Taran Fæhn*, Karl Jacobsen*, and Birger Strøm

4. Conclusions

Global cost-effective policies would require that the actions take place where abatement costs are the lowest. One would expect that reserving a share of the actions to take place domestically would be more costly, especially so within prosperous economies. Our results support this anticipation. A cost-effective way of achieving the domestic targets is by letting the marginal costs of the reductions be equal for all sources. Costs can be even lower by returning tax revenue via cuts in employers’ social security contributions reduces the cost of the policy because the consumption of time at work is intrinsically lower than what is optimal for welfare because of labour taxation. Even when this policy is conducted, we find that domestic abatement possibilities at levels specified here are far more expensive than international costs reflected by the expected international allowance prices. The marginal abatement cost is more than 4 times as large and welfare costs more than threefold the cost of allowing for unrestricted quota market exploitation. This is even true, when we account for the uncertainty og global achievements in CDM projects through leakages.
The result that domestic targets increase costs is even stronger if the government does not succeed to give reliable policy signals. Costs more than double. By the assumption that the technological barriers are prohibitive when climate policies are not trustworthy, the scenarios with barriers illustrate the outcome of a traditional CGE analysis as compared to our hybrid approach. It thus points to the large danger of overestimating abatement costs in top-down as well as bottom-up analyses and the necessity of combining the two approaches.