sectoral economic costs and benefits of ghg mitigation - IPCC

Fossil Fuels
fuel exporters should damages be incurred. Options reviewed include the use of emissions
trading, the removal of fossil fuel subsidies, and the use of long-term investment strategies to
broaden exporting countries’ economic portfolios.
1 Introduction
In the course of the negotiations of the United Nations Framework Convention on Climate
Change, it became clear that one particular group of countries – those with a heavy reliance on
the export of fossil fuels – perceived themselves at high risk from any possible actions taken to
mitigate climate change. As a result of their intensive lobbying (and ultimately, agreement by
negotiators) a number of Articles were included in the Climate Convention, and later the Kyoto
Protocol, to reflect these concerns 1 . This paper seeks to address only the issue of impacts on
fossil fuel exporters of climate change mitigation responses; it does not address other aspects of
climate change impacts, such as the possible benefits fossil fuel exporters might receive from
climate change mitigation itself. Clearly, the total costs of any impacts would need to be
appropriately adjusted to compensate for such omissions.
From the perspective of these countries, historic precedent could be brought to bear: the present
rates of taxation are applied differentially across the fossil fuels – with oil being taxed the most
heavily (in its refined form), with coal production and consumption being taxed only weakly or
even subsidized 2 . If pricing policy follows past patterns, it might thus be expected that national
efforts to reduce greenhouse gas emissions from fossil fuels could again disproportionately affect
the refined price of oil – although price elasticities suggest that such additional taxes may not be
particularly effective in reducing consumption. Conversely, if a carbon per unit of energy link is
the basis for reductions (a much more cost-effective approach), coal will feel the brunt of the
effort.
It is impossible to accurately assess the validity of this concern; future policy actions cannot be
definitively known. However, a more detailed look at the mechanisms used to assess climate
mitigation impacts, and possible policy approaches that might be used to reduce climate changecausing
emissions could shed some light on this question. For example, the overall economic
costs of mitigating climate change are largely based on models which use a carbon tax as a proxy
for the policies and measures that might be needed to mitigate climate change – and assume that
such a tax would be imposed on all carbon emissions at an equal level (See box on Economic
Models, p. 3).
Inasmuch as the sensitivity to price is not equal, a greater effect in any given sector might be
gained through a differential application of such a tax – e.g., resetting overall tax levels based on
carbon content rather than only establishing an additional or supplemental carbon tax. Clearly
such an approach would substantially alter the impacts that might be felt in any given sector. If
the goal is to reduce carbon most efficiently, such an approach might also lower the overall costs
of mitigation. Given that most models do not assume tax restructuring, they are almost certainly
giving an inflated estimate of costs.
1 See Appendix for texts of the relevant Articles from the Convention (4.8 and 4.9) and the Kyoto Protocol
(2.3 and 3.14). Note that the agreement on these texts reflects the fact that climate change impacts, both
from response strategies, but also from climate change itself, are to be considered. This text was
incorporated only after a comprehensive list of countries facing possible impacts was agreed, including not
only fossil fuel exporters, but also small island countries, countries with low-lying coastal areas, countries
with areas prone to drought and desertification, and an array of others.
2 For example taxes on fossil fuels within the IEA countries range from 4.8% (UK) to 29% (Finland) of the
consumer price for gas, 39% (US) to 85% (UK) for oil, and 1.2% (Switzerland) to 48% (Finland) for coal.
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