designed to also address other concerns that impede sustainable development (e.g., air pollution, soil erosion). A number of policies, many of which might be used by individual nations unilaterally, and some of which may be used by groups of countries and would require regional or international agreement, can facilitate the penetration of less greenhouse gas-intensive technologies and modified consumption patterns. These include, inter alia (not ordered according to priority):

:

Putting in place appropriate institutional and structural frameworks;

Energy pricing strategies - for example, carbon or energy taxes, and reduced energy subsidies;

Phasing out those existing distortionary policies which increase greenhouse gas emissions, such as some subsidies and regulations, non-internalization of environmental costs, and distortions in agriculture and transport pricing;

Tradable emissions permits;

Voluntary programs and negotiated agreements with industry;

Utility demand-side management programs;

Regulatory programs including minimum energy-efficiency standards, such as for appliances and fuel economy;

Stimulating research, development and demonstration to make new technologies available;

Market pull and demonstration programs that stimulate the development and application of advanced technologies;

Renewable energy incentives during market build-up;

*Incentives such as provisions for accelerated depreciation and reduced costs for

consumers;

Education and training; information and advisory measures;

Options that also support other economic and environmental goals.

5.14 The choice of measures at the domestic level may reflect objectives other than costeffectiveness such as meeting fiscal targets. If a carbon or carbon-energy tax is used as a policy instrument for reducing emissions, the taxes could raise substantial revenues and how the revenues are distributed could dramatically affect the cost of mitigation. If the revenues are distributed by reducing distortionary taxes in the existing system, they will help reduce the excess burden of the existing tax system, potentially yielding an additional economic benefit (double dividend). For example, those of the European studies which are more optimistic regarding the potential for tax recycling, show lower and, in some instances, slightly negative costs. Conversely, inefficient recycling of the tax revenues could increase costs. For example, if the tax revenues are used to finance government programs that yield a lower return than the private sector investments foregone because of the tax, then overall costs will increase. The choice of instruments may also reflect other environmental objectives such as reducing nongreenhouse pollution emissions or increasing forest cover or other concerns such as specific impacts on particular regions or communities.

6.1 Equity considerations are an important aspect of climate change policy and of the Convention and in achieving sustainable development". Equity involves procedural as well as consequential issues. Procedural issues relate to how decisions are made while consequential issues relate to outcomes. To be effective and to promote cooperation, agreements must be regarded as legitimate, and equity is an important element in gaining legitimacy.

6.2 Procedural equity encompasses process and participation issues. It requires that all Parties be able to participate effectively in international negotiations related to climate change. Appropriate measures to enable developing country Parties to participate effectively in negotiations increase the prospects for achieving effective, lasting, and equitable agreements on how best to address the threat of climate change. Concern about equity and social impacts points the need to build endogenous capabilities and strengthen institutional capacities, particularly in developing countries, to make and implement collective decisions in a legitimate and equitable

manner.

6.3 Consequential equity has two components: the distribution of the costs of damages or adaptation and of measures to mitigate climate change. Because countries differ substantially in vulnerability, wealth, capacity, resource endowments, and other factors listed below, unless addressed explicitly, the costs of the damages, adaptation, and mitigation may be borne inequitably.

6.4

Climate change is likely to impose costs on future generations and on regions where damages occur, including regions with low greenhouse gas emissions. Climate change impacts will be distributed unevenly.

6.5 The intertemporal aspects of climate change policy also raise questions of intergenerational equity because future generations are not able to influence directly the policies being chosen today that could affect their well-being, and because it might not be possible to compensate future generations for consequent reductions in their well-being. Discounting is the -principal analytical tool economists use to compare economic effects that occur at different points in time. The choice of discount rate is of crucial technical importance for analyses of climate change policy, because the time horizon is extremely long, and mitigation costs tend to come much earlier than the benefits of avoided damages. The higher the discount rate, the less future benefits and the more current costs matter in the analysis.

6.6

The Convention recognizes in Article 3.1 the principle of common but differentiated responsibilities and respective capabilities. Actions beyond "no regrets!" measures impose costs on the present generation. Mitigation policies unavoidably raise issues about how to share the

17

In common language equity means "the quality of being impartial" or "something that is fair and just."

18

"No regrets" measures are those whose benefits, such as reduced energy costs and reduced emissions of local/regional pollutants equal or exceed their cost to society, excluding the benefits of climate change mitigation. They are sometimes known as "measures worth doing anyway."

costs. The initial emission limitation intentions of Annex I Parties represent an agreed collective first step of those parties in addressing climate change.

6.7 Equity arguments can support a variety of proposals to distribute mitigation costs. Most of them seem to cluster around or combine approaches: equal per capita emission allocations and allocations based on incremental departures from national baseline emissions (current or projected). The implications of climate change for developing countries are different from those for developed countries. The former often have different urgent priorities, weaker institutions, and are generally more vulnerable to climate change. However, it is likely that developing countries' share of emissions will grow further to meet their social and developmental needs. Greenhouse gas emissions are likely to become increasingly global, even whilst substantial percapita disparities are likely to remain.

6.8

There are substantial variations both among developed and developing countries that are relevant to the application of equity principles to mitigation. These include variations in historical and cumulative emissions, current total and per-capita emissions, emission intensities and economic output, projections of future emissions and factors such as wealth, energy structures, and resource endowments.

6.9 A variety of ethical principles, including the importance of meeting people's basic needs, may be relevant to addressing climate change, but the application of principles developed to guide individual behaviour to relations among states is complex and not straightforward. Climate change policies should not aggravate existing disparities between one region and another nor attempt to redress all equity issues.

7.

7.1

ECONOMIC DEVELOPMENT TO PROCEED IN A SUSTAINABLE MANNER

Economic development, social development and environmental protection are interdependent and mutually reinforcing components of sustainable development, which is the framework for our efforts to achieve a higher quality of life for all people. The UNFCCC notes that responses to climate change should be coordinated with social and economic development in an integrated manner with a view to avoiding adverse impacts on the latter, taking into full account the legitimate priority needs of developing countries for the achievement of sustainable development and the eradication of poverty. The Convention also notes the common but differentiated responsibilities and respective capabilities of all Parties to protect the climate system. This section reviews briefly what is known about the costs and benefits of mitigation and adaptation measures as they relate, inter alia, to the sustainability of economic development and environment.

Social Costs of Climate Change

7.2 Net climate change damages include both market and non-market impacts as far as they can be quantified at present and, in some cases, adaptation costs. Damages are expressed in net terms to account for the fact that there are some beneficial impacts of climate change as well, which are, however, dominated by the damage costs. Non-market impacts, such as human health, risk of human mortality and damage to ecosystems, form an important component of

available estimates of the social costs of climate change. The estimates of non-market damages, however, are highly speculative and not comprehensive and are thus a source of major uncertainty in assessing the implications of global climate change for human welfare.

7.3 The assessed literature quantifying total damages from 2 to 3°C warming provides a wide range of point estimates for damages given the presumed change in atmospheric greenhouse gas concentrations. The aggregate estimates tend to be a few percent of world GDP, with, in general, considerably higher estimates of damage to developing countries as a share of their GDP. The aggregate estimates are subject to considerable uncertainty, but the range of uncertainty cannot be gauged from the literature. The range of estimates cannot be interpreted as a confidence interval given the widely differing assumptions and methodologies in the studies. Aggregation is likely to mask even greater uncertainties about damage components. Regional or sectoral approaches to estimating the consequences of climate change include a much wider range of estimates of the net economic effects. For some areas, damages are estimated to be significantly greater and could negatively affect economic development. For others, climate change is estimated to increase economic production and present opportunities for economic development. Equalizing the value of a statistical life at the level typical of that in developed countries would increase monetized damages several times, and would further increase the share of the developing countries in the total damage estimate, Small islands and low lying coastal areas are particularly vulnerable. Damages from possible large-scale catastrophes, such as major changes in ocean circulation, are not reflected in these estimates.

Benefits of Limiting Climate Change

7.4 The benefits of limiting greenhouse gas emissions and enhancing sinks are (a) the climate change damages and adaptation costs avoided and (b) the indirect economic and environmental benefits associated with the relevant policies - such as reductions in other pollutants jointly produced with greenhouse gases, biological diversity conserved and technological innovation driven by climate change response.

Adaptation Costs

7.5 Many options are available for adapting to the impacts of climate change and thus reducing the damages to national economies and natural ecosystems. Adaptive options are available in many sectors, ranging from agriculture and energy to health, coastal zone management, off-shore fisheries and recreation. Some of these provide enhanced ability to cope with the current impacts of climate variability. Systematic estimates of the costs of adaptation to cope with impacts on agriculture, human health, water supplies, and other changes are not available. Where adaptation measures are technically feasible, costs of adaptation, for example to sea level rise, could be prohibitively expensive for some countries without external assistance

Mitigation Costs and Benefits

7.6

The costs of stabilizing atmospheric concentrations of greenhouse gases at levels and within a time frame which will prevent dangerous anthropogenic interference with the climate

system will be critically dependent on the choice of emissions time path, consumption patterns, resource and technology availability and the choice of policy instruments. The cost of the abatement programme will be influenced by the rate of capital replacement, the discount rate and the effect of research and development. Failure to adopt policies as early as possible to encourage efficient replacement investments at the end of the economic life of plant and equipment (i.e., at the point of capital stock turnover) impose an economic cost to society. Implementing emissions reductions at rates that can be absorbed in the course of normal stock turnover are likely to be cheaper than enforcing premature retirement now. The choice of abatement paths thus involves balancing the economic risks of rapid abatement now against the risks of delay. Mitigation measures undertaken in a way that capitalize on other environmental benefits could be cost-effective and enhance sustainable development. Movement of polluting activities which lead to an increase in global greenhouse gas emissions can be lessened through coordinated actions of groups of countries.

7.7

While very few studies of the costs to stabilize atmospheric concentrations of greenhouse gases have been published, some estimates of the costs of various degrees of emissions reductions are available in the literature. Mitigation cost estimates vary widely, depending upon choice of methodologies, underlying assumptions, emission scenarios, policy instruments, reporting year, etc.

7.8 Despite significant differences in views, there is agreement that energy efficiency gains of perhaps 10% to 30% above baseline trends over the next two to three decades can be realized at negative to zero net cost. With longer time horizons, which allow a more complete turnover of capital stocks and which give research, development and demonstration, and market transformation policies a chance to impact multiple replacement cycles, this potential is much higher. The magnitude of such "no regrets" potential depends upon the existence of substantial market or institutional imperfections that prevent cost-effective emission reduction measures from occurring. The key question is then the extent to which such imperfections and barriers can be removed cost-effectively by policy initiatives.

7.9 OECD countries: Although it is difficult to generalize, top-down" analyses suggest that the costs of substantial reductions below 1990 CO2 emissions levels could be as high as several percent of GDP. In the specific case of stabilizing emissions at 1990 levels, most studies estimate that annual costs in the range of minus 0.5 percent of GDP (equivalent to a gain of about $60 billion in total for OECD countries at today's GDP levels) to plus 2 percent of GDP (equivalent to a loss of about $240 billion) could be reached over the next several decades. However, studies also show that appropriate timing of abatement measures and the availability of low-cost alternatives may substantially reduce the size of the overall bill. Some bottom-up studies show that the costs of reducing emissions by 20% in developed countries within two to three decades are negligible to negative. Other bottom-up studies suggest that there exists a potential for absolute reductions in excess of 50% in the longer term, without increasing and perhaps even reducing total energy system costs.

19

See box I in the Summary for Policymakers of IPCC Working Group III for a discussion of topdown and bottom-up models.