Costs and Benefits of CO2 emission reduction measures

What are the welfare gains of an ambitious climate policy? And what technological options can be used to design this ambitious climate policy? These are the two central questions in this study that ECN (Netherlands Energy Research Centre) and SEO Economic Research performed together for the Ministry of Infrastructure and Environment.

The ambition of the climate policy, in this study, is achieving a CO2 emission reduction of 80% in 2050. The report examines which measures or options are cost-effective for achieving this objective. This provides insight into the direct costs of climate policy. Think about the sources of energy (eg wind, biomass, solar, nuclear and other forms of generation) and options for energy efficiency. Climate and energy policy has also broader impacts on the economy. Reduction of CO2 emission can be seen as a form of welfare gains that citizens and businesses are willing to pay for. Such external effects are, in other words, part of the wealth.

This study brings all social costs and benefits of an ambitious climate policy together and looks at the impact on welfare. Examples of social costs that are measured are the costs of emission reduction measures and the costs of policy needed to make sustainable technologies profitable (through subsidies, standards or pricing). On the income side plays avoided CO2 emissions and air pollution a role, but also temporary and long term effects of sustained investment on production and employment, as well as the social benefit of enhanced energy security and benefit of purchasing power through energy savings.

All calculations are performed against the background of economic scenarios. These scenarios indicate the degree of uncertainty about developments of the economy and energy in the period to 2050. An important conclusion of this report is that a wide range of options is needed to bring down emissions drastically at minimum cost, regardless of the economic scenario for the future. Based on cost considerations few options are off in advance. To achieve a drastic emission reduction to the lowest possible cost it is important to make best use of the cheaper options, like wind on land, and cheaper saving options and to expand the potential where possible. This will prevent that more of the expensive alternatives may be required. For options with a long implementation time this requires early anticipation.

The balance of the social costs and benefits depends heavily on the global context. In case of the existence of a global climate policy, the welfare effect in the Netherlands are mostly positive, ranging from slightly negative to very positive.If only Europe reaches climate policy, the balance for the Netherlands is less positive, because the welfare gain from lower European emissions cannot be counted: other countries are not tied to the European objectives. The bandwidth in the calculated welfare effects is mainly determined by the uncertain valuation of CO2 emissions. There is a small risk of major climate damage caused by CO2 emissions. This explains a high ceiling in the value of CO2 and the potentially large welfare gains from ambitious climate policy in a global climate coalition, also in the Netherlands.