Methodological contrasts in costing greenhouse gas abatement policies: Optimization and simulation modeling of micro-economic effects in Canada

Abstract

The national process in Canada for greenhouse gas abatement selected contrasting models to estimate costs, providing a rare opportunity to assess the importance of methodological differences in cost estimates when other input assumptions are the same. MARKAL is a well-known optimization model of the energy-economy system; CIMS is a policy simulation model developed initially for Canada. The models require the same technology and financial data, but CIMS, which does not assume financial cost minimization, also requires information on technology preferences, risk perceptions, tax effects and other critical factors in the decision making of firms and households in order to simulate their likely response to policies. Given the market inertia that is incorporated in a CIMS simulation, it estimates higher costs of emission reduction than MARKAL. CIMS' present value cost estimate for Canada to achieve its Kyoto target of 6% below 1990 emissions by 2010 is $45 billion (CDN) while MARKAL's is $15 billion. When linked to a macro-economic model, the GDP impact of CIMS is 3% while that of MARKAL is less than 1%. This difference would have been slightly larger had all target assumptions of the two models been identical.