UNEP Collaborating Centre on Energy and Environment 1 Mitigation Cost Assessment John “Mac” Callaway Latin American and Caribbean Conference on Greenhouse Gases Quito, Ecuador, May 21-22, 1998

UNEP Collaborating Centre on Energy and Environment 2 Why assess mitigation costs? GEF project: Economics of GHG Limitations As input to “current” National Communications under FCCC To help identify cost-effective options for implementation under Kyoto and future protocols To set national priorities for –development planning –domestic actions Learning/capacity building Who knows what will come up?

UNEP Collaborating Centre on Energy and Environment 3 Steps in Cost Assessment I.Develop macro-economic projection of baseline development II. Project emissions and costs for baseline in relevant sectors III. Develop mitigation scenarios for relevant sectors IV. Estimate emissions and costs for mitigation scenarios V. Estimate emissions reductions and incremental costs for relevant sectors VI. Develop mitigation cost curves for relevant sectors, and, if possible an aggregate cost curve for all of the sectors VII. Report results

UNEP Collaborating Centre on Energy and Environment 4 What kinds of costs to assess? Financial costs: project outlays of money Economic = opportunity costs: value of real resources foregone by a project Private costs: opportunity costs that arise in market transactions External costs: opportunity costs from activities that are not accounted for by agents causing them Social costs = private costs + external costs Which costs to assess depends on …….. It’s helpful to know all of them

UNEP Collaborating Centre on Energy and Environment 5 OK, but what are incremental costs? Additional cost incurred when a mitigation project is undertaken with GEF financing, compared to project that would have been built without the financing An institutional, not an economic definition Incremental costs can be either financial or economic What would have been built without the GEF support: –market approach –social accounting approach –business as usual approach –strategic approach

UNEP Collaborating Centre on Energy and Environment 6 Some key issues in mitigation cost assessment System boundaries Economic opportunity costs “The” baseline No regrets actions Leakages Implementation costs Policies

UNEP Collaborating Centre on Energy and Environment 7 Key issues (cont.) Even though system boundaries may be well-defined, it can be hard to account for costs/emissions changes in linked sectors: –changes in technology –changes in input/output prices –price changes and their effects are hard to estimate using bottom-up models Economic opportunity costs include both changes in –production costs –changes in revenues –can be combined as changes in profits –price changes and their effects are hard to estimate using bottom-up models

UNEP Collaborating Centre on Energy and Environment 8 Key issues (cont.) The base line is not observed, so how will it be constructed: –Market driven (market models) –Scenario driven (bottom-up models –creates opportunities to create “strategic” baselines that affect incremental costs No regrets actions have very low or negative costs, but are not being implemented –costs aren’t accurate –some costs are left out –baseline isn’t realistic –are no regrets in the best interests of developing countries?

UNEP Collaborating Centre on Energy and Environment 9 Key issues (cont.) Leakages of carbon occur when a project indirectly increases CO 2 emissions someplace else in the economy, for example: –slowing deforestation in one place increases it another place –reducing use of manure as a fertiliser increases emissions to produce inorganic fertiliser –these leakages are hard to estimate without market models Implementation costs are often ignored, making some activities look unrealistically attractive: –Administration costs: Costs of planning, training, administration and monitoring. –Barrier removal costs: Costs of improving institutional capacity, reducing risk and uncertainty, enhancing market transactions, enforcing regulatory policies.

UNEP Collaborating Centre on Energy and Environment 10 Key issues (cont.) Most mitigation assessments do not consider how environmental policies can be used to create incentives for implementing GHG reduction measures –International policies –Domestic policies –Regulations –Taxes and subsidies –Emissions/offset trading –Joint implementation

UNEP Collaborating Centre on Energy and Environment 11 Are we finished? No, areas of further development include –widening and integrating the community of experts, policy makers, etc. involved in doing this work –special emphasis on building capacity to assess non-energy options and integrating experts in these fields with energy sector experts –gathering better data and organising into more comprehensive data bases for future mitigation studies –improving our sectoral models, hopefully to combine bottom-up and top-down approaches at the sectoral level to take into account market effects