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Flexibility with no regrets: an energy efficiency based, least cost approach to the Kyoto targets and mechanisms

Panel: Panel 6: Energy Efficiency Under Joint Implementation & The Clean Development Mechanism

Author:
Florentin Krause, International Project for Sustainable Energy Paths (IPSEP)

Abstract

This paper examines a global least-cost approach for mitigating climate change. This strategy consists of domestic energy market and fiscal reforms, complemented by international flexibility mechanisms. Economic analysis of such an approach reveals the decisive role of domestic market reform programs to stimulate cost-effective investments in energy efficiency. It also reveals that the economic significance of international allowance trading has been exaggerated. The potential contribution of profitable domestic "no regrets" energy efficiency options in realising the Kyoto targets for industrialised countries is quantified on the basis of recent state-of-the-art scenario studies for the EU and the U.S.

These studies show that cost-effective domestic energy efficiency options can supply a majority of required carbon reductions in 2010 and can contribute even larger "no regrets" reductions in 2020 if a number of targeted market reforms are implemented. When carbon charges are implemented, tax restructuring can augment the benefits of energy bill savings, leading to large net gains in economic welfare from domestic action alone.

Extrapolation to the Annex II countries with Kyoto commitments yields Annex II benefits of more than $200 billion/year in 2010 and more than $450 billion/year in 2020, equivalent to 1 percent and 1.75 percent of projected GDP. Measured against benefits obtainable from domestic market and fiscal reforms, the marginal economic benefits from the Kyoto flexibility mechanisms are found to be a roughly 5 percent effect. In an integrated least-cost approach, international JI and CDM projects still have an important role to play, but are limited to a supplementary role for purely economic reasons.

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