Energy efficiency policies and the timing of action: An assessment of climate mitigation costs

Abstract

This paper assesses the sensitivity of climate change mitigation costs to energy efficiency policies, and gives policy insights for the timing of climate action. A hybrid general equilibrium model (Imaclim-R) is used to investigate numerically the interaction between technical change and economic growth. Energy efficiency in productive sectors lowers energy prices. Lower energy prices increase demand due to lower prices of non-energy goods and higher household revenues. Energy efficiency lowers the carbon price, shifting the emission constraint away from household energy consumption. Energy efficiency policies drive economic growth and reduce policy costs, but only if energy efficiency policies in industrialised regions are combined with measures to accelerate technology transfers towards other regions. The timing of efforts reveals a trade-off between short and long term costs. Early action triggers energy efficiency but shows high short-term costs and should be considered in combination with policies to accelerate technology diffusion. Late action shows high long-term costs, even when combined with policies to enhance innovation and accelerate diffusion. Early action could reduce the cost uncertainty induced by the controversy surrounding the appropriate discount rate for policy assessment, while late action would require additional measures to reduce long term costs, notably in sectors with significant inertia.