Policies aimed at mitigating GHGs, as stated earlier, can yield other social benefits and costs (here called ancillary benefits and costs), and a number of empirical studies have made a preliminary attempt to assess these impacts. It is apparent that the actual magnitude of the ancillary benefits or co-benefits assessed critically depends on the scenario structure of the analysis, in particular on the assumptions about policy management in the baseline case (IPCC, 2000b; Krupnick et al., 1996; Krupnick et al., 2000).5 This implies that whether a particular impact is included or not depends on the primary objective of the programme. Moreover, something that is seen as a GHG reduction programme from an international perspective may be seen, from a national perspective, as one in which local pollutants and GHGs are equally important.
A second point is that the economic accounting of ancillary benefits depends crucially on assumptions about the demographic characteristics, regulatory regime, and available technology and how these will evolve. For example, consider the case in which a government imposes a cap on emissions of sulphur. If a GHG mitigation programme is introduced it may reduce the associated amount of sulphur produced, but other activities may take up the slack and so result in no net change in emissions. Alternatively, consider the situation in which the government has a tax on emissions. If the tax is set equal to the marginal damage from sulphur, a small mitigation programme will not generate any direct benefits in terms of sulphur reductions (the value of the reductions is exactly matched by the loss of charge revenue). As a third example, consider the case in which the regulator has a plan to tighten the controls on local pollutants. Any GHG mitigation programme that reduces the levels of these emissions has then to be valued relative to the costs of achieving the dynamic baseline, and not in terms of the benefits of reduced emissions themselves. To sum up, the valuation of ancillary and/or co-benefits requires the policymaker to look not only at the external costs of the pollutants, but also at the net costs and benefits of measures being introduced to deal with them.
Externalities do not necessarily arise when there are effects on third parties. In some cases, these effects may already be recognized, or internal, contained in the price of goods and services. Consider a stylized example, such as damages to vehicles in an automobile accident. If each driver is fully liable for damages to other vehicles and one can reliably assess fault and enforce liability, the damage in an accident would not be an externality because the party at fault would fully recognize the costs. Only if the drivers are not fully liable, or if fault cannot be established, or if liability is not enforceable is there a justification for treating the damage to vehicles in the example as an externality. The key idea is that such exceptions constitute a deviation from ideal institutions. In economic vocabulary, this is referred to as market failure. For damage to be considered an externality from the viewpoint of economic efficiency, some kind of failure in markets or other institutions that causes individuals to fail to take into account the social costs and benefits of their individual actions should be identifiable. From a practical perspective, it is also important that such failures result in an important misallocation of resources.
A full discussion of the empirical relevance of ancillary and/or co-benefits is provided in Chapters 8 and 9.
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