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Page 49

The Role of Cost-Effectiveness

A mitigation strategy should use options that minimize effects on domestic or world economies. Strategies therefore should be evaluated on the basis of cost-effectiveness as well as other considerations. Care must be taken to ensure that estimates of both costs and effects are comparable. Cost calculations, for example, need to use consistent assumptions about energy prices, inflation, or discount rates. Benefits must be evaluated in standard terms, such as the equivalent amount of CO2 emission reductions.

The cost of mitigation may include a number of components, some of which are difficult to measure. Three different kinds of costs need to be distinguished. First are direct expenditures to reduce emissions or otherwise reduce potential greenhouse warming. These include, for example, the purchasing of energy-efficient air conditioners or insulation. Second are long-term investments that increase the overall efficiency of large-scale systems. Examples include investment in more efficient electricity generation and industrial facilities. Third are possible substitutions among final goods and services that require different amounts of energy. An example is the substitution of public transit for private automobiles.

Current expenditures to reduce greenhouse warming are in principle the easiest to measure because there generally are current market transactions from which to obtain data. For longer-term capital expenditures, a discount rate must be used to calculate the present value of costs so they can be compared with costs of other options. Where major substitutions of final goods or services are required, the full costs are difficult to determine. The potential loss in value to consumers of the changes in consumption patterns must be estimated.

Technological Costing Versus Energy Modeling

There are two choices for estimating the costs of various mitigation options: "technological costing" and "energy modeling." Technological costing develops estimates on the basis of a variety of assumptions about the technical aspects, together with estimates—often no more than guesses—of the costs of implementing the required technology. This approach can be useful for evaluating emerging technologies when it is hard to apply statistical methods to estimate costs from market data. Technological costing relies implicitly on economic assumptions, and like energy modeling assumes that direct costs are a good measure of total cost.

Energy modeling uses a variety of techniques to project energy uses and supplies by region over time. Often, energy modeling uses data on prices and quantities consumed to construct statistical behavioral relationships. Unlike technological costing, energy models strive to ensure that the projections



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