‘Sustainable Development in OECD Countries Getting the Policies Right 9 OFcD 2004 Chapter 3 Reducing Emissions of Greenhouse Gases Climate change may impose very large costs in the second half of the century and later unless greenhouse gas emissions are kept under control. Given the magnitude of the emission reductions that are required in the long run, it is of paramount importance to ensure that the most cust: ient measures are used, Por this reason, the twenty country reviews dealing with the issue have focused on the capacity of climate change policies to deliver the highest possible amount of emission reductions for the cost incurred. The chapter reports the findings and recommendations {from country reviews based on analysis for each policy instrument: unluntary agreements, regulations, schemes ta pramate the use of renewable energy sources, carbon taxes and tradeable permits. It also includes data comparing actual emissions against adopted objectives and provides insights about the extent to which emission trends have been decoupled from economic growth. ‘SUSTAINABLE DEVELOPMENT IN OECD COUNTRIES - ISBN 92-64-01683-7 -© OECD 20083,_REDUGING EMISSIONS OF GREENHOUSE GASES 1. Introduction ‘This chapter provides a synthesis of the 21 reports on climate change policy that have been undertaken for OECD country economic surveys that have or will appear in the period October 2002 to the autumn of 2004.1 The focus of these country sections has been the cost-efficiency of the greenhouse gas (GHG) abatement policies implemented by OECD member countries. They hhave aleo diecuseed the cocial consequences of climate change policiee and how the perceived social implications have influenced the design of policies. Against the background of the policy analysis, the economic surveys have provided general and specific policy recommendations on the use of instruments. The sections have not addressed whether the objectives are appropriate given the expected costs and benefits of the policies. This issue will be important for the design of future greenhouse gas policies, but the benefits of abatement at global level are still uncertain though knowledge about the damage of imate change is improving (see Box 3.1). The examples given below are mostly drawn from the countries reviewed on this topic and therefore generally do not cover all OECD countries. 2, Objectives and performance The international community has twice chosen quantity-based objectives to address the challenge of climate change. First, all OECD countries bar Mexico, Korea and Turkey set an indicative target of keeping their domestic emissions below 1990 levels by 2000 under the UN Framework Convention on Climate Change (UNFCCC) signed in Rio in 1992 Secondly, the same group of countries and a number of non-OECD countries (together known as Annex B countries)” accepted national emission limits for the 2008/2012 period during the Kyoto conference in 1997, with a view to lowering emissions to 95 per cent of their 1990 level by 2008 to 2012. Subsequently the international community agreed limits on the extent to which increased uptake of carbon in agriculture and forestry (sinks) could count against the emissions of Annex B countries and on the extent to which emission credits from developing countries could be set against national emission limits. The overall result of these changes is that if maximum use is made of sinks and imports from developing countries (both of which are difficult to monitor), then therninimum domestic emission reduction required for all Annex B countries was set at 2 per cent, against the reduction of 5 per cent in net emissions that was initially foreseen in the Kyoto Protocol. 80 SUSTAINABLE DEVILOPMENT IN OECD COUNTRIES -ISEN 92 64-01693-7 - © OECD 20043,_REDUGING EMISSIONS OF GREENHOUSE GASES Box 3.1. Estimating the marginal benefit of reducing greenhouse gas emissions ‘Man-made emissions of greenhouse gases (GHG) have been found to modify the earth's climate and will have contrasting consequences across countries according to the Intergovernmental Penel on Climate Change (IPCC, 20012). Despite considerable progress in climate modeling in the past decade, impact forecasts are still marked by a high degree of uncertainty, especially with respect to the likelihood and nature of catastrophic occurrences. There is, however, a general consensus that climate change will affect ecosystems and human activities in many ways because mean temperatures will increase, the climate may become more variable, the sea level will rise and extreme climatic events may become more frequent (IPCC, 2001a). On the basis of numerous assumptions, these changes can be translated into economic gains and losses. Over the longer term, these estimates suggest that some countries stand to gain from climate change, notably because of higher farm productivity (Russia, Canada), a few others may be little affected (United States), while the majority of countries may incur losses, especially if they fail to improve their public health capabilities. At high levels of global warming (a temperature increase of 4°C or more), which is projected by a ‘ew models for the second part of the 22nd century, impacts might become overwhelmingly negative on the assumption of little technological change (Smith and Hitz, 2003). While there is considerable uncertainty surrounding the estimated benefits of a reduction in emissions, the country reviews showed that governments have used a central value for policy integration and project evaluation purposes. For evample, the It gouernmant has provisionally retained a damage estimate of GBP 20 per tonne of carbon dioxide, the French government uses a point estimate of EUR 27 and the European Commission has suggested a price range of EUR 21 to 54.1 ‘These values are based on research conducted in the early 1990s reported in IPCC (1995) and, since then, evaluation techniques have improved substantially. The rapid evolution of the state of knowledge meant that no update on consensual damage cost estimates could be included in the third assessment report issued by the IPCC (2001). ‘he mam tactors that intluence the marginal benefits are better known. Thus, estimates will differ according to the choice of the discount rate, integretion of catastrophes in the modelling scenarios, estimation of future income and rising damage estimates, the consideration of ancillary benefits, suchas reduced air pollution and noise that arise from lowering greenhouse gas emissions,” and the choice of social welfare funclion thatis used lo aggregate income losses for different groups in the world economy. The median of 88 estimates surveyed by Tol (2003) is a marginal damage of emitting GHG of USD 1% per tonne of carbon dioxide. Itis, however, subject to a large degree of uncertainty and results are strongly dependent on the discount factors used in the analyses (OECD, 2004).? 1. All monetary quantities in source documents have been updated to 2003 prices and, where appropriate, converted into a currency other than that used in the source at average 2003 2 eg ener vendo ge de vem ea um 2a pe eee cee tea (OECD, 2001). Including ancillary benefits in estimates of the gains of reducing GHG emissions may not be warranted if other policies are in place to deal with such extemaites. 3. Forpolicy evaluation purposes, a positive discount rate is necessary. ‘SUSTAINABLE DEVELOPMENT IN OECD COUNTRIES - ISBN 92-64-01683-7 -© OECD 2008 81