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energy sector
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Appendix R
Description of Economic Estimates of the Cost of Reducing
Greenhouse Emissions
It is useful to compare the estimates of the cost of mitigation
derived in this report with those from other studies. One
systematic study is a survey (Nordhaus, 1991) that derives from
nine different economic modeling families a "cost function" for
greenhouse gas emission reductions. The conceptual experiment
performed for each model is to estimate the cost of an efficient
reduction in CO2 emissions. For
models that assume no externalities or other market imperfections,
this is equivalent to estimating the response of greenhouse gas
emissions to increasingly stringent carbon taxes. The range of
carbon taxes is from zero to around $100/t CO2 equivalent.1
The methods employed in the nine modeling studies differ
considerably. At one extreme are the "econometric" models, which
rely largely on behavioral estimates of supply and demand
functions. In these studies, estimates are made of the structure of
demand and supply on the basis of observed market data on prices
and quantities. The models are often energy models that have been
extended to include CO2 emissions. A
second generic approach draws on programming or optimization models
of the energy sector. In this approach, the energy sector or the
economy is represented in terms of technological activities such as
demand for space heating or transportation services. By using a
mathematical programming or other algorithm, the models then solve
for the "optimal" trajectory of prices, outputs, fuel mix, and
technologies. It can be shown that, under certain conditions, the
optimal trajectory would correspond to the outcome of perfectly
competitive markets. Some models are a hybrid of the two
approaches.
All studies reviewed here share two important characteristics,
however, that differ from the approach of the Mitigation Panel.
First, they are all comprehensive energy sector models. That is,
they include a consistent accounting of the demand, supply, and
resources used in the countries or
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regions studied. In this respect, they differ from this report,
which examines the possibilities for greenhouse gas reductions from
individual technologies and attempts to make the estimates mutually
consistent by manual calculations.
A second important difference between the Nordhaus (1991) survey
and this report is that the survey estimates the cost function for
reducing greenhouse gas emissions beginning from the point at which
all the "negative-cost" options have been employed. In most
economic models, the market equilibrium is this point; in one
model, where market failures are allowed, the results have been
recast so that the cost estimates begin from the point at which
market failures have been allowed for. It is important to note,
then, that the negative-cost part of the cost function, should it
exist, is excluded from this survey.
The models represented in the survey encompass a wide variety of
approaches to energy sector modeling. The studies surveyed
(Nordhaus, 1991) were the following, listed roughly in order of
their chronological development:
1. A series of mathematical-programming models, developed
by Nordhaus and his associates, that use a technological
specification for supply and econometric estimates for demand.
2. A purely behavioral or econometric model developed by
Nordhaus and Yohe for the 1983 NAS study, Changing Climate,
with a simplification for estimates of the impact of different
taxes.
3. A series of models developed by Edmonds and Reilly,
which are a mixture of technological data on the supply side and
behavioral assumptions on the demand side.
4. A series of studies by Manne and Richels, which have
much the same analytical structure as study 1 but are generally
smaller and provide less detail on the demand side.
5. Estimates by Bodlund and associates for Sweden, using
largely a mathematical optimization model with many alternative
technologies.
6. Studies by Kram and others using a linear programming
model of the Netherlands economy with a structure similar to that
in study 5
7. A six-region computable general equilibrium model
developed by Whalley and Wigle that includes the energy and
nonenergy sectors. The energy sector is purely behavioral and is
not econometrically estimated.
8. A series of optimization models developed by the
European Community that include both supply and end-use
technologies for five European countries. These models allow for
market failures in the energy-using sectors.
9. An extension of the Jorgenson approach by Jorgenson and
Wilcoxen to include CO2 emissions.
The estimates are purely econometric but are based on extensive
data and estimation.
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FIGURE R.1 Survey of economic models.
The results of the survey are shown in Figure R.1, with the
individual points representing estimates from one of the nine
families of models. Figure R.1 also shows a "high" and "low"
frontier from the different models. The range has been constructed
to include almost all the models, although some of the extreme
estimates have been omitted if they appear to have features that
are particularly problematic.
Figure R.2 employs a consensus, derived as the central tendency
of the different models for CO2 and
alternative estimates for reforestation and CFCs, which shows the
"best-guess" estimate of the cost function for reducing greenhouse
gas emissions.
Finally, Figure R.3 shows a total cost function derived from the
survey. The estimates are the total cost of different reductions of
greenhouse gases at 1989 levels of world economic activity and
industrial mix.
Note
1. Tons (t) are metric.
Reference
Nordhaus, W. D. 1991. The cost of slowing climate change: A
survey. The Energy Journal 12(1):37–65.
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FIGURE R.2 Marginal cost of greenhouse gas
reduction.
FIGURE R.3 Total cost of greenhouse gas
reduction.
