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Although cost is a key component of the decision as to which policies to select, it is not the only consideration. Other factors enter the decision, such as the impacts of policies on different social groups in society, particularly the vulnerable groups, the benefits of GHG limitation in other spheres, such as reduced air pollution, and the impacts of the policies on broader concerns, such as sustainability. In developing countries these other factors are even more important than in developed countries. GHG limitation does not have as high a priority relative to other goals, such as poverty reduction, employment, etc., as it does in the wealthier countries. Indeed, it can be argued that the major focus of policy will be development, poverty alleviation, etc., and that GHG limitation will be an addendum to a programme designed to meet those needs. Accounting for the GHG component may change the detailed design of a policy or programme, rather than be the main issue that determines the policy.
Markandya (1998) developed a framework to expand the cost analysis with an assessment of the other impacts of climate change mitigation projects, such as employment, income distribution, environmental changes, and sustainability indicators. The suggestion is that monetary cost and benefit estimates be combined with physical indicators and qualitative information. These include the impacts of projects on vulnerable groups, on the environment more generally, and on sustainability in a broader sense.
Markandya and Boyd (1999) and Halsnæs and Markandya (1999) assessed the implications for cost-effectiveness of using an expanded cost-analysis framework compared with a focus on direct costs. They examined a number of case studies, including renewable energy options (biogas, solar water-heating systems, photovoltaic streetlights, and wind turbines), DSM programmes, and a number of transportation sector options. The expanded cost assessment includes a specific valuation for the welfare impacts of increased employment, local environmental improvements related to reduced non-GHG pollutants, and income distribution weights. The conclusion is that in a number of cases the application of an expanded cost-assessment framework has major implications for the cost-effectiveness ranking of mitigation projects compared with their ranking on direct costs alone. In particular, large differences in cost-effectiveness are seen for a biogas plant in Tanzania, for which combined social costs considered in the expanded framework go down to minus US$30/tCO2 reduction compared with a purely financial cost of plus US$20/tCO2. This cost difference reflects a positive welfare impact on presently unemployed low-income families and the time saved through reduced fuelwood collection. The case examples generally suggest that the combined social costs of mitigation policies in developing countries in particular will be lower than the purely financial costs, especially if the policies require presently unemployed labour and reduce the damages from local non-GHG pollutants. Similar studies for EITs reveal great large value of ancillary benefits in the form of reduced air pollution and increased employment, especially for carbon sink projects.
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