Arbejdsrapport fra Miljøstyrelsen 19/2006 – Litteraturstudie af omkostningerne ved drivhusgasreduktion

Litteraturstudie af omkostningerne ved drivhusgasreduktion

Summary and Conclusions

The purpose of this project was to review literature studies with a view to identifying the costs for Denmark’s economy associated with reducing emissions of greenhouse gases by 60-80 per cent by 2050. This reduction target corresponds to the recommendations of the European Council: The Council recommends that the global temperature be permitted to increase by no more than 2°C compared to the pre-industrial level in order to avoid catastrophic climate change. The increase of 2°C is estimated to correspond to a concentration of greenhouse gases in the atmosphere of 550 ppmv, but this conclusion is subject to some uncertainty.

None of the studies reviewed in this project focused on Denmark alone. Common for all the analyses that have been conducted is that they analyse the world by regions, with the EU and its 25 Member States representing one region. This means that there are several analyses of costs for the EU as a whole in relation to alternative climate scenarios, but there are no analyses of abatement costs for Denmark.

In the start-up phase of the project, the reference group highlighted three reports as particularly relevant. These reports are commented on in more detail in this report. The reports were prepared by the European Commission, the European Environment Agency and the DTI (Department of Trade and Industry, UK). The European Commission’s report collates findings from many independent sources in order to identify and analyse the major factors that wil influence mitigation costs for the European Union. The cost estimates referred to for the EU lie between 0-2 per cent of GDP. However, it is not possible to compare the findings on a consistent basis. Unfortunately, in the report from the European Environment Agency (EEA 2005), many of the calculations include the years up to 2030 only. The report from the DTI (DTI 2005) comes the closest to meeting the objective of this project. The report presents three scenarios for the UK for reducing CO₂emissions by 45-70 per cent by 2050. Based on own analyses and existing studies, the report estimates that the costs associated with CO₂ emissions will make up between 0 and 3 per cent of the GDP by the year 2050. However, it is worth noting that the report only deals with reducing CO₂ emissions and not with greenhouse gas emissions in general. This may mean that the abatement costs are overestimated, because the study overlooks the possibility that it might be less costly to reduce emissions of other greenhouse gases than CO₂.

To summarise the literature reviewed into a few key messages, the following findings of the existing studies conducted by recognised organisations can be highlighted:

Quantifying the economic costs of meeting the EU’s future climate targets is subject to much uncertainty. The studies looked at present economic costs between 0-3 per cent of GDP, which is the equivalent of about one to two years of economic growth.
The abatement costs can be reduced significantly if so-called flexible mechanisms are applied on a global basis, i.e. tradable CO₂permits, Joint Implementation (JI) and Clean Development Mechanisms (CDM).
Countries like Denmark, with high CO₂ emissions per capita and high income, will end up incurring average costs compared to other countries that have signed the climate agreement. The highest abatement costs would be experienced in China and countries in Latin America and the Middle East.
The costs of reducing emissions of greenhouse gases 50 years ahead depend to a great extent on technological improvements which are very difficult to predict in the long term. The EU Commission is, however, aware that a prerequisite for technological progress is that the Member States implement policies that support the development of new and less costly technologies.

The literature review does not answer the question: What will it cost Denmark to implement long-term climate policy based on the EU’s recommendations? An analysis for Denmark is, therefore, needed that is based on the forecasting assumptions which are most realistic from a Danish point of view. The conditions for e.g. economic growth, improvements in energy efficiency, renewable energy resources and national regulatory instruments directed towards energy consumption greatly influence the economic costs.

Many of the analyses presented in the literature surveyed in this study were carried out by combining a technological bottom-up model with an economic top-down approach. The advantage of a bottom-up model, such as MARKAL, is that it takes into consideration the total effect of the technological possibilities in the short and medium term. However, in the long term, this type of model will underestimate the technological possibilities. The advantage of a top-down approach in the form of a general equilibrium model, such as GEM-E3, is that the interaction of the entire economy is represented. In this way, the general equilibrium model makes it possible to interpret the welfare effects on a consistent basis. However, the description of technologies in this type of model is weak.

On this basis, it is therefore recommended to conduct a Danish analysis based on both approaches.