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The economics of reducing carbon emissions

A recent study has shown that the cost of reducing carbon emissions at the national level can only be properly determined when international energy policy and pricing are taken into account.

Climate Change and Environment

Economic instruments such as emissions trading and carbon taxes are foreseen by the Kyoto protocol to help countries achieve their carbon dioxide (CO2) emission reduction targets. The aim is to protect the environment at the lowest possible cost to society. The Kiel Institute of World Economics, affiliated with IfW, teamed up with several other top economic research institutes to form the TRANSUST network of excellence. They subsequently examined in detail the complex interaction between CO2 emission reduction costs and energy policy and pricing. The analysis focused on CO2 Marginal Abatement Costs (MACs), defined as the cost of avoiding the emission of a unit (e.g. tonne) of CO2. One of the reasons that cross-border emissions trading works is that polluters can take advantage of the fact that MACs vary from region to region. IfW generated MACs and MAC curves using a bottom-up approach with the TRANSUST models. What they discovered during the course of their investigation is that energy policy and pricing and MACs cannot be viewed in isolation; they are all interdependent. Furthermore, they learned that environmental taxes could be partially offset by decreases in energy prices as demand declines. MAC curves are also subject to additional uncertainty since energy prices depend on the global market. In conclusion, IfW recommends that attempts to derive country-specific MAC curves must take into account the effect of worldwide climate and energy policy and pricing. A relevant paper has been published summarising the results of the research.

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