Editing IPCC:AR6/WGIII/Chapter-3 (section)

=== 3.6.1 Economy-wide Implications of Mitigation ===

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==== 3.6.1.1 Global Economic Effects of Mitigation and Carbon Values in Mitigation Pathways ====

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Estimates for the marginal abatement cost of carbon in mitigation pathways vary widely, depending on the modelling framework used and socio-economic, technological and policy assumptions. However, it is robust across modelling frameworks that the marginal abatement cost of carbon increases for lower temperature categories, with a higher increase in the short term than in the longer term (Figure 3.32, left panel) ( ''high confidence'' ). The marginal abatement cost of carbon increases non-linearly with the decrease of CO 2 emissions level, but the uncertainty in the range of estimates also increases (Figure 3.33). Mitigation pathways with low‐energy consumption patterns exhibit lower carbon values ( [[#Méjean--2019|Méjean et al. 2019]] ; [[#Meyer--2021|Meyer et al. 2021]] ). In the context of the COVID-19 pandemic recovery, [[#Kikstra--2021a|Kikstra et al. (2021a)]] also show that a low-energy-demand recovery scenario reduces carbon prices for a 1.5°C-consistent pathway by 19% compared to a scenario with energy demand trends restored to pre-pandemic levels.

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'''Figure 3.33 | Marginal abatement cost of carbon with respect to CO''' 2 '''emissions for mitigation pathways with immediate global mitigation action, in 2030 (a) and 2050 (b).'''

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'''Figure 3.32 | Marginal abatement cost of carbon in 2030, 2050 and 2100 for mitigation pathways with immediate global mitigation action (a), and ratio in 2050 between pathways that correspond to NDCs announced prior to COP26 in 2030 and strengthen action after 2030 and pathways with immediate global mitigation action, for C3 and C4 temperature categories (b)''' .

For optimisation modelling frameworks, the time profile of marginal abatement costs of carbon depends on the discount rate, with lower discount rates implying higher carbon values in the short term but lower values in the long term ( [[#Emmerling--2019|Emmerling et al. 2019]] ) (see also ‘Discounting’ in Annex I: Glossary, and Annex III.I.2). In that case, the discount rate also influences the shape of the emissions trajectory, with low discount rates implying more emissions reduction in the short term and, for low-temperature categories, limiting CDR and temperature overshoot.

Pathways that correspond to NDCs announced prior to COP26 in 2030 and strengthen action after 2030 imply higher marginal abatement costs of carbon in the longer run than pathways with stronger immediate global mitigation action (Figure 3.32b) ( ''hi'' ''gh confidence'' ).

Aggregate economic activity and consumption levels in mitigation pathways are primarily determined by socio-economic development pathways but are also influenced by the stringency of the mitigation goal and the policy choices to reach the goal ( ''high confidence'' ). Mitigation pathways in temperature categories C1 and C2 entail losses in global consumption with respect to their baselines – not including benefits of avoided climate change impacts nor co-benefits or co-harms of mitigation action – that correspond to an annualised reduction of consumption growth by 0.04 (median value) (interquartile range [0.02–0.06]) percentage points over the century. For pathways in temperature categories C3 and C4 this reduction in global consumption growth is 0.03 (median value) (interquartile range [0.01–0.05]) percentage points over the century. In the majority of studies that focus on the economic effects of mitigation without accounting for climate damages, global economic growth and consumption growth is reduced compared to baseline scenarios (that omit damages from climate change), but mitigation pathways do not represent an absolute decrease of economic activity level (Figure 3.34b,c).

However, the possibility for increased economic activity following mitigation action, and conversely the risk of large negative economic effects, are not excluded. Some studies find that mitigation increases the speed of economic growth compared to baseline scenarios ( [[#Pollitt--2018|Pollitt and Mercure 2018]] ; [[#Mercure--2019|Mercure et al. 2019]] ). These studies are based on a macroeconomic modelling framework that represent baselines below the efficiency frontier, based on non-equilibrium economic theory, and assume that mitigation is undertaken in such a way that green investments do not crowd out investment in other parts of the economy – and therefore offers an economic stimulus. In the context of the recovery from the COVID-19 crisis, it is estimated that a green investment push would initially boost the economy while also reducing GHG emissions ( [[#IMF--2020|IMF 2020]] ; [[#Pollitt--2021|Pollitt et al. 2021]] ). Conversely, several studies find that only a GDP non-growth/degrowth or post-growth approach enable reaching climate stabilisation below 2°C ( [[#Hardt--2017|Hardt and O’Neill 2017]] ; [[#D’Alessandro--2020|D’Alessandro et al. 2020]] ; [[#Hickel--2020|Hickel and Kallis 2020]] ; [[#Nieto--2020|Nieto et al. 2020]] ), or to minimise the risks of reliance on high energy-GDP decoupling, large-scale CDR and large-scale renewable energy deployment ( [[#Keyßer--2021|Keyßer and Lenzen 2021]] ). Similarly, feedbacks of financial system risk amplifying shocks induced by mitigation policy and lead to a higher impact on economic activity ( [[#Stolbova--2018|Stolbova et al. 2018]] ).

Mitigation costs increase with the stringency of mitigation ( [[#Hof--2017|Hof et al. 2017]] ; [[#Vrontisi--2018|Vrontisi et al. 2018]] ) (Figure 3.34b,c), but are reduced when energy demand is moderated through energy efficiency and lifestyle changes ( [[#Fujimori--2014|Fujimori et al. 2014]] ; [[#Bibas--2015|Bibas et al. 2015]] ; [[#Liu--2018|Liu et al. 2018]] ; [[#Méjean--2019|Méjean et al. 2019]] ), when sustainable transport policies are implemented (Zhang et al. 2018c), and when international technology cooperation is fostered ( [[#Schultes--2018|Schultes et al. 2018]] ; [[#Paroussos--2019|Paroussos et al. 2019]] ). Mitigation costs also depend on assumptions on availability and costs of technologies (Clarke et al. 2014; [[#Bosetti--2015|Bosetti et al. 2015]] ; [[#Dessens--2016|Dessens et al. 2016]] ; [[#Creutzig--2018|Creutzig et al. 2018]] ; [[#Napp--2019|Napp et al. 2019]] ; [[#Giannousakis--2021|Giannousakis et al. 2021]] ), on the representation of innovation dynamics in modelling frameworks ( [[#Hoekstra--2017|Hoekstra et al. 2017]] ; [[#Rengs--2020|Rengs et al. 2020]] ) (Chapter 16), as well as the representation of investment dynamics and financing mechanisms ( [[#Iyer--2015c|Iyer et al. 2015c]] ; [[#Mercure--2019|Mercure et al. 2019]] ; [[#Battiston--2021|Battiston et al. 2021]] ). In particular, endogenous and induced innovation reduce technology costs over time, create path dependencies and reduce the macroeconomic cost of reaching a mitigation target ( [[IPCC:Wg3:Chapter:Chapter-1#1.7.1.2|Section 1.7.1.2]] ). Mitigation costs also depend on socio-economic assumptions ( [[#Hof--2017|Hof et al. 2017]] ; [[#van%20Vuuren--2020|van Vuuren et al. 2020]] ).

Mitigation pathways with early emissions reductions represent higher mitigation costs in the short-run but bring long-term gains for the economy compared to delayed transition pathways ( ''high confidence'' ). Pathways with earlier mitigation action bring higher long-term GDP than pathways reaching the same end-of-century temperature with weaker early action (Figure 3.34d). Comparing counterfactual history scenarios, [[#Sanderson--2020|Sanderson and O’Neill (2020)]] also find that delayed mitigation action leads to higher peak costs. [[#Rogelj--2019b|Rogelj et al. (2019b)]] and [[#Riahi--2021|Riahi et al. (2021)]] also show that pathways with earlier timing of net zero CO 2 lead to higher transition costs but lower long-term mitigation costs, due to dynamic effects arising from lock-in avoidance and learning effects. For example, Riahi et al.(2021) find that for a 2°C target, the GDP losses (compared to a reference scenario without impacts from climate change) in 2100 are 5–70% lower in pathways that avoid net negative CO 2 emissions and temperature overshoot than in pathways with overshoot. Accounting also for climate change damage, [[#van%20der%20Wijst--2021a|van der Wijst et al. (2021a)]] show that avoiding net negative emissions leads to a small increase in total discounted mitigation costs over 2020–2100, between 5% and 14% in their medium assumptions, but does not increase mitigation costs when damages are high and when using a low discount rate, and becomes economically attractive if damages are not fully reversible. The modelled cost-optimal balance of mitigation action over time strongly depends on the discount rate used to compute or evaluate mitigation pathways: lower discount rates favour earlier mitigation, reducing both temperature overshoot and reliance on net negative carbon emissions ( [[#Emmerling--2019|Emmerling et al. 2019]] ; [[#Riahi--2021|Riahi et al. 2021]] ). Mitigation pathways with weak early action corresponding to NDCs announced prior to COP26 in 2030 and strengthening action after 2030 to reach end-of-century temperature targets imply limited mitigation costs in 2030, compared to immediate global action pathways, but faster increase in costs post-2030, with implications for intergenerational equity (Aldy et al. 2016; [[#Liu--2016|Liu et al. 2016]] ; [[#Vrontisi--2018|Vrontisi et al. 2018]] ). Emissions trading policies reduce global aggregate mitigation costs, in particular in the context of achieving NDCs ( [[#Fujimori--2015|Fujimori et al. 2015]] , 2016a; [[#Böhringer--2021|Böhringer et al. 2021]] ; [[#Edmonds--2021|Edmonds et al. 2021]] ), and change the distribution of mitigation costs between regions and countries ( [[#3.6.1|Section 3.6.1]] .2).

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==== 3.6.1.2 Regional Mitigation Costs and Effort-sharing Regimes ====

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The economic repercussions of mitigation policies vary across countries (Aldy et al. 2016; [[#Hof--2017|Hof et al. 2017]] ): regional variations exist in institutions, economic and technological development, and mitigation opportunities. For a globally uniform carbon price, carbon-intensive and energy-exporting countries bear the highest economic costs because of a deeper transformation of their economies and of trade losses in the fossil markets ( [[#Stern--2012|Stern et al. 2012]] ; [[#Tavoni--2015|Tavoni et al. 2015]] ; [[#Böhringer--2021|Böhringer et al. 2021]] ). This finding is confirmed in Figure 3.35. Since carbon-intensive countries are often poorer, uniform global carbon prices raise equity concerns ( [[#Tavoni--2015|Tavoni et al. 2015]] ). On the other hand, the climate economic benefits of mitigating climate change will be larger in poorer countries (Cross-Working Group Box 1 in this chapter). This reduces policy regressivity but does not eliminate it ( [[#Taconet--2020|Taconet et al. 2020]] ; [[#Gazzotti--2021|Gazzotti et al. 2021]] ). Together with co-benefits, such as health benefits of improved air quality, the economic benefits of mitigating climate change are likely to outweigh mitigation costs in many regions ( [[#Li--2018|Li et al. 2018]] , 2019; [[#Scovronick--2021|Scovronick et al. 2021]] ).

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'''Figure 3.35 | a: regional mitigation costs in the year 2050 (expressed as GDP losses between mitigation scenarios and corresponding baselines, not accounting for climate change damages), under the assumption of immediate global action with uniform global carbon pricing and no international transfers, by climate categories for the 2°C (&gt;67%) and 1.''' '''5°C (&gt;50%) (with and without overshoot) categories. Right panel:''' policy costs in 2050 (as in panel a) for 2°C (&gt;67%) climate category C3 for scenario pairs that represent either immediate global action (‘immediate’) or delayed global action (‘delayed’) with weaker action in the short term, strengthening to reach the same end-of-century temperature target.

Regional policy costs depend on the evaluation framework ( [[#Budolfson--2021|Budolfson et al. 2021]] ), policy design, including revenue recycling, and on international coordination, especially among trade partners. By fostering technological change and finance, climate cooperation can generate economic benefits, both in large developing economies such as China and India ( [[#Paroussos--2019|Paroussos et al. 2019]] ) and industrialised regions such as Europe ( [[#Vrontisi--2020|Vrontisi et al. 2020]] ). International coordination is a major driver of regional policy costs. Delayed participation in global mitigation efforts raises participation costs, especially in carbon-intensive economies (Figure 3.35a. Trading systems and transfers can deliver cost savings and improve equity ( [[#Rose--2017a|Rose et al. 2017a]] ). On the other hand, measures that reduce imports of energy-intensive goods such as carbon-border tax adjustment may imply costs outside of the policy jurisdiction and have international equity repercussions, depending on how they are designed ( [[#Böhringer--2012|Böhringer et al. 2012]] , 2017; [[#Cosbey--2019|Cosbey et al. 2019]] ) ( [[IPCC:Wg3:Chapter:Chapter-13#13.6.6|Section 13.6.6]] ).

An equitable global emission-trading scheme would require very large international financial transfers, in the order of several hundred billion USD per year ( [[#Tavoni--2015|Tavoni et al. 2015]] ; [[#Bauer--2020|Bauer et al. 2020]] ; [[#van%20den%20Berg--2020|van den Berg et al. 2020]] ). The magnitude of transfers depends on the stringency of the climate goals and on the burden-sharing principle. Some interpretations of equitable burden sharing compliant with the Paris Agreement leads to negative carbon allowances for developed countries and some developing countries by mid-century ( [[#van%20den%20Berg--2020|van den Berg et al. 2020]] ), more stringent than cost-optimal pathways. International transfers also depend on the underlying socio-economic development ( [[#Leimbach--2019|Leimbach and Giannousakis 2019]] ), as these drive the mitigation costs of meeting the Paris Agreement ( [[#Rogelj--2018|Rogelj et al. 2018]] b). By contrast, achieving equity without international markets would result in a large discrepancy in regional carbon prices, up to a factor of 100 ( [[#Bauer--2020|Bauer et al. 2020]] ). The efficiency-sovereignty trade-off can be partly resolved by allowing for limited differentiation of regional carbon prices: moderate financial transfers substantially reduce inefficiencies by narrowing the carbon price spread ( [[#Bauer--2020|Bauer et al. 2020]] ).

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==== 3.6.1.3 Investments in Mitigation Pathways ====

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Figures 3.36 and 3.37 show increased investment needs in the energy sector in lower temperature categories, and a major shift away from fossil fuel generation and extraction towards electricity, including for system enhancements for electricity transmission, distribution and storage, and low-carbon technologies. Investment needs in the electricity sector are 2.3 trillion USD2015 yr –1 over 2023–2050 on average for C1 pathways, 2 trillion USD for C2 pathways, 1.7 trillion USD for C3, 1.2 trillion USD for C4 and 0.9–1.1 billion USD for C5/C6/C7 (mean values for pathways in each temperature category). The regional pattern of power sector investments broadly mirrors the global picture. However, the bulk of investment requirements are in medium- and low-income regions. These results from the AR6 scenarios database corroborate the findings from [[#McCollum--2018a|McCollum et al. (2018a)]] , [[#Zhou--2019|Zhou et al. (2019)]] and [[#Bertram--2021|Bertram et al. (2021)]] .

In the context of the COVID-19 pandemic recovery, [[#Kikstra--2021a|Kikstra et al. (2021a)]] show that a low-energy-demand recovery scenario reduces energy investments required until 2030 for a 1.5°C consistent pathway by 9% (corresponding to reducing total required energy investment by USD1.8 trillion) compared to a scenario with energy demand trends restored to pre-pandemic levels.

Few studies extend the scope of the investment needs quantification beyond the energy sector. [[#Fisch-Romito--2019|Fisch-Romito and Guivarch (2019)]] and [[#Ó%20Broin--2017|Ó Broin and Guivarch (2017)]] assess investment needs for transportation infrastructures and find lower investment needs in low-carbon pathways, due to a reduction in transport activity and a shift towards less road construction, compared to high-carbon pathways. [[#Rozenberg--2019|Rozenberg and Fay (2019)]] estimate the funding needs to close the service gaps in water and sanitation, transportation, electricity, irrigation, and flood protection in thousands of scenarios, showing that infrastructure investment paths compatible with full decarbonisation in the second half of the century need not cost more than more-polluting alternatives. Investment needs are estimated between 2% to 8% of GDP, depending on the quality and quantity of services targeted, the timing of investments, construction costs, and complementary policies.

[[IPCC:Wg3:Chapter:Chapter-15|Chapter 15]] also reports investment requirements in global mitigation pathways in the near term, compares them to recent investment trends, and assesses financing issues.

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'''Figure 3.36''' '''| Global average yearly investments from 2023–2052 for''' '''nine electricity supply subcomponents and for extraction of fossil fuels (in''' '''billion''' '''USD2015), in pathways by temperature categories.''' T&amp;D: transmission and distribution of electricity. Bars show the median values (number of pathways at the bottom), and whiskers show the interquartile ranges.

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'''Figure 3.37 | Average yearly investments from 2023–2052 for the four subcomponents of the energy system representing the larger amounts (in''' '''billion''' '''USD2015), by aggregate regions, in pathways by temperature categories.''' T&amp;D: transmissions and distribution of electricity. Extr.: extraction of fossil fuels. Bars show the median values (number of pathways at the bottom), and whiskers show the interquartile ranges. For definition of regional classifications used see Annex II Table 1.

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