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

=== Box 3.5 | Concepts and Modelling Frameworks Used for Quantifying Macroeconomic Effects of Mitigation ===

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Most studies that have developed mitigation pathways have used a cost-effectiveness analysis (CEA) framework, which aim to compare the costs of different mitigation strategies designed to meet a given climate change mitigation goal (e.g., an emission-reduction target or a temperature stabilisation target) but does not represent economic impacts from climate change itself, nor the associated economic benefits of avoided impacts. Other studies use modelling frameworks that represent the feedback of damages from climate change on the economy in a cost-benefit analysis (CBA) approach, which balances mitigation costs and benefits. This second type of study is represented in [[#3.6.2|Section 3.6.2]] .

The marginal abatement cost of carbon, also called carbon price, is determined by the mitigation target under consideration: it describes the cost of reducing the last unit of emissions to reach the target at a given point in time. Total macroeconomic mitigation costs (or gains) aggregate the economy-wide impacts of investments in low-carbon solutions and structural changes away from emitting activities. The total macroeconomic effects of mitigation pathways are reported in terms of variations in economic output or consumption levels, measured against a reference scenario, also called baseline, at various points in time or discounted over a given time period. Depending on the study, the reference scenario reflects specific assumptions about patterns of socio-economic development and assumes either no-climate policies or the climate policies in place or planned at the time the study was carried out. When available in the AR6 scenarios database, this second type of reference scenario, with trends from implemented policies until the end of 2020, has been chosen for computation of mitigation costs. In the vast majority of studies that have produced the body of work on the cost of mitigation assessed here, and in particular in all studies that have submitted global scenarios to the AR6 scenarios database except ( [[#Schultes--2021|Schultes et al. 2021]] ), the feedbacks of climate change impacts on the economic development pathways are not accounted for. This omission of climate impacts leads to overly optimistic economic projections in the reference scenarios, in particular in reference scenarios with no or limited mitigation action where the extent of global warming is the greatest. Mitigation cost estimates computed against no or limited policy reference scenarios therefore omit economic benefits brought by avoided climate change impact along mitigation pathways, and should be interpreted with care ( [[#Grant--2020|Grant et al. 2020]] ). When aggregate economic benefits from avoided climate change impacts are accounted for, mitigation is a welfare-enhancing strategy ( [[#3.6.2|Section 3.6.2]] ).

If GDP or consumption in mitigation pathways are below the reference scenario levels, they are reported as losses or macroeconomic costs. Such cost estimates give an indication of how economic activity slows relative to the reference scenario; they do not necessarily describe, in absolute terms, a reduction of economic output or consumption levels relative to previous years along the pathway. Aggregate mitigation costs depend strongly on the modelling framework used and the assumptions about the reference scenario against which mitigation costs are measured, in particular whether the reference scenario is, or not, on the efficiency frontier of the economy. If the economy is assumed to be at the efficiency frontier in the reference scenario, mitigation inevitably leads to actual costs, at least in the short-run until the production frontier evolves with technical and structural change. Starting from a reference scenario that is not on the efficiency frontier opens the possibility to simultaneously reduce emissions and obtain macroeconomic gains, depending on the design and implementation of mitigation policies. A number of factors can result in reference scenarios below the efficiency frontier, for instance distorting labour taxes and/or fossil fuel subsidies, misallocation or under-utilisation of production factors such as involuntary unemployment, imperfect information or non-rational behaviours. Although these factors are pervasive, the modelling frameworks used to construct mitigation pathways are often limited in their ability to represent them ( [[#Köberle--2021|Köberle et al. 2021]] ).

The absolute level of economic activity and welfare also strongly depends on the socio-economic pathway assumptions regarding, ''inter alia'' , evolutions in demography, productivity, education levels, inequality, and technical change and innovation. The GDP or consumption indicators reported in the database of scenarios, and synthesized below, represent the absolute level of aggregate economic activity or consumption but do not reflect welfare and well-being ( [[#Roberts--2020|Roberts et al. 2020]] ), that notably depend on human-needs satisfaction, distribution within society and inequality ( [[#3.6.4|Section 3.6.4]] ).

[[IPCC:Wg3:Chapter:Chapter-1|Chapter 1]] and Annex III.I give further details of the economic concepts and modelling frameworks, including their limitations, used in this report, respectively.

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