Economic Evaluation of Sectoral Emission Reduction Objectives
for Climate Change
Chris Hendriks,1 David de Jager,1 Jochen Harnisch,2 Judith Bates,3 Leonidas Mantzos,4 and Matti Vainio5
1
Ecofys Energy and Environment, P.O. Box 8408, NL-3503 RK Utrecht, Netherlands, [email protected]
2
Ecofys Energy and Environment, ETZ, Landgrabenstr. 100, Nuremberg, Germany
3
AEA Technology Environment, E6 Culham, Abingdon, Oxfordshire OX14 3ED, UK
4 3
E M-Lab, ICCS/NTUA, Iroon Polytechniou 9, Athens 15773, Greece
5
European Commission, DG Environment, B-1049 Brussels, Belgium
ABSTRACT
This paper summarises a study that identifies a least-cost allocation of objectives for different sectors and
greenhouse gases so that the European Union would meet its Kyoto target of –8% in 2008-2012 compared to
1990 emissions. For the purposes of the study it was assumed that the EU would comply with its Kyoto target
without the “Kyoto mechanisms”. 1
The study concludes that the marginal abatement cost amounts to €99 42/tCO2-eq if each Member State fulfils
their Kyoto “burden sharing” target individually. However, the cost would be reduced to €99 20/tCO2-eq if the
EU Member States fulfil their Kyoto obligations jointly, allowing to take measures where they are most costeffective. In this least cost case, the annual compliance cost in 2010 is estimated at €99 3.7 billion. The
compliance cost would be fairly small in most sectors.
INTRODUCTION
At the Conference of the Parties in Kyoto in December 1997, the Member States of the European Union
jointly committed themselves to reduce their emissions in the period 2008-2012 by 8% compared to the 1990
emission level. The reductions concern six (groups of) greenhouse gases: carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O) and three categories of fluorinated gases (HFCs, PFCs and SF6). In the European
Environment Council of June 1998 the Member States agreed to “share the burden”2 of the 8% target so that
some Member States would commit to a higher reduction target while others were allowed to increase their
emissions. In 1990/1995 the EU15 Member States emitted a total of 4138 Mtonnes of CO2 equivalent (Mt CO2
eq.). At the end of the decade emissions were at about the same level, whereas in projections up to 2010
emissions will increase by about 1% if no additional policies are assumed to be implemented.
This paper summarises the results of a two-year study to identify a least-cost allocation of objectives for
different sectors and greenhouse gases that allows the European Union to reduce its greenhouse gas emissions
by 8% by 2008 – 2012 compared to 1990 emissions. This approach will fully maintain the environmental
integrity of the Kyoto Protocol, while identifying those policies and measures that achieve the Kyoto target in
a manner that minimises the cost. Simply, the intention is to identify a least-cost allocation so that the cost of
production of energy and other goods would increase as little as possible.
1
The Kyoto mechanisms are International Emissions Trading, Joint Implementation and Clean Development Mechanisms. As the compliance costs of the EU are
likely to be higher than in other Parties to the Kyoto Protocol, it is plausible that the EU would comply with its Kyoto target partly by acquiring emission rights. Thus,
in reality it is likely that the reduction target for the EU would be lower than –8%. This was, however, beyond the scope of this study.
2
The “Burden Sharing Agreement” was reached in June 1998. The European Community and EU Member States deposited the rafitifaction papers to the UN on May
31, 2002. The greenhouse gas reduction targets are: European Community -8%, Austria -13%, Belgium -7½%, Denmark -21%, Finland 0%, France 0%, Germany
-21%, Greece +25%, Ireland +13%, Italy -6½%, Luxembourg -28%, the Netherlands -6%, Portugal +27%, Spain +15%, Sweden +4%, and the United Kingdom
-12½%.
The study combines „top-down‟ and „bottom-up‟ methodological approaches and compares them as far as
possible. As both approaches have their strengths and weaknesses, they complement each other, and increase
understanding of different cost-effective greenhouse gas mitigation options.
In the 'bottom-up' approach for each sector technological reduction options and associated costs were analysed
with the GENESIS database. The results of the 'top-down' analysis with the PRIMES model give good insight
in the total compliance costs for the EU.
The study was conducted for the Environment Directorate General of the European Commission by a research
team consisting of Ecofys (co-ordinator), AEA Technology Environment and E3M-Lab of the National
Technical University of Athens.
BOTTOM-UP APPROACH
The bottom-up approach is the engineering-economic analysis of individual emission reduction options. In this
approach a detailed inventory is carried out to the technical emission reduction options available before 2010
in all economic sectors. The options are characterised on emission reduction potential, investment costs,
operation and maintenance costs, operational benefits and lifetime. The database GENESIS compiled by
Ecofys and AEA Technology contains over 250 reduction options (56 for the energy supply sector, 24 for fuel
related emissions, 91 for industry, 17 for transport, 32 for households and services, 18 for agriculture and 13
for the waste sector). It should be noted that even this level of detail does not cover the full variety of options
that are available. However, differences between Member States are taken into account, if relevant. For
instance, differences in climate makes building insulation more effective in reducing emissions in Finland than
in Spain. Doing so, the study gives a reliable approximation of the emission reduction potentials and
associated costs on sector, Member State, on European Union level, and by (group of) greenhouse gas.
TOP-DOWN APPROACH
In the top-down approach, the PRIMES model developed by NTUA is used in which all options are analysed
simultaneously. In the top-down approach only the energy-related CO2 emissions are modelled. The top-down
approach is less detailed compared to the bottom-up approach and it is more difficult to separate distinct
options from one another. However, the advantage of the top-down approach is that the results are 100%
consistent within the model. To include also the non-CO2 information, a meta-model has been developed. In
this model, PRIMES data is completed by emission reduction data of the GENESIS database for non-CO2
greenhouse gases (NCGGs) and process emissions of CO2.
COMPARISON OF BOTTOM UP AND TOP DOWN APPROACHES
Figure 1 shows the results of the bottom-up analysis in a cost-curve (calculated with a discount rate of 4%,
energy related CO2 emissions only). The presented reduction potential for 2010 should be compared to the
frozen technology reference level3 of 4194 MtCO2. The –8% level of 2823 Mt can be obtained with an
emission reduction potential of 1372 Mt CO2.
Figure 2 presents cost curves for the bottom-up and the top-down approaches for the energy-related CO2
emission only. In the range of 3000 Mt CO2 the results of the two approaches are surprisingly close to each
other with a similar carbon value at –8% target level. In both approaches the costs gradually increase from
zero in the baseline to about €50 per tonne CO2 in the case of 500 Mt reduction compared to the baseline.
When reading the figure, it should be noted that
 in the PRIMES analysis emission reduction options with negative costs are already assumed to be
implemented in the baseline.
3
The frozen technology reference level serves for the bottom-up analysis as a (theoretical) reference level in which no additional development to reduce emissions
from 1990 onwards are included. The baseline serves as a reference level for the top-down approach and the meta-model in which all options with zero costs or less
are incorporated.

in the PRIMES analysis substantial reductions occur below 2700 Mt and no further reductions result from
the GENESIS data. This can be explained mainly by the fact that in GENESIS the reduction options
become exhausted, whereas PRIMES allows for further reactions of the systems, like dynamic expansion
of the market potential for the various emission reduction options, indirect interaction of demand and
supply for energy and structural changes.
500
400
(process emissions excluded)
300
200
20 Euro/tonne CO2-eq. level
100
0
-100
0
200
400
600
800
1000
1200
1400
1600
1800
2000
-200
-300
-400
Specific costs (Euro/ton CO2)
Specific costs (Euro/tonne CO 2-eq.)
500
2010 EU-15
CO2 Supply Curve
400
Frozen technology reference level
GENESIS 4%
GENESIS Sector specific
Baseline emissions
PRIMES
300
200
100
0
1000
-100
1500
2000
2500
3000
3500
4000
4500
-200
-500
-600
-300
Emission reduction potential (Mtonne CO2-eq.)
Figure 1 Cost curve for the GENESIS energy related
CO2 emission reduction in the EU15
Remaining emissions after implementation (Mt CO2)
Figure 2 Cost curve for the GENESIS and
PRIMES approach
EUROPEAN UNION WIDE RESULTS
Table 1 presents the distribution of direct emissions of greenhouse gases in the base year, for the 2010
baseline, and in the most cost-effective solution for 2010 where emissions are reduced by 8%. The least cost
allocation implies that some sectors need to reduce their emissions by more than 8% compared with 1990.
These are energy supply (11%), fossil fuel extraction (46%), industry (26%), agriculture (8%) and waste
(28%). Since (with the exception of energy supply) greenhouse gas emissions in these sectors were projected
to decrease, the real effort needed to make the required reductions is less than it appears. Taking this into
account, the real reductions that these sectors would need to make from their projected 2010 emissions are
much lower: for fossil fuel extraction (16%), industry (12%), agriculture (4%) and waste (13%). Emissions in
the remaining sectors would need to be reduced from their projected levels in 2010 as follows: transport (4%)
(assuming the full implementation of the voluntary agreement with the European, Japanese and Korean car
manufacturers to reduce CO2 emissions from cars by 25% by 2008), households (6%), commercial and public
services (15%). The overall weighted reduction remains at 8% from 1990.
According to the least-cost allocation of sectoral objectives EU-wide, the compliance costs for the EU would
be €99 3.7 billion per annum for the period 2008-2012.4 Compared to the baseline, the cost increase will be low
for most sectors: the average electricity and steam generation costs would increase by 10%, energy costs for
most energy demand sectors would increase by 5% at most. For example, costs for all household energy
services and related equipment will increase by about €99 56 per household, per year.
The six most important ways for the EU to reach the Kyoto target in the most cost-effective manner are
identified as being:
 Decarbonisation of energy supply
 Further switching from coal to gas.
 More efficient generation of power (e.g. increasing the share of Combined Heat and Power).
 Increase in the use of renewable energy (notably biomass and wind energy).
 Improvement of energy efficiency, particularly in industry, households (retrofitting) and the services
sector.
4
With the ACEA/JAMA/KAMA agreement incorporated in the baseline; full flexibility scenario, i.e. a European-wide allocation of least-cost objectives for different
sectors. If the agreement was excluded from the baseline, the compliance costs would be €99 2.9 billion higher.




Further reduction of nitrous oxide from the adipic acid industry and implementation of reduction options
in the nitric acid industry.
Reduction of methane emission in coal mining, the oil and natural gas system as well as waste and
agriculture sectors.
Reduction of fluorinated gases in specific applications, e.g. industrial processes, mobile air conditioning
and commercial refrigeration.
Energy efficiency improvement measures in the transport system.
Table 1
Distribution of direct emissions of greenhouse gases in 1990/1995, in the 2010 baseline
and in the most cost-effective solution at the EU15 level for 2010 where emissions are
reduced by 8% compared to the 1990/1995 level.
_________________________________________________________________________________________________________________
Mtonne CO2-eq.
Emissions
Baseline
Cost-effective
Change
Change
emissions
objective
from
from
1990/1995
2010
2010
1990/1995
baseline
_________________________________________________________________________________________________________________
Breakdown per gas
Carbon dioxide
3232
3376
3104
-4%
-8%
o.w. energy related
3068
3193
2922
-5%
-8%
Methane
462
380
345
-25%
-9%
Nitrous oxide
376
317
282
-25%
-11%
HFCs
52
84
54
4%
-36%
PFCs
10
25
19
90%
-24%
SF6
5
7
3
-40%
-57%
Total
4138
4190
3807
-8%
-9%
_________________________________________________________________________________________________________________
Breakdown per sector
Energy supply
1190
1206
1054
-11%
-13%
Non-CO2 fossil fuel
95
61
51
-46%
-16%
Industry
894
759
665
-26%
-12%
Transport
753
984
946
26%
-4%
Households
447
445
420
-6%
-6%
Services
176
200
170
-3%
-15%
Agriculture
417
398
382
-8%
-4%
Waste
166
137
119
-28%
-13%
Total
4138
4190
3807
-8%
-9%
__________________________________________________________________________________________________________________
RESULTS PER MEMBER STATE
Table 1 shows an EU-wide allocation of least-cost objectives for different sectors. If each Member State fulfils
their target individually according to the Burden Sharing Agreement, the least-cost allocation (percentage
change from 1990/1995 by sector) changes by coincidence so little, that the percentages in Table 1 would not
alter significantly. However, the marginal abatement costs would increase from €99 20/tCO2 eq. to €99 42/tCO2
eq. (weighted EU average), and the total compliance cost of all EU Member States would increase from € 99
3.7 billion to €99 7.5 billion per annum. The marginal abatement cost in each Member State would range from
€99 1/tCO2 eq. to over €99 100/tCO2 eq.
One way of interpreting the difference between the EU-wide allocation and the Member State based allocation
approach is to identify this as a potential for EU-wide emission trading.5 An alternative way to interpret the
difference is a recommendation for the allocation of a specific number of permits to those sectors that would
be given the possibility to participate in emission trading and specific objectives to those sectors that are
subject to other policies and measures. These interpretations are useful to keep in mind when using this study
5
In this case it would be (unrealistically) assumed that emission trading would be possible across all sectors and all greenhouse gases. Thus, EU-wide emission trade
could save as much as half of EU Member States total compliance costs. In its proposal for a Directive for EU-wide emissions trading dated 23 October 2001 (see
http://europa.eu.int/eur-lex/en/com/pdf/2001/en_501PC0581.pdf) the European Commission suggests that in the first instance only CO2 from energy production,
cement, iron and steel, paper and pulp would be included. This represents sligthly under half of the EU’s greenhouse gas emissions
to identify policies and measures either at the EU level, i.e. in the Working Groups of the European Climate
Change Programme, or in Member States.
CAVEATS OF THE STUDY
A number of reasons may exist why not
The role of non-CO2 greenhouse gases
automatically the potentially cheapest identified
Our analysis shows that the specific costs of emission
allocation should be adopted. A few of them are
reduction of non-CO2 greenhouse gases (NCGG) are
stipulated:
relatively low compared to energy related CO2. At EUi) some options may not be politically or
level implementation of the most cost-effective options
otherwise feasible e.g. due to strong lobby
results in a 22% reduction objective for NGCC emissions,
group pressure or due to technical or social
whereas CO2 „only‟ need to be reduced by 4%.
difficulties,
In addition to the reduction options in industry (adipic
ii) choosing a longer time horizon than used
and nitric acid production), considerable reduction
in this study (2008-2012) could give rise to
potentials can be found for methane emissions by the
a different allocation, since the longer-term
extraction, transport and distribution of coal, oil and
potential of technological progress is taken
natural gas; emission reduction of HFCs in the cooling
into account. Such consideration of
sector and in the production of foams. If the EU15
allocations was beyond the scope of this
reduction objective of -8% were only to be realised by
study,
emission reductions of energy related CO2 emissions,
iii) some options, such as fuel cells, have not
marginal abatement costs would increase from €20 to
been included in this study because of their
about 25 €/tCO2.
technological limitations and expected
development up to 2010,
iv) it is possible that some mitigation options have been omitted, or that the potential of some measures has
been over or under-estimated,
v) due to the extensive coverage of all gases and due to the unavailability of detailed data in some sectors
(e.g. aviation) it has not been possible to cover all sectors equally deeply,
vi) due to paucity of data, land-use change and the corresponding changes in biological sinks have not been
included,
vii) for the purposes of this study, it was assumed that the EU would reach its target without using the
flexible mechanisms.
CONCLUSIONS
The inventory of technical reduction potentials shows that significant emission reductions are achievable
within the EU with state-of-the-art technologies: in 2010 up to levels that are 20% below the emission levels
of 1990/1995. According to the analysis the main contribution should come from the energy sector and
industry. A fuel shift from coal to natural gas is seen as the most important option with a significant reduction
potential. The additional costs of this option are dependent on local market circumstances and the effects of
the ongoing liberalization of the energy markets. The analysis shows that the electricity price for end-users
would increase by about 5%. Reduction options in industry are a further improvement of energy efficiencies in
industrial production processes and various end-of-pipe measures that reduce the emissions of N2O (e.g. in the
nitric and adipic acid industry), PFCs and HFCs. From both the bottom-up and the top-down meta-analysis, it
is evident even if the European Union complies with its Kyoto obligations without the Kyoto Mechanisms, the
costs would be rather low (the marginal cost is about €99 20-25/tCO2 eq). This study has clearly demonstrated
that cost-effective implementation of the Kyoto Protocol calls for different sectors to make differing
quantitative contributions to reduce greenhouse gas emissions. Allocating to every sector, or to even every
actor within a sector, the same reduction objective may be perceived by some as “fair”. However, using a
different definition of equity where the “effort” of each sector is the same rather than the emission reduction
percentage, differentiated sectoral reduction objectives would be identified.
This study has shown that such differentiated
reduction objectives are, from an economic
perspective, highly desirable provided that the
objectives are established in order to minimise
costs to the society.
Even if the analysis carried out in this study is
comprehensive, it still represents only a
„snapshot‟ of the EU situation in 2000. Thus, the
sector specific allocation of emission reduction
objectives would change if, for instance
economic growth changed substantially, if some
sectors underwent rapid growth changes or if
technological breakthroughs facilitated cheaper
emission reduction options. Thus, the emission
reduction objective allocations described in this
study are likely to alter in the years to come and
thus, consider these allocations in a dynamic
context. In particular, the optimal allocation is
likely to be different in the second commitment
period (i.e. after 2012).
Role of the study in the European Climate Change
Programme (ECCP)
The results of the study were the analytical underpinning of
the European Climate Change Programme
(http://europa.eu.int/comm /environment/climat/eccp.htm), which
was launched in March 2000. As the results of the study
were known to be significant, Environment DirectorateGeneral organised seven stakeholder workshops to validate
the assumptions and projections made in the study. These
workshops, as well as the discussions in the ECCP working
groups, helped to increase understanding of the reduction
options and costs of complying with the Kyoto Protocol.
With the study all working groups had a consistent basis
for staring their work, and were able to see the links
between their work. For instance, the three working groups
on Energy Supply, Energy Consumption and Transport
were frequently discussing same issues and could use the
study as the common point of reference.
ACKNOWLEDGEMENT
The authors want to thank the representatives and experts of industrial organisations, environmental
organisation organisations, governments and the European Commission involved in this study for their
support, information and critical review on drafts of the study results. The authors wish to recognise that the
study was made as a contract with the Environment Directorate-General of the European Commission .
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Analysis of Emission Reduction Opportunities for CO2 in the European Union (Memorandum), Ecofys Energy and
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Capros, P., Kouvartakis, N., and Mantzos, L. (2001) Economic Evaluation of Sectoral Emission Reduction Objectives for
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Hendriks, C.A., De Jager, D., Blok K., De Beer, J., Harnisch, J., Joosen, S., Phylipsen, D., Kersschemeeckers, M., Byers, C.,
Patel, M., Bates, J., Brand, C., Davison, P., Haworth, A., and Hill, N. (2001) Economic Evaluation of Sectoral Emission
Reduction Objectives for Climate Change: Bottom-up Analysis of Emission Reduction Potentials and Costs for Greenhouse
Gases in the EU, Ecofys Energy and Environment and AEA Technology, Utrecht, The Netherlands.
More information on the GENESIS database can be found on http://www.ecofys.com/climate/datasale_en.html.
All reports and supporting sector reports prepared can be downloaded from
http://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htm