Efficiency Gains from "What"-Flexibility in Climate Policy: An Integrated CGE Assessment

The primary objective of this paper is to ascertain the relative importance of a multi-gas emission control strategy (in our case: CO2 and CH4) vis-à-vis a CO2-only abatement strategy. In other words: We want to sort out how much can be gained if we put “what”-flexibility on top of “where”- and “when”-flexibility. The explanatory power of such a comparison depends crucially on the proper design of the overall analytical framework. Therefore, we place special emphasis on the description of the baseline calibration and the integration of climate relationships into PACE, a dynamic multi-sector, multi-region computable general equilibrium (CGE) model of global trade and energy use. Based on numerical simulation with this integrated assessment model we find that “what”-flexibility substantially reduces the compliance costs under alternative emission control schemes. When comparing policies that simply involve long-term temperature targets against more stringent strategies that include additional constraints on the rate of temperature increase, it turns out that the latter involve huge additional costs. These costs may be interpreted as additional insurance payments if damages should not only dependent on absolute temperature change but also the rate of temperature change. Our calculations also confirm the shortcomings of the global warming potential (GWP) approach to represent the contribution of different greenhouse gases to global temperature change because the relative contribution may vary substantially over time.

LOESCHEL Andreas;  RUTHERFORD Thomas F.;  BOEHRINGER Christoph; 

2007-01-22

INT ASSOC ENERGY ECONOMICS

JRC34351