2.1 Today’s Agenda Morning: –Review of day 1 –Module 2: Mitigation Assessment: Concepts, Structure and Steps –Introduction to first hands-on exercise Afternoon –First Hands-on Computer Exercise: Screening of Mitigation Options –U,S. EPA Integrated Environmental Strategies Programme

2.2 Module 2 Mitigation Assessment: Concepts, Structure and Steps a.Introduction Why do a mitigation assessment? Preparation, structure and steps Data collection Key participants b.Baseline scenarios c.Screening d.Mitigation scenarios

2.3 Module 2a Introduction (Preparation, structure, steps, data collection, key participants)

2.4 Why do Mitigation Assessment? To take advantage of funding opportunities to build national capacity To comply with international and national commitments To meet long-term planning needs To meet obligations under the UNFCCC To assess potential of energy savings and develop projects To facilitate institutional coordination across sectors for medium to long-term integrated planning To inform policymakers on the costs and benefits of policy options To assess the net (positive/negative) spillover effects and impacts of response measures resulting from mitigation by AI countries To identify win-win policies and measures, particularly with reference to oil-exporting countries To assess mitigation costs to minimise the potential economic impacts on developing countries, particularly those that are heavily dependent on fossil fuel exports

2.5 To decouple GHG emissions and development

2.6 Why do Mitigation Assessment? To meet the principles and objectives of the UNFCCC. Under Article 4, all Parties are required to assess programs and measures that will mitigate climate change. To provide policy makers with an evaluation of technologies and practices that can mitigate climate change and also contribute to national development objectives. To understand the costs of avoiding climate disruption. To identify potential project/programme investments. As a way to develop capacity for energy and environmental planning and to further the goals of sustainable development

2.7 Where are the Opportunities for Mitigation? Initial findings from 300+ studies in 24 NA1 Countries DS - Demand SidePS - Power Supply EE - Energy EfficiencyFS - Fuel Switching NPS - Other Source: ECN, SEI & AED, 1999

2.8 …and what will they cost? Ability to aggregate is limited by inconsistency in definition of costs and baseline assumptions across studies. Some studies excluded significant mitigation options. Studies may neglect or under estimate transaction and barrier reduction costs. Source: ECN, SEI & AED, 1999

2.9 Projected Costs of GHG Mitigation Repetto and Austin (WRI, 1997) compared the results from bottom-up and top-down modeling exercises Their analysis clearly illustrates the extent to which results depend critically on a handful of key assumptions

2.10 Predicted Impacts of CO2 Abatement on U.S. GDP in 2020: 162 Projections from 16 models Adapted from Repetto and Austin, WRI, 1997

2.11 Changing Assumptions Takes Results From Costs to Benefits Air pollution damages averted Revenues recycled efficiently Joint Implementation Increased energy and product substitution Non-carbon backstop fuel available Efficient economic responses Climate change damages averted % Change in GDP % CO 2 Abatement Worst Case Assumptions Adapted from Repetto and Austin, WRI, 1997

2.12 UNFCCC, GHG Inventories, and GHG Mitigation Inventory of GHG Sources and Sinks Taxonomy of Mitigation Options MITIGATION IDENTIFICATION STRATEGIC PLANNING PROJECT DEVELOPMENT and FINANCE INVENTORY ASSESSMENT Mitigation Assessment GHG Reduction & Sequestration GHG Mitigation Projects & Policies UNFCCC Reporting Assessment of Mitigation Options

2.13 Preparing for a Mitigation Assessment What are the key elements?

2.14 Preparing for a Mitigation Assessment Define Time Frame (typically long run) Define Scope (energy demand & supply, agriculture, land-use, forestry, solid waste, geological sequestration). Define participants and key stakeholders/users (policy makers, scientific community, NGOs). Define desired results. Select methodologies consistent with data and expertise availability. Standardize key parameters (base year, end year, discount rate, etc.) Define project boundaries (consistent with approach used to develop emissions inventories) Define scenarios (typically at least two: “baseline” and “mitigation”)

2.15 Key Participants The development of mitigation assessments will require close cooperation among a wide range of stakeholders. Energy, environment and finance ministries will all likely need to be involved. Some tasks may be undertaken by outside consultants or the academic community. Expert skills required include: statisticians, energy policy experts, engineers, modelers, statisticians & technical writers. However, mitigation assessments are not simply technocratic exercises: they involve much broader judgments about how mitigation activities can fit into national development priorities. Thus, the context for defining mitigation priorities will in large part depend on the process by which priorities are expressed in each country (e.g. whether priorities are set by the Government alone or in consultation with other stakeholders such as NGOs, industries, the scientific community, etc.)

2.16 Structure of a Mitigation Assessment Source: UNEP Economics of Greenhouse Gas Limitations Guidelines (1999)

2.17 What should be the steps in a mitigation assessment?

2.18 Steps in a Mitigation Assessment Depends on goals, scope & sectors, but has common steps: 1.Collect data. 2.Assemble base year/historical data on activities, technologies, practices and emission factors. 3.Calibrate base year to standardized statistics such as national energy balance or emissions inventory. 4.Prepare baseline scenario(s). 5.Screen mitigation options. 6.Prepare mitigation scenario(s) and sensitivity analyses. 7.Assess impacts (social, economic, environmental). 8.Develop Mitigation Strategy. 9.Prepare reports.

2.19 Timeframe for Assessments Ideally, should be long-term to reflect economic lifetime and potential for stock turnover of major technologies (e.g years in the energy sector). But development of long-term projections are very difficult, especially in developing countries, due to uncertainties over future development and limited statistical data. Nearer term assessments (10-20 years) based on national plans and sectoral assessments are more practical for most developing countries. These nearer term assessments could usefully be complemented by more aggregate assessments of longer- term trends.

2.20 Integrating with GHG Inventories and Vulnerability and Adaptation (V&A) Assessments Mitigation assessments should be linked to the other national communications: GHG inventories and V&A assessments. Should be consistent with data and assumptions used in those assessments (e.g. demographic and economic assumptions). Reporting on the 3 elements should be harmonized and closely coordinated. GHG Inventories: –will identify major sources and sinks of GHGs, helping to determine the scope and emphasis in the mitigation assessment. –Mitigation assessment accounts should use inventories accounting procedures and emission factors wherever possible. V&A Assessments: –Will identify possible changes in natural resource conditions and management practices, which could effect baseline resource conditions as well as the applicability of mitigation options. –For example: climate change might affect hydro potential, irrigation energy requirements, and biomass productivity, and alter the effectiveness of mitigation strategies such as afforestation or the reduction of agricultural emissions.

2.21 What are Key Study Parameters?

2.22 Key Study Parameters Base year of study Time horizon System boundaries Costing perspective (societal or market) Discount rate Treatment of avoided emissions: –Should they be discounted?

2.23 Analysis of Costs Actions taken to mitigate climate change will often cause economic resources to be diverted away from alternative uses. Mitigation assessments normally attempt to estimate the value of these resources using cost-benefit analysis techniques. Incremental Costs are measured relative to a “no action” counterfactual situation (the baseline). As far as possible, assessments should try and include all costs. Some costs may be negative (“no regrets”). Multi-attribute analysis is a technique for integrating different quantitative indicators in an overall decision framework based on scores and weights. Allows factors that are hard to cost to be included in an overall decision framework.

2.24 Cost of Saved Carbon (CSC) NPV - net present value of option at discount rate i NPE - net present value, or discounted sum of emissions (E) at discount rate j  - difference between mitigation and reference (baseline) option CSC is a common numeraire for reporting and comparing costs of GHG mitigation options.

2.25 Issues Over Discounting Carbon Reported CSCs typically embody a time preference for emission savings or “carbon discount rate” (CDR), often equal to the monetary discount rate used Discounting C at 7% suggests it’s better to save 1 ton C today than 2 tons C in 10 years, even though climate will be worse off. By not discounting emissions, one assumes that the future economic damage caused by emissions increases at the real rate of discount. CSCs for a given abatement measure can vary by a factor of four or higher depending on CDR method used. Carbon discounting approach seldom noted in literature. Lack of consistent approach can lead to misleading results.

2.26 Data Collection Specific data requirements depend on scope and objectives of study. Depending on methodology, may need to collect data only for a base year, or may need to collect historical time series data (e.g. if using econometric methods). Decide on level of data disaggregation: avoid temptation to be “data driven”. Primary focus should be collation of secondary data, but some primary data collection may be required and assumptions/judgment will be needed to fill data gaps.

2.27 From Mitigation Assessments to National Action Plans… Developing a national action plan on mitigation is beyond the scope of this workshop. Involves a much more ambitious scope of work. Key components of this challenge include: –Plan development must involve a diverse group of government agencies. –Requires participation of non-governmental stakeholders. –Must focus on well-defined objectives. –Should emphasize implementation and have a practical focus. –Should have local control and ownership: not be driven by donors. –Should include aspects that aim to increase public awareness of climate change. –Plans should be living documents and viewed as part of an ongoing process to address climate change.

2.28 Module 2b Baseline Scenarios

2.29 Baseline Scenarios A baseline is a plausible and consistent description of how a system might evolve into the future in the absence of explicit new GHG mitigation policies. Assessments will typically require one or more baseline scenarios: the counterfactuals against which mitigation scenarios will be evaluated. A baseline should not be considered a forecast of what will happen in the future, since the future is inherently unpredictable and depends, in part, on planning and the adoption of policies. Baselines are highly uncertain over the long run and may be controversial, particularly in developing countries. –For example, should a baseline assume that the Millennium Development Goals will actually be met, and if so what does this imply for the energy systems of the poorest countries? Ideally, multiple baselines should be constructed to reflect uncertainties (sensitivity analysis). Each baseline requires separate mitigation analyses. In practice, some reasonable balance will need to be struck between this ideal and keeping the assessment manageable.

2.30 Baseline Scenarios (2) Reasonable baselines are critical to a mitigation analysis since mitigation scenarios are largely judged on the basis of the incremental costs and benefits relative to the baseline scenario. Baselines should not be a simple extrapolation of current trends: they should consider likely evolution of activities that effect GHG sources and sinks including consideration of: –Macroeconomic and demographic trends. –Structural shifts in the economy –Projections of the main GHG emitting activities and sinks. –Evolution of technologies and practices, including saturation effects and the likely adoption of efficient technologies that effect GHG emissions.

2.31 Baseline Scenarios Typology Three approaches to defining baselines: 1.Economic efficiency case: assumes perfect allocation of resources: mitigation will always imply economic losses. 2.Business as usual case: a continuation of current trends. 3.Most likely case: markets and institutions are NOT assumed to behave perfectly. May imply the existence of “no regrets” mitigation options. Many real-world examples of economic inefficiency, particularly in large sectors such as energy and transport in both the OECD and the developing world (“efficiency gap”). “Efficiency gap” may be due to market distortions and barriers, or to broader social, political and cultural reasons. Plausible baselines must consider “most likely case”: How persistent will be the “efficiency gap”, given high economic growth rates and the potential for rapid turnover of technology stocks.

2.32 Module 2c Screening of Mitigation Options

2.33 Screening Mitigation Options Enables a rough assessment of the potential feasibility of options. Particularly important when using bottom-up methodologies in which a wide range of technologies and policies need to be considered. May include a quantitative assessment of the mitigation potential (T CO2) and cost of saved carbon ($/TC) of each option. May also include qualitative factors. One approach is to prepare a matrix and assign scores or rankings to options in order to identify those options that need to be included in the more in depth analysis. Gives the opportunity to explicitly consider a comprehensive set of options while reducing the level of effort required in the later more in-depth mitigation analysis. Reduces likelihood of overlooking important options. Screening criteria should be consistent with overall framing of mitigation scenario.

2.34 Possible Screening Criteria Potential for large impact on greenhouse gases (GHGs) Consistency with national development goals Consistency with national environmental goals, such as: –emissions reduction of local air pollutants –effect on biodiversity –soil conservation –watershed management –indoor air quality, etc. Potential effectiveness of implementation policies Sustainability of an option Data availability for evaluation Institutional considerations such as: –Institutional capacity needed (data collection, monitoring, enforcement, permitting, etc.) –Political Feasibility –Replicability (adaptability to different geographical, socio-economic-cultural, legal, and regulatory settings) Other sector-specific criteria

2.35 Possible Economic and Social Screening Criteria Cost-effectiveness –Average and marginal costs Project-level considerations –Capital and operating costs, opportunity costs, incremental costs Macro-economic considerations –GDP, jobs created or lost, effects on inflation or interest rates, implications for long-term development, foreign exchange and trade, other economic benefits or drawbacks Equity considerations –Differential impacts on countries, income groups or future generations

2.36 Screening Matrix

2.37 Screening with Cost Curves A technique for screening and ranking GHG mitigation options. Plot cumulative GHG reduction from successive mitigation options (e.g. tonnes of CO2 avoided) against cost per unit of GHG reduction (e.g. $/tonne). Area under curve yields total cost of avoided emissions. Care should be taken to consider interdependencies among options (e.g. benefits such as fuel switching in electric sector may be reduced by end-use efficiency programs). Source: Sathaye & Meyers. Greenhouse Gas Mitigation Assessment: A Guidebook (1995)

2.38 Three Approaches to Developing Cost Curves Partial approach Retrospective systems approach Integrated systems approach

2.39 The Partial Approach Each technology is evaluated separately and compared to a reference technology. Overall emission reductions and costs are created by combining options while assuming no interaction between options. Simple to conduct, but relies on analyst to identify interdependencies among options.

2.40 The Retrospective System Approach Step 1: Independent ranking of options (like partial approach) Step 2: Include most cost effective option in a scenario and then recalculate costs and emission reductions for all other options. Step 3: Include next option and recalculate. Continue until cost curve meets mitigation objectives.

2.41 The Retrospective System Approach (continued) Takes into account interdependencies between an option and previous options on curve May not account for impacts that more expensive options have on cheaper options already chosen May be important for efficiency options.

2.42 Integrated System Approach Accounts for interdependencies among options. Requires an integrated model that can chose marginal options based on their cost per emission reduction. Automatically develops least cost curves within technical parameters and model constraints. Powerful but complex modeling process - may be difficult to equate reductions with specific options (points on cost curve are a mix of options). Hard to examine interactions between the energy and non- energy sectors.

2.43 Macroeconomic Implications “Bottom-Up” approach only captures direct economic costs, not impacts on GDP growth, employment, industrial structure, etc. Estimating macroeconomic effects requires linkage to macroeconomic model (e.g. through as investment requirements, fuel expenditures, imports/exports, etc.) Macroeconomic effects may in turn feedback to effect energy system. In a general equilibrium approach, whole system will be interdependent – but such models are complex and controversial.

2.44 Module 2d Mitigation Scenarios

2.45 Mitigation Scenarios Reflect a future in which explicit policies and measures are adopted to reduce the sources (or enhance the sinks) of GHGs. Mitigation scenarios should take into account the common but differentiated responsibilities of the Parties and the specific national and regional development priorities, objectives and circumstances. Mitigation scenarios should not simply reflect current plans. Instead they should assess what would be hypothetically achievable based on the goals of the scenario.

2.46 Steps in Constructing Mitigation Scenarios Establish framing. Create option portfolios (identify synergistic and/or mutually exclusive options & double counting), estimate penetration rates. Construct integrated scenarios using chosen modeling methodology. Calculate overall costs, benefits and GHG mitigation potential.

2.47 Framing Mitigation Scenarios Scenario frameworks include: An emission reduction target –relative to the baseline, –relative to emissions in some historical year, or –Relative to some indicator such as CO2/capita or CO2/$ All options up to a certain cost per unit of emissions reduction (equivalent to a carbon tax). “No regrets” (cost-effective options only). Specific options or technologies: included based on perceived technical and/or political feasibility. Parties may wish to assess more than one mitigation scenario.

2.48 Possible Topics for Discussion What approach makes most sense: top- down/macroeconomic or bottom-up? What are the challenges in defining a baseline? –what does “no action” really mean? What scenario framing approach makes most sense (e.g., no regrets, reduction target, all options up to a cost ceiling, etc.)? What criteria could be used in a screening?