alongside relatively low GHG emissions and other environmental impacts.
Many macroeconomic and sectoral policies have important consequences for future GHG emissions through the impacts on sectoral structure, resource intensity, prices, and thereby technology choice. Macroeconomic issues like constrained capital and foreign exchange can lead to low investments in the energy sector, to major energy-intensive production sectors, or to the high utilization of pollution-intensive domestic fuels. In the same way, uncertainty or macroeconomic instability has a tendency to slow down investments because of the risk perceptions of foreign and national investors, and because of high interest rates.
As noted, GHG emissions are interlinked with general economic development patterns and economic policies. These policies have an influence both on the baseline as well as on the effectiveness of the mitigation options, and thereby on GHG emission levels. It is useful to decompose the GHG emission/GDP intensity factor into subcomponents that explain the implicit resource components behind the GHG emissions. One way to achieve this for the energy sector is based on the so-called Kaya identity (Kaya, 1989):
The first component of the identity, GHG emissions per energy unit, reflects the GHG emission intensity of energy consumption, which again reflects natural resource endowment and relative prices of the different energy sources. The second factor (energy consumption per GDP unit) reflects both the weight of energy-intensive processes in GDP and the efficiency of the resources used. The same approach can be used to assess GHG emission intensities of other sectors, such as agriculture, forestry, waste management, and industry.
Development may follow different paths in countries according to socioeconomic conditions, resources, national policies and priorities, and institutional issues. For instance, a rapidly growing economy develops a different composition of capital stock and energy use pattern compared with a slowly growing country. A nation following development policies that emphasize greater investments in infrastructure, such as efficient rail transport, renewable energy technologies, and energy efficiency improvements, exhibits a low GHG emission trajectory. However, a nation with substantial coal resources, scarce capital, and a low level of trade can be pushed towards a development path with high emissions.
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