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

==== 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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