sectoral economic costs and benefits of ghg mitigation - IPCC

Fossil Fuels
World gas use falls by 230 BCM per year below BaU projections in 2010, and 280 BCM in
2020. Total gas demand is equivalent to 57.5 and 79 million barrels per day in 2010 and 2020 in
the BaU case. Gas demand falls below the BaU levels by 4 mbl/d of oil equivalent in 2010, and
4.8 mbl/d in 2020 world-wide, 4.2 mbl/d and 5.7 mbl/d in 2010 and 2020 in the Annex I region.
The adverse impact on gas is therefore larger than the impact on oil, both in absolute and in
relative terms.
As in the case of oil, non-Annex I demand for gas increases due to price reductions relative to the
BaU levels. Non-Annex I countries increase gas use by 11 and 56 bcm in 2010 and 2020 relative
to the BaU levels, which is equivalent to 190 and 962 thousand barrels of oil per day. This is
only one tenth and one third of the ‘leakage’ observed in the oil market. Gas prices fall by an
average of 6 and 8 per cent from the BaU levels for the years 2010 and 2020.
Similar to coal, three quarters of total gas are used in electricity and energy intensive industries.
Reductions from BaU projections shown in Table 4 for these two sectors amount to 2.9 and 3.6
mbl/d oil equivalent in 2010 and 2020 out of total reductions in gas demand of 4 and 4.8 mbl/d
oil equivalent. ‘Leakage’ in gas use is 200 and 900 thousand bl/d oe for the two periods as world
gas prices decline and non-Annex I countries substitute away from coal.
Comparing the impact of Kyoto produces surprising results: the quantitative impact on gas is
about as large as that on coal, and the impact on oil is smaller in 2010, but larger in 2020 than the
impacts on coal or gas. This deserves some explanations.
The implementation of the Kyoto policies increases user prices of fossil fuels through carbon and
energy levies, which depend on carbon and energy contents of the fuels. It is assumed that the
main instrument of implementation of the Kyoto Protocol is tradable carbon permits, which are
sold at a uniform price per unit of carbon throughout the Annex I region (with the exception of
Japan, which restricts trading and increases the domestic price of permits in 2010). Economic
agents base their decisions on total domestic prices of energy, which are determined by producer
prices, transport costs, domestic taxation (consumption taxes and input taxes), and carbon
permits. Uniform prices of carbon permits affect the three fuels differently, because (a) initial
domestic prices differ strongly whether we look at prices per unit of energy or prices per unit of
carbon; and (b) because of different elasticities of substitution between different fuels in
production, and between goods in consumption, and because of different elasticities of demand
with respect to consumer incomes.
Figure 5 shows differences between prices for coal, refined oil, and gas as measured in energy
and carbon units. Differences are shown in per cent of the gas prices for major Annex I regions.
Positive bars show prices greater than the gas price, negative bars show that prices are below the
gas price. The series in the foreground shows data for coal, the background series shows indices
for refined oil. For each region the bars on the left show relative price indices per unit of energy,
bars on the right show prices per unit of carbon. The figure shows clearly that in all regions
refined oil is substantially more expensive than gas, and in most regions coal is cheaper than gas,
and this general result holds both for prices per energy unit and for prices per carbon unit.
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