Mitigation Cost Assessment

1
Mitigation Cost Assessment

• John Mac Callaway
• Latin American and Caribbean Conference on
  Greenhouse Gases
• Quito, Ecuador, May 21-22, 1998

2
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?

3
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

4
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 ..
• Its helpful to know all of them

5
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

6
Some key issues in mitigation cost assessment

• System boundaries
• Economic opportunity costs
• The baseline
• No regrets actions
• Leakages
• Implementation costs
• Policies

7
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

8
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 arent accurate
• some costs are left out
• baseline isnt realistic
• are no regrets in the best interests of
  developing countries?

9
Key issues (cont.)

• Leakages of carbon occur when a project
  indirectly increases CO2 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.

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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

11
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