emissions and assumes many flexibilities in the system (e.g., high responsiveness of consumption to price and nonprice signals, or availability of low carbon-intensive techniques). With emissions growing over time, a target of constant emissions implies that larger emission reductions are required in every future time period, requiring recourse to more and more expensive measures. Conversely, if a model embeds optimistic assumptions about technological progress in the long run, this tendency may be counterbalanced and the costs in the short term may be higher than over the long run. For given assumptions about technical progress the time profile of the abatement may be a key determinant of differences in cost estimates. In discussing these timing issues, there is a key distinction between the transition period and the backstop period. The transition period comes first and is characterized by an existing capital stock and limited technological options for replacing existing techniques with less carbonintensive or carbon-free techniques. In effect, much of the infrastructure and technology is fixed. The backstop period is entered after sufficient time elapses to allow the entire capital stock to be replaced and for carbon-free backstop technologies to become available, in other words, technologies available for widespread adoption at the end of the economic life of existing equipment. One of the most important determinant of costs during the transition period is the turnover of the capital stock. Over the backstop period the cost of carbon-free technologies places an upper limit on how great the costs of reducing carbon emissions can be. Successful research and development that accelerates the availability of less carbon-intensive and carbon-free technologies can reduce costs in the backstop period. What policy instruments are used to trigger modifications in consumption and technical adoption behaviours and how they are accounted for in the models can also affect the models' results. The types of policy instruments that have been studied in detail are energy taxes and quotas on the one hand and a collection of regulatory programmes, efficiency standards, incentives, information programmes, and voluntary programmes that are intended to bring about adoption of specific technical measures to reduce energy use on the other. Significant differences exist among different models as to which instruments are considered and how they are treated. To date the focus of macroeconomic models has been on carbon or energy taxes (the focus of new generations of sectoral technico-economic analysis has been on the impact of other types of incentive instruments), and significant differences in the results come from the way the revenues of a carbon tax are recycled in an economy. In the earlier models, many simulations were made that assumed no tax recycling. Such an assumption amounts to treating a carbon tax as an external shock such as an oil shock and places an upper bound on the macroeconomic costs. In later analyses, most of the models represented recycling in the form of a lump-sum process, namely, without modifying the rest of the fiscal structure. This method makes comparison easier but does not describe the recycling techniques that have the highest probabilities of being implemented. In a third stage, models tried to exemplify other ways of recycling a tax by changing the level of payroll taxes, income taxes, and corporate taxes, or simply by reducing public deficits. This methodological development complicates comparisons, because the outcome depends on the ways the existing distortions of fiscal structures (or subsidies) are accounted for in the baseline, but it is more meaningful from a policymaking viewpoint. Theoretically, the recycling of a carbon tax may result in either an economic double dividend or an added tax burden (Bovenberg and Van der Mooij, 1994; Goulder, 1994). Rectangle B in the right-hand diagram in Box 10.1 represents the additional cost of a tax when it is levied on top of existing distorting taxes. In these circumstances, emission taxes would yield an economic double dividend if the added tax burden they cause is lower than the decreased tax burden they make possible by reduced taxes on other factors of production (labour, capital, rent). Otherwise, emission taxes would increase the costs to the economy. [Figure 8.4] [THE TEXT DESCRIBING FIGURE 8.4 WAS DELETED. THERE IS NOW NO REFERENCE TO THIS FIGURE IN THE TEXT, ALTHOUGH THE FIGURE HAS BEEN RETAINED. WE SHOULD PROBABLY TRY TO MENTION IT AT LEAST BRIEFLY, SO THAT IT IS INTEGRATED WITH THE TEXT AND NOT ORPHANED.] Box $1 Basic Principles for the Assessment of the Welfare Cost of a Tax Make D the demand curve for a given good (part (a) When a tax is levied, the new price of the good is P1. rectangle R. The net loss in welfare is then equal to 8.2.3.4 International Dimensions of Climate Policies The last factor affecting the cost figures provided by the models is the nature of the assumptions made about the international context of climate policy. On the one hand, unilateral reduction of greenhouse gases may negatively affect the competitiveness of national industries and create a "leakage" of emissions from one country to another. This leakage occurs if mitigation policies in a given country cause firms to relocate their polluting plants and production processes to countries in which no such policies exist, or if firms in countries with no mitigation policies gain a comparative advantage due to lower costs, thus increasing their output and thereby their emissions relative to countries with mitigation policies. On the other hand, international coordination of mitigation policies may not only avoid these outcomes but may result in lowering the total global cost of reducing emissions. To the extent that mitigation costs vary among countries, then the costs of a given level of global mitigation would be lower if international coordination resulted in the most cost-effective mitigation policies being adopted first, than if each country were simply to reduce emissions by an equal amount." Although a growing theoretical literature is currently devoted to this issue, it has been addressed only in a few empirical modelling works to date. Most analyses have assumed either that national polices are adopted unilaterally or that the effects of national mitigation policies are neutral with respect to international competition (i.e., that all countries take the same action or that the effects of mitigation policies on international competitiveness are small). So far no model has been able to account for the gains to be expected from international cooperation in research and development and technology diffusion. 8.3 Patterns of Development and Technological Change For any country, both the level of greenhouse gas emissions and the costs of mitigation of those emissions depend on a series of factors, including the range of technologies used and the underlying technological and socioeconomic conditions that give rise to final demands for land, energy services, or transportation. Most models explore options and alternatives as well as possible future economic conditions, based upon particular assumptions about the nature of technological change and long-term development paths. This section of the chapter will explore this latter question in more detail, because these assumptions are very often only implicit and because current modelling methodologies and current data do not enable modellers to treat explicitly some of these critical parameters. 8.3.1 Links Between Development Patterns, Technical Change, and Mitigation Costs 8.3.1.1 The Importance of the Socioeconomic Assumptions Underlying Scenarios Much of the discussion about the costs of greenhouse gas emission reduction - and indeed about energy issues in general - naturally focuses on economic concepts and variables such as income, prices, and growth in GDP. We therefore begin with a rather trite observation: damages to the environment are not caused by a given amount of dollars, yen, pounds, Deutschmarks, or francs, but by the material content of the consumption or production activities that are the counterparts of these monetary values. To put it in another way, greenhouse gas emissions over the long run depend not only on the rate of economic growth but also on the structure and physical content of this growth. It is well known that countries with rather similar development levels may have very different energy consumption per capita ratios or very different transportation requirements. Some of these disparities are obviously due to natural and geographical characteristics (temperature, population density, etc.), but many of them stem from differences between the development patterns of these countries. Comparative studies aiming at explaining these differences (Martin, 1992; Darmstadter, et al., 1977) suggest the importance of five considerations that will influence the amount of greenhouse gas emissions, given a certain overall rate of economic growth: 1. 2. 3. 5. Technological patterns in sectors such as energy, transport, heavy industry, construction, agriculture, and forestry. As discussed below, these patterns encompass individual technological choices and options but also include overall technological systems, with their particular internal consistencies and dynamics. Consumption patterns. For a given per capita income, parameters such as housing patterns, leisure styles, or the durability and the rate of obsolescence of consumption goods will have a critical influence on long-run emission profiles. Beyond their purely technical aspects, these patterns are also related to the level of education, distribution of income, and degree of dualism in an economy. The geographical distribution of activities, which encompasses the distribution of Trade patterns. It is generally argued in the economic literature that removing |