Climate Change 2001: Working Group III: Mitigation

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7.3.3 Cost Implications of Different Scenario Approaches

The costs of climate change mitigation policies are, by definition, a net incremental cost relative to a given scenario, which includes assumptions on both the baseline case and the policy case. The following section presents a taxonomy of baseline cases and policy scenario cases and discusses these in relation to cost assessments.

In Section 7.2 it is stated that cost assessments should include, in principle, all costs and benefits related to the policies as well as any ancillary benefits and costs. The actual determination of impacts related to the policies, however, is open to interpretation and discussion, and the actual selection of system boundaries for the cost assessment will reflect specific assumptions in the baseline as well as in the policy case scenario.

One way to evaluate the impact of different scenario structures on costs is to distinguish between the gross and the net costs of climate change mitigation policies. Gross costs are here defined to reflect all direct and indirect costs and benefits of the mitigation policy, when this policy is considered as the primary policy objective. Net costs are the gross costs corrected for side effects that result from potential synergies or trade-offs between mitigation policies and general economic policies or non-GHG environmental policies. These side effects can be divided into three categories (IPCC, 1996a, Chapter 8):

• A double dividend related to recycling of the revenue of carbon taxes in such a way that it offsets distortionary taxes.
  
• Ancillary impacts, which can be synergies or trade-offs in cases in which the reduction of GHG emissions have joint impacts on other environmental policies (i.e., relating to local air pollution, urban congestion, or land and natural resource degradation). These are referred to as ancillary or co-benefits and are discussed in Section 7.2.2.
  
• Impacts on technological development and efficiency. These include specific incentives to develop and penetrate new technologies, technology learning, and reduction of current barriers to efficiency improvements in existing technical systems (part of these impacts are considered as part of the so called no regret potential, see Section 7.3.4.2 for a more detailed discussion).