Where is it Cheapest to Cut Carbon Emissions?

The answer to the question depends on what you mean by "cheap". In other words, how you measure cost.

I have a new working paper coauthored with Ross Lambie that attempts to answer the question using the results of the GTEM modeling exercises carried out as part of the Australian Treasury review of climate change policy.

Development of policy on the cutting of greenhouse gas emissions has in many countries, including Australia and the United States, been characterized by fierce debate among opposing interest groups. Obviously some interest groups will suffer larger losses than other groups in society and are likely to oppose climate policy.

But putting this issue to one side, is it possible that there are many cheap ways to cut emissions in countries such as the United States and Australia as green groups argue, yet the total cost of climate policy are higher in these countries than in other countries that are often perceived as being more environmentally responsible such as Sweden and the Netherlands as often argued by industry lobbies?

The cost of mitigation - in plainer language cutting carbon emissions - is often represented by a cost curve such as this:



On the X axis is the level of emissions and on the Y axis cost. So that we can put both large and small countries in the same diagram emissions are measured in terms of emissions intensity - emissions per dollar of GDP. Cost is measured as marginal cost - the additional cost of reducing emissions by another unit.

The chart shows two hypothetical countries. One, that I call Ameralia, has high emissions, while Swepan has low emissions. Because it gets harder to cut emissions the lower they get - the "law of diminishing returns" - the marginal cost of reducing emissions is higher in low emissions Swepan than in high emissions Ameralia. The environmentally responsible who have already made efforts to reduce pollution and save energy have higher costs.

The chart shows a Kyoto style equal percentage emissions cut in both countries. The green areas are the total costs that are born by each country in meeting the mitigation target. I've designed the curve so that Ameralia's total costs are greater than Swepan's.

So in this example it is true that depending on what you mean by cheaper it could be cheaper to cut emissions in either Ameralia or Swepan.

The difference between total cost in the two countries will be greater for other policy goals. The total cost of converging on a common emissions intensity will be far greater in Ameralia. Similarly, a common carbon price, if it is to affect Swepan at all, will impose huge costs on Ameralia.

Things get more complicated in the real world. I'll discuss some of those complications in future blog posts.