WG III Mitigation - Technical Summary

9.2 Selected Specific Sectoral Findings on Costs of Climate Change Mitigation

9.2.1 Coal

Within this broad picture, certain sectors will be substantially affected by mitigation. Relative to the reference case, the coal industry, producing the most carbon-intensive of products, faces almost inevitable decline in the long term, relative to the baseline projection. Technologies still under development, such as CO₂ removal and storage from coal-burning plants and in-situ gasification, could play a future role in maintaining the output of coal whilst avoiding CO₂ and other emissions. Particularly large effects on the coal sector are expected from policies such as the removal of fossil fuel subsidies or the restructuring of energy taxes so as to tax the carbon content rather than the energy content of fuels. It is a well-established finding that removal of the subsidies would result in substantial reductions in GHG emissions, as well as stimulating economic growth. However, the effects in specific countries depend heavily on the type of subsidy removed and the commercial viability of alternative energy sources, including imported coal.

9.2.2 Oil

The oil industry also faces a potential relative decline, although this may be moderated by lack of substitutes for oil in transportation, substitution away from solid fuels towards liquid fuels in electricity generation, and the diversification of the industry into energy supply in general.

Table TS.6 shows a number of model results for the impacts of implementation of the Kyoto Protocol on oil exporting countries. Each model uses a different measure of impact, and many use different groups of countries in their definition of oil exporters. However, the studies all show that the use of the flexibility mechanisms will reduce the economic cost to oil producers.

Thus, studies show a wide range of estimates for the impact of GHG mitigation policies on oil production and revenue. Much of these differences are attributable to the assumptions made about: the availability of conventional oil reserves, the degree of mitigation required, the use of emission trading, control of GHGs other than CO₂, and the use of carbon sinks. However, all studies show a net growth in both oil production and revenue to at least 2020, and significantly less impact on the real price of oil than has resulted from market fluctuations over the past 30 years. Figure TS.9 shows the projection of real oil prices to 2010 from the IEA's 1998 World Energy Outlook, and the effect of Kyoto implementation from the G-cubed model, the study which shows the largest fall in Organization of Oil Exporting Countries (OPEC) revenues in Table TS.6. The 25% loss in OPEC revenues in the non-trading scenario implies a 17% fall in oil prices shown for 2010 in the figure; this is reduced to a fall of just over 7% with Annex I trading.

*Table TS.6:* Costs of Kyoto Protocol implementation for oil exporting region/countries^a

Model^b	Without trading^c	With Annex-I trading	With "global trading"

G-Cubed	-25% oil revenue	-13% oil revenue	-7% oil revenue
GREEN	-3% real income	"Substantially reduced loss"	N/A
GTEM	0.2% GDP loss	<0.05% GDP loss	N/A
MS-MRT	1.39% welfare loss	1.15% welfare loss	0.36% welfare loss
OPEC Model	-17% OPEC revenue	-10% OPEC revenue	-8% OPEC revenue
CLIMOX	N/A	-10% some oil exporters' revenues	N/A

^a The definition of oil exporting country varies: for G-Cubed and the OPEC model it is the OPEC countries, for GREEN it is a group of oil exporting countries, for GTEM it is Mexico and Indonesia, for MS-MRT it is OPEC + Mexico, and for CLIMOX it is West Asian and North African oil exporters. ^b The models all considere the global economy to 2010 with mitigation according to the Kyoto Protocol targets (usually in the models, applied to CO₂ mitigation by 2010 rather than GHG emissions for 2008 to 2012) achieved by imposing a carbon tax or auctioned emission permits with revenues recycled through lump-sum payments to consumers; no co-benefits, such as reductions in local air pollution damages, are taken into account in the results. ^c "Trading" denotes trading in emission permits between countries.

These studies typically do not consider some or all of the following policies and measures that could lessen the impact on oil exporters:

policies and measures for non-CO₂ GHGs or non-energy sources of all GHGs;
offsets from sinks;
industry restructuring (e.g., from energy producer to supplier of energy services);
the use of OPEC's market power; and
actions (e.g., of Annex B Parties) related to funding, insurance, and the transfer of technology.

In addition, the studies typically do not include the following policies and effects that can reduce the total cost of mitigation:

the use of tax revenues to reduce tax burdens or finance other mitigation measures;
environmental co- or ancillary benefits of reductions in fossil fuel use; and
induced technical change from mitigation policies.

As a result, the studies may tend to overstate both the costs to oil exporting countries and overall costs.

Figure TS.9: Real oil prices and the effects of Kyoto implementation.

9.2.3 Gas

Modelling studies suggest that mitigation policies may have the least impact on oil, the most impact on coal, with the impact on gas somewhere between; these findings are established but incomplete. The high variation across studies for the effects of mitigation on gas demand is associated with the importance of its availability in different locations, its specific demand patterns, and the potential for gas to replace coal in power generation.

These results are different from recent trends, which show natural gas usage growing faster than the use of either coal or oil. They can be explained as follows. In the transport sector, the largest user of oil, current technology and infrastructure will not allow much switching from oil to non-fossil fuel alternatives in Annex I countries before about 2020. Annex B countries can only meet their Kyoto Protocol commitments by reducing overall energy use and this will result in a reduction in natural gas demand, unless this is offset by a switch towards natural gas for power generation. The modelling of such a switch remains limited in these models.

9.2.4 Electricity

In general as regards the effects on the electricity sector, mitigation policies either mandate or directly provide incentives for increased use of zero-emitting technologies (such as nuclear, hydro, and other renewables) and lower-GHG-emitting generation technologies (such as combined cycle natural gas). Or, second, they drive their increased use indirectly by more flexible approaches that place a tax on or require a permit for emission of GHGs. Either way, the result will be a shift in the mix of fuels used to generate electricity towards increased use of the zero- and lower-emitting generation technologies, and away from the higher-emitting fossil fuels.

Nuclear power would have substantial advantages as a result of GHG mitigation policies, because power from nuclear fuel produces negligible GHGs. In spite of this advantage, nuclear power is not seen as the solution to the global warming problem in many countries. The main issues are (1) the high costs compared to alternative CCGTs, (2) public acceptance involving operating safety and waste, (3) safety of radioactive waste management and recycling of nuclear fuel, (4) the risks of nuclear fuel transportation, and (5) nuclear weapons proliferation.

9.2.5 Transport

Unless highly efficient vehicles (such as fuel cell vehicles) become rapidly available, there are few options available to reduce transport energy use in the short term, which do not involve significant economic, social, or political costs. No government has yet demonstrated policies that can reduce the overall demand for mobility, and all governments find it politically difficult to contemplate such measures. Substantial additional improvements in aircraft energy efficiency are most likely to be accomplished by policies that increase the price of, and therefore reduce the amount of, air travel. Estimated price elasticities of demand are in the range of -0.8 to -2.7. Raising the price of air travel by taxes faces a number of political hurdles. Many of the bilateral treaties that currently govern the operation of the air transport system contain provisions for exemptions of taxes and charges, other than for the cost of operating and improving the system.

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