Lecture on the costs of carbon dioxide emission reduction to postgraduate students of economics. Covers Chapter 3 of Climate Economics textbook.

1. Costs of Emission Reduction
• The problem
• The solution
– What will it cost?

2. Abatement Costs
• Abatement costs are real and positive
• Without climate policy, emissions are free
– with climate policy, emissions are costly
• Alternatively, climate policy puts an
additional constraint on the energy system
– if the constraint bites, costs necessarily
increase
• Note that the market reduces emissions
too – saving energy saves money – there are
niche applications of renewable energy

3. 650 550 450 650 550 450 650 550 450 650 550 450
full full full full full full partial partial partial partial partial partial
Carbon tax, 2005$ per metric tonne of carbon dioxide
ETSAP 3 10 214 8 70 5 24 13 1296
FUND 20 52 51 260 43 239 147
GTEM 14 27 27 48 16 28
IMAGE 1 16 11 1 92 12
MERGE opt 13 52 43 27
MERGE pess 9 35 29 13 256 154
MESSAGE 6 26 7 15 35 35
MESSAGE no becs 6 27 12 70
MiniCAM 4 14 101 8 20 7 10 53
MiniCAMlt 12 34 34 263 19 169
POLES 7 41 27 9 51
SGM 10 40 40 11 67 67
SWITCH 3 22 4 6 131 36
overshootnot-to-exceedovershootnot-to-exceed

4. 650 550 450 650 550 450 650 550 450 650 550 450
full full full full full full partial partial partial partial partial partial
Carbon tax, 2005$ per metric tonne of carbon dioxide
ETSAP 3 10 214 8 70 5 24 13 1296
FUND 20 52 51 260 43 239 147
GTEM 14 27 27 48 16 28
IMAGE 1 16 11 1 92 12
MERGE opt 13 52 43 27
MERGE pess 9 35 29 13 256 154
MESSAGE 6 26 7 15 35 35
MESSAGE no becs 6 27 12 70
MiniCAM 4 14 101 8 20 7 10 53
MiniCAMlt 12 34 34 263 19 169
POLES 7 41 27 9 51
SGM 10 40 40 11 67 67
SWITCH 3 22 4 6 131 36
overshootnot-to-exceedovershootnot-to-exceed
0
2
4
6
8
10
12
14
16
18
20
ETSAP
FUND
GTEM
IMAGE
MERGE-)
MERGE-(
MESSAGE
MESSAGE-No
MiniCAM
MiniCAM-LT
POLES
SGM
SWITCH
Carbontax($/tC)in2020
0
100
200
300
400
500
600
650 550 450
Carbontax($/tC)in2020
Partial, not to exceed
Full, not to exceed
Full, overshoot

5. 650 550 450 650 550 450 650 550 450 650 550 450
full full full full full full partial partial partial partial partial partial
Total costs of emission reduction, net present value for a 5% discount rate, trillion 2005$
ETSAP -0.2 5.1 54.5 4.8 36.2 0.5 7.4 6.4 78.6
FUND 13.4 30.9 30.4 123.4 18.8 64.1 48.2
GTEM 23.8 38 33.9 56.7 18.9 26.3
IMAGE 1.4 5.1 3.8 1.2 10.2 5.1
MERGE opt 15.6 32.7 29.7 17.3
MERGE pess 7.2 18.8 16.2 7.8 35.7 29.8
MESSAGE 2.2 10.9 4.4 11.9 6.5 9.1
MESSAGE no becs 2.2 12.4 5.9 27.9
MiniCAM 2.4 6.5 25.7 5.3 15.5 3.1 6.7 32.8
MiniCAMlt
POLES
SGM 13 44.3 44.3 12.8 59.8 59.8
SWITCH 1.9 32.1 27.9 2.6 64.5 39.7
not-to-exceed overshoot not-to-exceed overshoot

6. Abatement Costs -2
• Abatement costs are higher if
– There are fewer options to reduce emissions
– The costs of emission reduction options are
higher
– The costs of emission reduction options fall
more slowly over time
– The rate of cost decline does not respond to
climate policy
– The economy is less responsive because
elasticities are lower or because capital lasts
longer
• Abatement costs are uncertain because we
have little experience

8. It is better to start slow because:
1. Capital stock turnover
2. Technological progress
3. Discount rate
4. Carbon cycle

9. Negative Abatement Costs
• There are claims that we could reduce
emissions and save money
• Most of this is bogus
– Confusion of market forces and policy

11. Negative Abatement Costs
• There are claims that we could reduce
emissions and save money
• Most of this is bogus
– Confusion of market forces and policy
– Omission of hidden costs
– Inappropriate discount rates
• Reduced fossil fuel imports are also seen
as a benefit
– Import substitution is no strategy for growth
– Reduced imports mean reduced exports,
increased imports of other stuff, ...

12. Negative Abatement Costs
• Most economic models are optimisation
models or assume perfect markets
• If you‘re in the optimum, any policy would
increase costs
• If the starting point is an imperfect
market, costs may be positive or negative
• Negative costs arise if climate policy
reduces the overall market failure, or if
the carbon tax reduces the overall
distortion by the fiscal system

13. Distortions
• A tax is more distortionary if
– Tax base is narrower
– Price elasticity is higher
• Deadweight loss of a tax is roughly
quadratic in the level of the tax
• Raising the carbon tax distorts the
economy, but probably not by that much
• The carbon tax revenue can be used to
reduce another tax – this would at least
partly but maybe more than offset the
costs of the carbon tax

17. Recycling Taxes: Change in 2010
GDP due to a $40/tC tax
DRI LINK DGEM Goul.
Lump sum -0.58 -0.46 -0.62 -0.24
Spend -0.40 -1.02 -0.24
Pers. Inc. -0.56 -0.53 -0.16 -0.16
Corp. Inc. 0.40 -0.11 0.60 -0.17
Payroll -0.18
Pay – employee -0.58 -0.53
Pay – employer 0.19 -0.25
Inv. Cred. 1.55 1.67 0.00