Emissions Reduction

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This page focuses on the costs associated with emissions reductions.  The costs are presented in two forms: (1) marginal cost, as represented by the $ per ton of carbon reduced, and (2) the percent reduction in GDP.   (When possible, both values are given.)  The goal of the page is to familiarize the reader with the general range of cost estimates provided in the literature. 

It may help to consider for a moment the meaning of the GDP cost concept.  As discussed on the Costs of Mitigation page, GDP is not a true measure of welfare, but of economic activity.  Given that, what does this two percent reduction in economic activity really mean in the economy?  The counter-view to that expressed by Darmstadter is illustrated by a discussion in Schelling's chapter on the Economics of Global Warming.  Schelling identifies the policy question at hand - namely, are we willing to spend 2% of GNP to mitigate climate change, or is our money spent better elsewhere [18]?  The scope of available models does not generally allow for a full evaluation of where the money is best spent.  For this reason, the question at hand, is - does 2% of GNP seem to be a manageable cost and are we willing to pay it?  The interesting consideration that Schelling brings to the table is as follows.  "Subtracting 2% in perpetuity lowers the GNP curve by not that much more than the thickness of a line drawn with a number two pencil, or to formulate it as I did earlier, it postpones the GNP of 2050 until 2051" [18].  The postponement of a higher standard of living by one year has a much different ring to it than the estimated equivalent loss of $10 trillion from American GNP over the next sixty years [18].

The information is divided into three sections.  Section 1 contains the results of an Energy Modeling Forum study published in 1993, which compares the costs of several top-down models.  The study standardizes assumptions about several exogenous variables and compares the cost over the same time frame and reduction scenarios.  These results are obtained from the Climate Change 1995: Economic and Social Dimensions of Climate Change text [1].

Section 2 looks at the OECD's model comparison project, which also attempts to standardize key inputs and reduction targets.  The information provided was taken from the OECD Working Paper, "Costs of Reducing CO₂ Emissions: Evidence from Six Global Models" [4].

Section 3 contains an overview of the main assumptions and results of U.S. bottom-up studies.  These results are taken from the Climate Change 1995: Economic and Social Dimensions of Climate Change text as well [1].

It is interesting to compare results in Sections 1 and 2 because some of the same models are used and yet different results are reached.  This illustrates the points made in the discussion on the key assumptions page of this web site.  It is also interesting to note the relatively lower cost predictions made by the bottom-up models vs. the top-down models.

Section 1: Energy Modeling Forum results - Comparison of top-down models

Common Assumptions

Table information taken from Bruce, et.al. (ed.) Climate Change 1995: Economic and Social Dimensions of Climate Change. [1]

Models used and comparison of carbon taxes and GDP loses in 2010.

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Section 2: OECD Model Comparisons Project results

Results are presented for years and scenarios most useful for comparison to the Section 1 results.  The Whalley-Wigle model results, which were used in the OECD study, are not included in the table because the model is a comparative-static general equilibrium model.  These models do not give the dynamic path of changes in costs and thus can not be compared along the same time frame as the other models [4].  A discussion of the common assumptions used for the comparison, as well as a description of the models used, can be found in the following paragraphs.

Common Assumptions

Source:  Information for table taken from Dean and Holler, 1992. [4]

Models used

Source: Table modified from Dean and Holler, 1992. [4]

Summary of results - simulation results for 2 percentage point reduction in baseline emission growth ($ per ton carbon / percentage GDP loss relative to baseline) 

Source: Modified from Dean and Hoeller. "Costs of Reducing CO2 Emissions: Evidence from Six Global Models." [4]

Notes:

The results present the cost of a two percentage point reduction, from a business as usual emissions path, in the rate of growth of emissions.  Thus, the amount of reductions, in percentage terms, will be similar across the models even though the baseline and growth predictions will not be the same.

Summary of results - Simulation results for stabilization scenario: Stabilization of emissions at 1990 levels ($ per ton carbon / percentage GDP loss relative to baseline)

* Value given is for GDP loss in 2005.

Source: Modified from Dean and Hoeller. "Costs of Reducing CO2 Emissions: Evidence from Six Global Models." [4]

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Section 3: Results from U.S. bottom-up studies

The results presented below were not taken from a comparative analysis of bottom up models, which means that they studies included were not normalized in terms of factors such as economic growth, structural change, fuel prices, technology costs, or policy effectiveness.  Thus, the range of emissions reduction costs is wider than that presented for the top-down comparison studies.

Trends are apparent, however.  Within the 1990-2030 time frame the results show that larger reductions become feasible at zero net costs and that mitigation costs decline as adjustment periods increase [1].  The discussion in the Climate Change 1995 text identifies three reasons for these findings, and a more detailed discussion about the characteristics of both top-down and bottom-up models can be viewed on the web page "Top-down vs. bottom-up models".  

The three factors that lead to the pattern of results include the following: (1) bottom-up studies generally identify large energy efficiency potentials that are not included in the reference case; (2) the studies identify transition benefits rather than transaction costs for technology shifts because energy improvements are assumed to occur at the economically optimal rate of capital stock replacement; and (3) inexpensive cogeneration opportunities are included in the models [1].

Bottom up studies of U.S. emissions mitigation costs - major assumptions and results

n.a. = not available

Source: Modified from Bruce, et al. (ed.) Climate Change 1995: Economic and Social Dimensions of Climate Change [1].

Note: Details on percent annual growth rates for energy prices that several of the models used can be found in the Climate Change 1995: Economic and Social Dimensions of Climate Change text.  These differences account for the apparent internal model result discrepancies. 

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