Climate Change 2001: Working Group III: Mitigation

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7.3.4.2 No Regrets Options

Figure 7.3: Trade-off between emissions reduction and economic activity.

No regrets options are by definition GHG emissions reduction options that have negative net costs, because they generate direct or indirect benefits that are large enough to offset the costs of implementing the options. The costs and benefits included in the assessment, in principle, are all internal and external impacts of the options. External costs arise when markets fail to provide a link between those who create the “externality and those affected by it; more generally, when property rights for the relevant resources are not well defined. External costs can relate to environmental side-impacts, and distortions in markets for labour, land, energy resources, and various other areas. By convention, the benefits in an assessment of GHG emissions reduction costs do not include the impacts associated with avoided climate change damages. A broader definition could include the idea that a no regrets policy would, in hindsight, not preclude (e.g., by introducing lock-in effects or irreversibilities) even more beneficial outcomes, but this is not taken up in the mitigation literature. The no regret concept has, in practice, been used differently in costing studies, and has in most cases not included all the external costs and implementation costs associated with a given policy strategy.

The discussion of “no regrets” potential has triggered an extensive debate, which is particularly well covered in the SAR (IPCC 1996a, Chapters 8 and 9). The debate is summarized rather simply in graphical form in Figure 7.3.

Figure 7.3 illustrates the production frontier (F) of an economy that shows the trade-off between economic activity (Q) and emissions reduction (E). Each point on the curve shows the maximum level of emissions reduction for a given level of economic activity. The economy is producing composite goods, namely an aggregation of all goods and services Q and environmental quality E, which here represent GHG emissions. Given such an assumption it is possible to construct a curve F(Q,E) that represents the trade-off between Q and E. For a given economy at a given time, each point on F shows the maximum size of the economy for each level of GHG emissions, and therefore it shows the loss in economic output measured by Q associated with reductions in GHG emissions level E. If the economy is at a level below F then it is possible to increase the total production of Q and/or E. If O is taken as the starting point of the economy in Figure 7.3 then all movements in the “triangle” OO¢O¢¢ increase environmental quality E and/or economic output Q, but do not decrease either of these goods. Movements to positions outside this “triangle” imply a decrease in both economic activity Q and environmental quality E, or a trade-off in which one of these two goods decreases.

In estimating the costs, the crucial question is where the baseline scenario is located with respect to the efficient production frontier of the economy F. If the chosen baseline scenario assumes that the economy is located on the frontier, as in the efficient baseline case, there is a direct trade-off between economic activity and emissions reduction. Increased emissions reduction moves the economy along the frontier to the right. Economic activity is reduced and the costs of mitigation increase. If the economy is below the frontier, at a point such as O, there is a potential for combined GHG emissions reduction policies and improvements of the efficiency of resource use, implying a number of benefits associated with the policy.

Returning to the implications for the cost of climate change mitigation, it can be concluded that the no regrets issue reflects specific assumptions about the working and efficiency of the economy, especially the existence and stability of a social welfare function, based on a social cost concept. Importantly, the aggregate production frontier is uncertain, as it is dependent on the distribution of resources and is changed by technological development. Since it also involves the weighting of different goods and services by market valuations to form an aggregate, it is also affected by personal and social preferences that influence those valuations.

The critical question is how climate change mitigation policies can contribute to efficient and equitable development of the economy.

In this way it can be argued that the existence of a no regret potential implies:

• that market and institutions do not behave perfectly, because of market imperfections such as lack of information, distorted price signals, lack of competition, and/or institutional failures related to inadequate regulation, inadequate delineation of property rights, distortion-inducing fiscal systems, and limited financial markets;
  
• that it is possible to identify and implement policies that can correct these market and institutional failures without incurring costs larger than the benefits gained; and
  
• that a policy decision is made to eliminate selectively those failures that give rise to increased GHG emissions.

In other words, the existence of market and institutional failures that give rise to a no regrets potential is a necessary, but not a sufficient, condition for the potential implementation of these options. The actual implementation also requires the development of a policy strategy that is complex and comprehensive enough to address these market and institutional failures and barriers.

The costs that actually face private agents are different from the social costs, and therefore the market potential (as defined in Chapter 5) may be very different from the potential based on social costs. This implies that the actual implementation of no regrets options requires that it be possible to introduce policies that “narrow the gap” between the market potential and a potential estimated on the basis of social costs. Cameron et al. (1999) give a systematic overview of market failures and market barriers important to the implementation of no regrets options.

Returning to the implications for climate change mitigation cost, it can be concluded that the no regrets issues reflect specific assumptions about the location of the economy in relation to the efficient production frontier. Bottom-up studies have (in most cases on the basis of a specific assessment of production practices in main GHG emitting sectors, such as the energy sector) assumed that the economy in the baseline case operates below the optimal frontier and that mitigation policies imply an increased efficiency of technologies. The costs of implementing mitigation policies are then partly offset by direct and indirect benefits, which sometimes are large enough to generate a negative cost result. Top-down approaches, however, assume that the economy is efficient in the baseline case and mitigation policies therefore always imply a trade-off with other goods and thereby have a positive cost.