sectoral economic costs and benefits of ghg mitigation - IPCC

Energy Intensive Industries
intensive sector or the electricity sector meet a hard reduction target, with no trading across the
economy, still implies that reductions are made in a cost-effective manner within the sector. We
expect that technology standards or hard targets prescribed on a plant-by-plant or firm-by-firm
basis, without inter-sector trade, would lead to greater inefficiency and higher economic cost than
we estimate.
Our cost estimates must be qualified if there are pre-existing economic distortions that are
“corrected” by the carbon policy, even though the policy itself may appear to be inefficient.
Examples of such a pre-existing distortions include high excise taxes on electricity (Babiker,
Reilly, and Ellerman, 1999), or on refined fuels (Babiker, Reilly and Jacoby, 2000). Also, our
estimates do not account for possible benefits, such as equity concerns, aid for depressed areas,
or ancillary environmental benefits that may help justify the choice of these sector-specific
measures. However, even taking these qualifying factors into account, we believe that, given the
level of aggregation applied in this study, our results will tend to understate the welfare effects of
differentiating emissions controls by sector, and may miss some of the shifts of activity among
sectors and unintended effects on sector trade balances. 1
Table 2
Reference Case and Policy Cases (No International Permit Trade)
CASE
REF
DEFINITION
Reference Case, no climate policy
Cases under Kyoto target, with no exemption of sectors
FT
NT
Full Trading Domestically:
No Trading among US sectors: Each industrial sector and households capped at the
U.S. target.
Cases under Kyoto target, with exemptions of some sectors (E/ . . .). Permit trade among sectors
under cap.
E/TRG
E/H&AG
E/EINT
E/TRAN
E/ELEC
Exempt Tradable Goods. Tradable goods include other industry, energy intensive
industry, agriculture, and the fuel sectors (coal, oil, gas and refoil).
Exempt Households and Agriculture
Exempt Energy Intensive Industry
Exempt Transportation
Exempt Electric Utilities
Cases for Analysis
The Reference Case and Definition of a Kyoto-Type Commitment
The reference and policy cases used in this analysis are summarized in Table 2. Our reference
case (REF), which presumes no climate policy, is similar to that used in previous analyses using
the EPPA model (e.g., Babiker, Reilly and Jacoby, 2000). Over the period 1995 to 2030 studied
here, the U.S. GNP grows at an average annual rate of 2.3%. The welfare index used here is
Equivalent Variation (roughly, the change in real consumption) and it increases by 2.4% per
year. Carbon emissions grow at 1.5% per year. To make short-term economic growth as realistic
as possible, labor productivity growth rates were set for 1995 to 2005 to produce overall
economic growth rates that equal those actually experienced through 1998, and that follow
1 We also do not consider ways that particular injured parties within a sector might be protected by direct
compensation (e.g., through the permit issuing process). Bovenberg and Goulder (1999) show that the
owners of capital assets (but not labor in their analysis) could be protected at costs far below those shown
here.
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