Climate Change Mitigation in Sou

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					           Mitigation Cost Assessment

                  John “Mac” Callaway

         Latin American and Caribbean Conference on
                      Greenhouse Gases

               Quito, Ecuador, May 21-22, 1998

                     UNEP Collaborating Centre on Energy and Environment
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           Why assess mitigation costs?

     • GEF project: Economics of GHG Limitations
     • As input to “current” National Communications under
       FCCC
     • To help identify cost-effective options for implementation
       under Kyoto and future protocols
     • To set national priorities for
         – development planning
         – domestic actions
     • Learning/capacity building
     • Who knows what will come up?
                          UNEP Collaborating Centre on Energy and Environment
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                Steps in Cost Assessment

     I. Develop macro-economic projection of baseline development
     II. Project emissions and costs for baseline in relevant sectors
     III. Develop mitigation scenarios for relevant sectors

     IV. Estimate emissions and costs for mitigation scenarios
     V. Estimate emissions reductions and incremental costs for
        relevant sectors
     VI. Develop mitigation cost curves for relevant sectors, and, if
        possible an aggregate cost curve for all of the sectors
     VII. Report results


                             UNEP Collaborating Centre on Energy and Environment
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           What kinds of costs to assess?

     • Financial costs: project outlays of money
     • Economic = opportunity costs: value of real resources foregone
       by a project
     • Private costs: opportunity costs that arise in market
       transactions
     • External costs: opportunity costs from activities that are not
       accounted for by agents causing them
     • Social costs = private costs + external costs
     • Which costs to assess depends on ……..
     • It’s helpful to know all of them

                           UNEP Collaborating Centre on Energy and Environment
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         OK, but what are incremental costs?

     • Additional cost incurred when a mitigation project is
       undertaken with GEF financing, compared to project that
       would have been built without the financing
     • An institutional, not an economic definition
     • Incremental costs can be either financial or economic
     • What would have been built without the GEF support:
          –   market approach
          –   social accounting approach
          –   business as usual approach
          –   strategic approach

                               UNEP Collaborating Centre on Energy and Environment
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         Some key issues in mitigation cost
                   assessment
     • System boundaries
     • Economic opportunity costs
     • “The” baseline
     • No regrets actions
     • Leakages
     • Implementation costs
     • Policies
                        UNEP Collaborating Centre on Energy and Environment
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                        Key issues (cont.)

     Even though system boundaries may be well-defined, it can be hard to
       account for costs/emissions changes in linked sectors:
        – changes in technology
        – changes in input/output prices
        – price changes and their effects are hard to estimate using bottom-up
            models
     Economic opportunity costs include both changes in
        – production costs
        – changes in revenues
        – can be combined as changes in profits
        – price changes and their effects are hard to estimate using bottom-up
            models

                              UNEP Collaborating Centre on Energy and Environment
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                        Key issues (cont.)

     The base line is not observed, so how will it be constructed:
         – Market driven (market models)
         – Scenario driven (bottom-up models
         – creates opportunities to create “strategic” baselines that affect
           incremental costs
     No regrets actions have very low or negative costs, but are not being
       implemented
         – costs aren’t accurate
         – some costs are left out
         – baseline isn’t realistic
         – are no regrets in the best interests of developing countries?

                              UNEP Collaborating Centre on Energy and Environment
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                          Key issues (cont.)
     Leakages of carbon occur when a project indirectly increases CO 2
       emissions someplace else in the economy, for example:
         – slowing deforestation in one place increases it another place
         – reducing use of manure as a fertiliser increases emissions to produce
           inorganic fertiliser
         – these leakages are hard to estimate without market models
     Implementation costs are often ignored, making some activities look
       unrealistically attractive:
         – Administration costs: Costs of planning, training, administration and
           monitoring.
         – Barrier removal costs: Costs of improving institutional capacity, reducing
           risk and uncertainty, enhancing market transactions, enforcing regulatory
           policies.
                                UNEP Collaborating Centre on Energy and Environment
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                     Key issues (cont.)

     Most mitigation assessments do not consider how
       environmental policies can be used to create incentives
       for implementing GHG reduction measures
        – International policies
        – Domestic policies
        – Regulations
        – Taxes and subsidies
        – Emissions/offset trading
        – Joint implementation

                         UNEP Collaborating Centre on Energy and Environment
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                         Are we finished?

     • No, areas of further development include
         – widening and integrating the community of experts, policy makers,
           etc. involved in doing this work
         – special emphasis on building capacity to assess non-energy
           options and integrating experts in these fields with energy sector
           experts
         – gathering better data and organising into more comprehensive
           data bases for future mitigation studies
         – improving our sectoral models, hopefully to combine bottom-up
           and top-down approaches at the sectoral level to take into account
           market effects


                             UNEP Collaborating Centre on Energy and Environment
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