Figure 10.3: Relationship between present discounted costs for stabilizing the concentration of carbon dioxide in the atmosphere at alternative levels from two studies. Costs are discounted at 5%/yr over the time period 1990 to 2100. Sources: Manne and Richels (1997) and Edmonds et al. (1997).
There is an increased interest in cost-minimizing paths that lead to alternative, stable steady-state concentrations of GHGs in the atmosphere. This interest stems from the objective of the UNFCCCto stabilize the concentration of GHGs. Work has focused primarily on the problem of stabilizing the concentration of CO2. The focus on CO2 reflects the importance placed on this gas by the Intergovernmental Panel on Climate Change Working Group I (IPCC WGI) and the distinctive characteristic of CO2. As CO2 does not have an atmospheric sink, the net emissions to the atmosphere must eventually decline indefinitely to maintain any steady-state concentration (IPCC, 1996a). In contrast, GHGs such as CH4 and N2O, with atmospheric sinks, have steady-state concentrations associated with steady-state emissions. Cost-effective paths depend on many factors including reference emissions, technical options for emissions limitation, the timing and rate of change of the availability of options, the discount rate, and assumed control mechanisms and their efficiency. The analysis conducted to date generally does not take into account that long-term emissions mitigation must take place against a background of climate change that affects both the nature and composition of economic activity and the carbon cycle.
Both Manne and Richels (1997) and Edmonds et al. (1997) examined the relationship between steady-state concentrations of CO2 and associated minimum costs. Both papers computed the minimum cost of honouring a concentration ceiling. All cost calculations assumed that all activities throughout the world pursued emissions mitigation based on a common marginal cost of carbon emissions mitigation. While real-world implementation strategies are likely to be less efficient, the choice of a cost-effective assumption for each period provides a unique benchmark for comparison purposes. Several assumptions regarding cost-effectiveness over time were examined. The two studies examined three cases:
Costs were discounted over time at 5%/yr over the period 1990 to 2100. The results are displayed in Figure 10.3.
Costs are roughly an order of magnitude greater for concentration ceilings of 450ppmv than for the 750ppmv ceiling between WGI, WRE, and optimal global emissions constraints. Furthermore, costs decline sharply as the constraint is relaxed from 450ppmv to 550ppmv. Relaxation of the constraint from 650ppmv to 750ppmv reduces costs, but at a more modest rate. As discussed in Chapters 2, 7 and 8, it should be noted that the total costs of stabilizing atmospheric carbon concentrations are very dependent on the baseline scenario: for example, for scenarios focusing on the local and regional aspects of sustainable development costs are lower than for other scenarios.
Progress has also been made in examining the time path of the value of a tonne of carbon when the cost of stabilizing the concentration of CO2 is minimized. Peck and Wan (1996) demonstrated that the results of Hotelling (1931) could be applied to the problem of minimizing the cost to stabilize the concentration of CO2 and generalized. They show that to minimize present discounted cost, the value of a tonne of carbon should rise at the rate of interest (discount rate). This theorem ensures that the marginal cost of emissions mitigation across both space and time is equal after taking into account that carbon is naturally removed from the system. Thus, the initial marginal costs should be relatively modest, but should rise steadily (at the rate of interest plus the rate of carbon removal, approximately 1%/yr). The rise in marginal cost continues until it reaches the marginal cost of a backstop technology, one capable of providing effectively unlimited emissions mitigation at a constant marginal cost.
All cost-effective policies minimize the cost of stabilization by equalizing the marginal cost of mitigation across time and space, that is, in all regions, across all human activities, and across all generations, except to the extent that non-linearities, non-convexities, and corner solutions exist. The implementation of real-world regimes to control net emissions to the atmosphere is likely to be inefficient to some degree for a number of reasons, including, for example, the problems of free riding; cheating; in some cases considerations of fairness and equity; and monitoring, compliance, and transactions costs.
Some work has been undertaken to compare potential policy regimes with respect to cost-effectiveness. For example, Chapter 8 shows the difference in emissions mitigation requirements between various potential implementations of the Kyoto Protocol and more cost-effective paths. Edmonds and Wise (1998) examined the cost effectiveness of a strategy that sought to minimize the costs of monitoring and verification, and premature retirement of capital stocks, while simultaneously addressing concerns about fairness and equity. They considered a hypothetical protocol that focused on new investments in energy technology. They assumed that Annex I nations required new emissions sources to be carbon-neutral after a prescribed date. Existing sources were treated as new after a fixed period following their initial deployment. Non-Annex I nations remained unencumbered until their incomes reached levels comparable to those in Annex I nations. The authors concluded that the regulatory regime could stabilize the concentration of GHGs, and that the level at which concentrations stabilized is determined by the initial date of obligations. The hypothetical protocol is economically inefficient, however. That is, it does not minimize the cost of achieving a concentration limit. The authors compare the hypothetical protocol, which uses a technology regulation to limit emissions, with an alternative cap-and-trade regime that achieved the same emissions path. Costs in the hypothetical protocol were approximately 30% greater than in those in the alternative cap-and-trade regime.
Jacoby et al. (1998) also considered the problem of accession to the Kyoto Protocol. They reject the idea that there is such a thing as inter-temporal cost-effectiveness in the context of a century-scale problem. Rather, they begin with the proposition that a continuous process of negotiation and re-negotiation is required. They analyze a system of obligations based on per-capita income that can lead to the stabilization of concentrations of GHGs.
A substantial body of work has considered the implication of technology development and deployment on the cost of meeting alternative emissions-mitigation obligations. This line of investigation has a long tradition extending back to, for example, Cheng et al. (1985). These are discussed in Chapter 8.3 Recent studies, for example by Dooley et al. (1999), Edmonds and Wise (1999), Grübler et al. (1999), PCAST (1999), Schock et al. (1999), and Weyant and Olavson (1999), have explored the potential role of a variety of technologies in both the near term and the longer term. The principal conclusion of this body of investigation is that the cost of emissions mitigation depends crucially on the ability to develop and deploy new technology. The value of successful technology deployment appears to be large with the value depending on the magnitude and timing of emissions mitigation and on anticipated reference scenario progress.
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