Cost Concepts For Climate Change Mitigation

Major cost concepts used for evaluation of carbon policy are considered, including change in GDP, change in consumption, change in welfare, energy system cost, and area under marginal abatement cost (MAC) curve. The issues associated with the use of these concepts are discussed. We use the results from the models that participated in the European Energy Modeling Forum (EMF28) study to illustrate the cost concepts. There is substantial variability in the estimates of costs between the models, with some models showing substantial costs and some models reporting benefits from mitigation in some scenarios. Because impacts of a policy are evaluated as changes from a reference scenario, it is important to define a reference scenario. MAC cost measures tend to exclude existing distortions in the economy, while existing energy taxes and subsidies are substantial in many countries. We discuss that carbon prices are inadequate measures of the policy costs. We conclude that changes in macroeconomic consumption or welfare are the most appropriate measures of policy costs.