sectoral economic costs and benefits of ghg mitigation - IPCC

Renewable Energy
change to be as important in strictly economic terms as the health impacts of air pollution on
urban residents.
8 Case F – Guidelines for IPCC – Third Assessment Report
With the purpose to generate a uniform treatment on cost issue, which is understood by IPCC
authors as a subject analyzed in several chapters and by different authors, a paper providing
general guidelines was prepared (Markandya and Halsnaes, 1999). Some useful aspects of the
paper are presented below.
Social cost of something (X) is the full value of the scarce resources that have been used in
producing X. That in turn is measured in terms of the value of the next best thing which could
have been produced with the same resources and is called the social opportunity cost.
The social cost of any activity includes the value of all the resources used in its provision. Some
of these are priced and others are not. Non-priced resources are referred to as externalities. It is
the sum of the costs of these externalities and the priced resources that makes up the social cost.
Social opportunity cost is defined in terms of WTA/WTP (willing to accept payment/willing to
pay, or Social Cost = External Cost + Private Cost).
Private cost is generally taken from the market price of inputs. Adjustment to private costs based
on market prices to bring them into line with social costs is referred to as shadow pricing.
Table 5
Types of Adjustment to Market-based Cost Data to Obtain Social Cost
CATEGORY ADJUST. TO PRIVATE COST ADJUST. TO EXTERNAL COSTS
LAND
Under-pricing or over-pricing of land Values of changes in biodiversity,
services
non-priced forest
LABOR
INVESTMENTS
MATERIALS
ENERGY
ENVIRONMENTAL
SERVICES (NON
ENERGY)
FOREIGN
EXCHANGE
Opportunity cost may be more or less than
wage
Capital may be scarce, in which case it will
have too low a cost associated with it.
Alternatively the opposite may be the case.
Taxes on material inputs which result in too
high a cost. Subsidies in too low a cost.
Energy prices may be below marginal cost of
supply, in which case the cost estimate will
be too low. If they are above the cost of
supply the cost estimate will be too high.
Water supply, wastewater, hazardous waste
services are often under-priced.
Foreign exchange may be scarce in which
case it will have a too low cost associated
with it. If the currency is over-valued it will
have too high a cost associated with it.
products, etc.
Possible external costs arise from
over occupation and
unemployment health effects.
Extraction and transport will have
some external costs attached.
Use of energy generated external
costs in air, water and solid waste
emissions.
External costs are associated with
changes in the levels of use of
these services.
Note: The categories are not mutually exclusive. Foreign exchange, for example, may be used for labor
and capital.
In estimating the social costs, all changes in cost arising from the policy being considered have to
be taken into account.
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