The Cost of Closing the

For those cases in which a gap exists—that is, for economies that are not on a course that will lead to the stabilization of CO2 concentrations on their own—resources that would not otherwise be employed to reduce emissions must be diverted from some other human enterprise to the task of closing the gap. That is, there is an economic cost.

Many factors will determine the magnitude of that cost, including the scale of economic activity, the technical, political, and institutional ability of society to limit emissions wherever it is cheapest to do so, the set of technologies available to fill the gap, the stabilization concentration level, and the distribution of emissions in time.

The latter factor reflects the fact that cumulative, not annual, emission of carbon to the atmosphere determines atmospheric CO2 concentrations. That is, the same concentration target can be achieved through a variety of emission pathways. This process is illustrated in Figure 4.7, which shows alternative concentration profiles leading to stabilization at 350, 450, 550, 650, and 750 ppm.

The choice of emission pathway can be thought of as a "carbon budget" allocation problem. In a first approximation, a concentration target defines an allowable amount of carbon to be emitted into the atmosphere between now and the date at which the target is to be achieved. The issue is how best to allocate the carbon budget over time.

Some insight into the characteristics of the least-cost mitigation pathway can be obtained from an exercise conducted under the Stanford Energy Modeling Forum. A group of modelers was asked to examine two alternative emission pathways for stabilizing concentrations at 450, 550, 650, and 750 ppm (see Figure 4.8). The solid and dashed lines are referred to as WG 1 and WRE, respectively, denoting their source (Houghton et al. 1995; Wigley et al. 1996).

Notice that for each model, global mitigation costs are less expensive under WRE. There are several reasons why the models tend to favor a more gradual departure from their reference path. First, energy-using and energy-producing capital stock (e.g., power plants, buildings, and transport) are typically long lived. The current system was put into place based upon a particular set of expectations about the future. Large emission reductions in the near term will require accelerated replacement. This replacement is apt to be costly. There will be more opportunity for reducing emissions cheaply once the existing capital stock turns over.

Second, the models suggest that there are currently insufficient low-cost substitutes, on both the supply and demand sides of the energy sector, for deep near-term cuts in carbon emissions. With the anticipated improvements in the efficiency of energy supply, transformation, and end-use technologies, such reductions should be less expensive in the future.

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Figure 4.7. Comparison of emissions trajectories consistent with various atmospheric CO2 concentrations. Developed by the IPCC (S350-S750) and by Wigley, Richels, and Edmonds (S350a-S750a) (Wigley et al. 1996).

Figure 4.7. Comparison of emissions trajectories consistent with various atmospheric CO2 concentrations. Developed by the IPCC (S350-S750) and by Wigley, Richels, and Edmonds (S350a-S750a) (Wigley et al. 1996).

WG 1, FUND WRE, FUND WG1, MERGE WRE, MERGE WG 1, MiniCAM WRE, MiniCAM Optimal, MiniCAM

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Figure 4.8. Relationship between present discounted costs for stabilizing the concentrations of CO2 in the atmosphere at alternative levels.

Third, with the economy yielding a positive return on capital, future reductions can be made with a smaller commitment of today's resources. For example, assume a net real rate of return on capital of 5 percent per year. Further, suppose that it costs $50 to remove a ton of carbon, regardless of the year in which the reduction occurs. If we were to remove the ton today, it would cost $50. Alternatively, we could invest $19 today to have the resources to remove a ton of carbon in 2020.

The result that the lower-cost mitigation pathway tends to follow the baseline in the early years has been misconstrued by some as an argument for inaction. Wigley et al. (1996, 242), referring to their own work, argue that this is far from the case.

We must stress that, even from the narrow perspective of a cost effectiveness analysis, our results should not be interpreted as suggesting a "do nothing" or "wait and see" policy. First, all stabilization targets still require future capital stock to be less carbon-intensive than under a BAU scenario. As most energy production and use technologies are long-lived, this has implications for current investment decisions. Second, new supply options typically take many years to enter the marketplace. To ensure sufficient quantities of low-cost, low-carbon substitutes in the future requires a sustained commitment to research, development and demonstration today. Third, any "no regrets" measures for reducing emissions should be adopted immediately. Last, it is clear from [Figure 4.7] that one cannot go on deferring emission reductions indefinitely, and that the need for substantial reductions in emissions is sooner the lower the concentration target.

Returning to Figure 4.8, note the "bend" in the cost curve as we move from a 550 to a 450 ppm concentration target. The reason is that even under WRE, a 450 ppm target requires an immediate departure from the baseline resulting in premature retirement of existing plant and equipment.

Finally, it should be noted that different emission pathways for achieving a given concentration target imply not only different mitigation costs, but also different benefits in terms of environmental impacts averted. These differences occur because of the differences in concentration in the years preceding the accomplishment of the target. It is therefore important to examine the environmental consequences of choosing one emission path over another.

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