ABSTRACT The overall objective of this paper is to scrutinize previous economic models used to assess the economic costs of cli-mate policy. We pay particular attention to the way in which different model structures and assumptions affect cost es-timates, and highlight the limitations and the strengths of different types of modelling approaches. The paper begins by briefly discussing the concept of economic costs, different cost categories (i.e., direct costs, partial equilibrium costs and general equilibrium costs), and the various model approaches that can be used to assess the economic impacts of climate policy (e.g., top-down versus bottom-up models). A systematic review of the main assumptions and methodo-logical choices that underlie different reported cost estimates is presented, and we distinguish between five main types of climate policy cost drivers: a) the baseline scenario; b) the structural characteristics of the models; c) the representa-tion of technological change (e.g., endogenous or exogenous); d) the design of climate policy; and e) the inclusion of non-market costs and benefits. The analysis shows that all these elements help explain model outcomes.
Cite this paper
P. Söderholm, "Modeling the Economic Costs of Climate Policy: An Overview," American Journal of Climate Change, Vol. 1 No. 1, 2012, pp. 14-32. doi: 10.4236/ajcc.2012.11002.
 S. Solomin, D. Qin, Z. Chen, M. Marquis, K. B. Tignor and H. L. Miller, “Contribution of Working Group I to the Fourth Assessment Report of the IPCC on Climate Change,” Climate Change 2007: The Physical Science Basis, Cambridge University Press, Cambridge, 2007, p. 996.
 J.-C. Hourcade, K. Halsneas, M. Jaccard, W. D. Montgomery, R. G. Richels, J. Robinson, P. R. Shukla and P. Sturm, “A Review of Mitigation Cost Studies,” In: J. P. Bruce, H. Lee and E. F. Haites, Eds., Climate Change, 1995: Economic and Social Dimensions of Climate Change, Contribution of Working Group III to the Second Assessment Report of the IPCC, University of Cambridge Press, New York, 1996.
 T. Barker and P. Ekins, “The Costs of Kyoto for the US Economy,” The Energy Journal, Vol. 25, No. 3, 2004, pp. 53-71. doi:10.5547/ISSN0195-6574-EJ-Vol25-No3-4
 R. S. J. Tol, “Modelling the Costs of Emission Reduction: Different Approaches,” Pacific and Asian Journal of Energy, Vol. 10, No. 1, 2000, pp. 1-7.
 J. Peace and J. Weyant, “Insight Not Numbers: The Appropriate Use of Economic Models,” Pew Center on Global Climate Change, Arlington, 2008.
 C. D. Kolstad and M. Toman, “The Economics of Climate Policy,” Resources for the Future, Washington DC, 2000, p. 40.
 R. Gerlagh and B. C. C. Van Der Zwaan, “Long-Term Substitutability between Environmental and Man-Made Goods,” Journal of Environmental Economics and Management, Vol. 44, No. 2, 2002, pp. 329-345.
 N. Stern, “The Economics of Climate Change: The Stern Review,” Cambridge University Press, Cambridge, 2006.
 W. D. Nordhaus, “A Review of the Stern Review on the Economics of Climate Change,” Journal of Economic Literature, Vol. 45, No. 3, 2007, pp. 686-702.
 M. L. Weitzman, “A Review of the Stern Review on the Economics of Climate Change,” Journal of Economic Literature, Vol. 45, No. 3, 2007, pp. 703-724.
 M. Olson, “The Logic of Collective Action: Public Goods and the Theory of Groups,” Harvard University Press, Cambridge, 1965.
 P. S?derholm, R. Hildingsson, B. Johansson, J. Khan and F. Wilhelmsson, “Governing the Transition to Low-Carbon Futures: A Critical Survey of Energy Scenarios for 2050,” Futures, Vol. 43, No. 10, 2011, pp. 1105-1116.
 W. A. Pizer and R. Kopp, “Calculating the Costs of Environmental Regulation,” Resources for the Future, Washington DC, 2003, pp. 3-6.
 R. Schmalensee, “The Costs of Environmental Protection,” In: M. B. Kotowski, Ed., Balancing Economic Growth and Environmental Goods, American Council for Capital Formation, Center for Policy Research, Washington DC, 1994.
 A. Mas-Colell, M. D. Whinston and J. R. Green, “Microeconomic Theory,” Oxford University Press, New York, 1995.
 L. H. Goulder, “Environmental Taxation and the Double Dividend: A Reader’s Guide,” International Tax and Public Finance, Vol. 2, No. 2, 1995, pp. 157-183.
 A. L. D. Bovenberg and R. A. De Mooij, “Environmental Levies and Distortionary Taxation,” American Economic Review, Vol. 84, No. 4, 1994, pp. 1085-1089.
 A. L. Bovenberg and F. Van Der Ploeg, “Optimal Taxation, Public Goods and Environmental Policy with Involuntary Unemployment,” Journal of Public Economics, Vol. 62, No. 1-2, 1996, pp. 59-83.
 L. H. Goulder, I. W. H. Parry and D. Burtraw, “RevenueRaising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions,” RAND Journal of Economics, Vol. 28, No. 4, 1997, pp. 708-731.
 P. Ekins, “Rethinking the Costs Related to Global Warming: A Survey of the Issues,” Environmental and Resource Economics, Vol. 6, No. 3, 1995, pp. 231-277.
 A. Krook-Riekkola, E. O. Ahlgren and P. S?derholm, “Ancillary Benefits of Climate Policy in a Small Open Economy: The Case of Sweden,” Energy Policy, Vol. 39, No. 9, 2011, pp. 4985-4998.
 A. L?schel, “Technological Change in Economic Models of Environmental Policy: A Survey,” Ecological Economics, Vol. 43, No. 2-3, 2002, pp. 105-126.
 A. Grübler, N. Naki?enovi? and W. D. Nordhaus, “Technological Change and the Environment,” Resources for the Future , Washington. DC, 2002.
 L.G. Fishbone, G. Giesen, H. A. Goldstein and K. J. Stocks, “User’s Guide to MARKAL (BNL/KFA Version 2.0): A Multi-Period, Linear-Programming Model for Energy Systems Analysis,” Brookhaven National Laboratory, New York, 1983.
 S. Messner, “Endogenized Technological Learning in an Energy Systems Model,” Journal of Evolutionary Economics, Vol. 7, No. 3, 1997, pp. 291-313.
 N. Kouvaritakis, A. Soria C. Thonet and S. Isoard, “Endogenous Learning in World Post-Kyoto Scenarios: Application of the POLES Model under Adaptive Expectations” International Journal of Global Energy Issues, Vol. 14, No. 1-4, 2000, pp. 222-248.
 R. Repetto and D. Austin, “The Costs of Climate Protection: A Guide for the Perplexed,” World Resources Institute, Washington DC, 1997.
 T. Schatzki, R. Stavins and J. Jaffe, “Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy,” Resources for the Future, Washington DC, 2007, pp. 7-12.
 I. S. Wing, “Computable General Equilibrium Models and Their Use in Economy-Wide Policy Analysis: Everything You Ever Wanted to Know (But Were Afraid to Ask),” Center for Energy & Environmental Studies, Boston University, Boston, 2005.
 K. Conrad, “Computable General Equilibrium Models for Environmental Economics and Policy Analysis,” In: J. C. J. M. Van Den Bergh, Eds., Handbook of Environmental and Resource Economics, Edward Elgar, Cheltenham, 1999.
 M. K. Jaccard, J. Nyboer, C. Bataille and B. Sandownik, “Modeling the Cost of Climate Policy: Distinguishing between Alternative Cost Definitions and Long-Run Cost Dynamics,” The Energy Journal, Vol. 24, No. 1, 2003, pp. 49-73. doi:10.5547/ISSN0195-6574-EJ-Vol24-No1-3
 P. S?derholm “The Modelling of Fuel Use in the Power Sector: A Survey of Econometric Analysis,” Journal of Energy Literature, Vol. 4, No. 2, 1998, pp. 3-27.
 H. Pan, “The Cost Efficiency of Kyoto Flexible Mechanisms: A Top-Down Study with the GEM-E3 World Model,” Environmental Modelling & Software, Vol. 20, No. 11, 2005, pp. 1401-1411.
 P. M. Bernstein, W. D. Montgomery, T. F. Rutherford and G.-F. Yang, “Effects of Restrictions on International Permit Trading: The MS-MRT Model,” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 221-256.
 J.-M. Burniaux, et al., “Green a Multi-Sector, Multi-Region General Equilibrium Model for Quantifying the Costs of Curbing CO2 Emissions: A Technical Manual,” OECD Economics Department, Paris, 1992.
 M. H. M. Babiker, J. M. Reily, M. Mayer, R. S. Eckaus, I. S. Wing and R.C. Hyman, “The MIT Emissions Prediction and Policy Analysis (EPPA) Model: Revisions, Sensitivities, and Comparisons of Results,” MIT Global Change Joint Program, Cambridge, 2001.
 L. L. Viguier, M. H. Babiker and J. M. Reily, “The Costs of the Kyoto Protocol in the European Union,” Energy Policy, Vol. 31, No. 5, 2003, pp. 459-481.
 D. W. Jorgensen and P. J. Wilcoxen, “Reducing US Carbon Emissions: An Econometric General Equilibrium Assessment,” Resource and Energy Economics, Vol. 15, No. 1, 1993, pp. 7-25. doi:10.1016/0928-7655(93)90016-N
 T. Barker, “Economic Theory and the Transition to Sustainability: A Comparison of General-Equilibrium and Space-Time-Economics Approaches,” Tyndall Centre for Climate Change Research, University of Cambridge, Cambridge, 2004.
 D. V. Nestor and C. A. Pasurka, “Alternative Specifications for Environmental Control Costs in a General Equilibrium Framework,” Economics Letters, Vol. 48, No. 3-4, 1995, pp. 273-280. doi:10.1016/0165-1765(94)00627-E
 R. E. Brinner, M. G. Shelby, J. M. Yanchar and A. Christofaro, “Optimizing Tax Strategies to Reduce Greenhouse Cases without Curtailing Growth,” US Environmental Protection Agency, Washington DC, 1992.
 T. Barker, P. Haoran, J. K?hler, R. Warren and S. Winne, “Decarbonising the Global Economy with Induced Technological Change: Scenarios to 2100 Using E3MG,” The Energy Journal, Vol. 27, Special Issue, 2006, pp. 143-160.
 A. Cooper, S. Livermore, V. Rossi, J. Walker and A. Wilson, “Economic Implications of Reducing Carbon Emissions: The Oxford Model,” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 335-365.
 R. B. Dellink, “Modelling the Costs of Environmental Policy: A Dynamic Applied General Equilibrium Assessment,” Edward Elgar, Cheltenham, 2005.
 W. D. Nordhaus, “Managing the Global Commons,” MIT Press, Cambridge, 1994.
 K. E. Rosendahl, “Cost-Effective Environmental Policy: Implications of Induced Technological Change,” Journal of Environmental Economics and Management, Vol. 48, No. 3, 2004, pp. 1099-1121.
 C. B?hringer and T. F. Rutherford “Combining BottomUp and Top-Down,” Energy Economics, Vol. 30, No. 2, 2008, pp. 574-596. doi:10.1016/j.eneco.2007.03.004
 A. S. Manne and R. G. Richels, “The Kyoto Protocol: A Cost-Effective Strategy for Meeting Environmental Objectives?” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 1-23.
 S. C. Peck and T. J. Teisberg, “CO2 Emissions Control Agreements: Incentives for Regional Participation,” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 367-390.
 J. P. Weyant, “Costs of Reducing Global Carbon Emissions,” The Journal of Economic Perspectives, Vol. 7, No. 4, 1993, pp. 27-46.
 A. D. Ellerman and A. Decaux, “Analysis of Post-Kyoto CO2 Emissions Trading Using Marginal Abatement Curves,” Joint Program on the Science and Policy of Global Change, MIT Press, Cambridge, 1998.
 T. Barker, M. S. Qureshi and J. K?hler, “The Costs of Greenhouse Gas Mitigation with Induced Technical Change: A Meta-Analysis of Estimates in the Literature,” Cambridge Center for Climate Change Mitigation Research Department of Land Economy, University of Cambridge, Cambridge 2006.
 M. Lasky, “The Economic Costs of Reducing Emissions of Greenhouse Gases: A Survey of Economic Models,” Technical Paper Series, Congressional Budget Office, Washington DC, 2003.
 I. S. Wing, “Representing Induced Technological Change in Models for Climate Policy Analysis,” Energy Economics, Vol. 28, No. 5-6, 2006, pp. 539-562.
 J. P. Weyant and J. N. Hill, “The Costs of the Kyoto Protocol: A Multi-Model Evaluation,” The Energy Journal, Special Issue, 1999.
 T. Barker, J. K?hler and M. Villena, “The Costs of Greenhouse Gas Abatement: A Meta-Analysis of PostSRES Mitigation Scenarios,” Environmental Economics and Policy Studies, Vol. 5, No. 2, 2000, pp. 135-166.
 C. Fisher and R. D. Morgenstern, “Carbon Abatement Costs: Why the Wide Range of Estimates?” Resources for the Future, Washington DC, 2005, pp. 3-42.
 J. P. Weyant and J. Hill, “The Costs of the Kyoto Protocol: A Multi-Model Evaluation.” The Energy Journal, Special Issue, 1999, pp. 744.
 O. Edenhofer, C. Kemfert, K. Lessmann, J. K?hler and M. Grubb, “Induced Technological Change: Exploring Implications for the Economics of Atmospheric Stabilization—Synthesis Report from the Innovation Modeling Comparison Project,” The Energy Journal Special Issue: Endogenous Technological Change and the Economics of Atmospheric Stabilisation, 2006, pp. 57-108.
 H. Dowlatabadi, “Sensitivity of Climate Change Mitigation Estimates to Assumptions about Technical Change,” Energy Economics, Vol. 20, No. 5-6, 1998, pp. 473-493.
 A. Golub, A. Markandya and D. Marcellino, “Does the Kyoto Protocol Cost Too Much and Create Unbreakable Barriers for Economic Growth?” Contemporary Economic Policy, Vol. 24, No. 4, 2006, pp. 520-535.
 J. A. Edmonds, T. Wilson and R. Rosenzweig, “A Global Energy Technology Strategy Project Addressing Climate Change: An Initial Report on International Public-Private Collaboration,” Joint Global Change Research Institute, Prince George’s, 2000.
 W. Harrington, R. D. Morgenstern and P. Nelson, “On the Accuracy of Regulatory Cost Estimates,” Journal of Policy Analysis and Management, Vol. 19, No. 2, 2000, pp. 297-322.
 R. Pielke, T. Wigley and C. Green, “Dangerous Assumptions,” Nature, Vol. 452, No. 3, 2008, pp. 531-532.
 A. Rezai, “The Opportunity Cost of Climate Policy: A Question of Reference,” The Scandinavian Journal of Economics, Vol. 113, No. 4, 2011, pp. 885-903.
 W. R. Cline, “The Economics of Global Warming,” Institute for International Economics, Washington DC, 1992.
 H. D. Jacoby and I. S. Wing, “Adjustment Time, Capital Malleability and Policy Cost,” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 73-92.
 V. Tulpule, S. Brown, J. Lim, C. Polidano, H. Pant and B. S. Fischer, “The Kyoto Protocol: An Economic Analysis Using GTEM,” The Energy Journal, Vol. 20, Special Issue, 1999, pp. 257-285.
 F. C. De La Chesnaye and J. P. Weyant, “EMF 21 Multi-Greenhouse Gas Mitigation and Climate Policy,” Energy Modeling Forum and The Energy Journal Special Issue, 2006, pp. 1-32.
 J. M. Reily, H. D. Jacoby and R. G. Prinn, “Multi-Gas Contributors to Global Climate Change: Climate Impacts and Mitigation Costs of Non-CO2 Gases,” Pew Center on Global Climate Change, Arlington, 2003.
 W. D. Nordhaus, “The Allocation of Energy Resources,” Brookings Papers on Economic Activity, Vol. 1973, No. 3, 1973, pp. 529-576. doi:10.2307/2534202
 O. Kuik, L. Brander and R. S. J. Tol, “Marginal Abatement Costs of Greenhouse Gas Emissions: A Meta-Analysis,” Energy Policy, Vol. 37, No. 4, 2009, pp. 1395-1403.
 N. Mabey and J. Nixon, “Are Environmental Taxes a Free Lunch? Issues in Modelling the Macroeconomic Effects of Carbon Taxes?” Energy Economics, Vol. 19, No. 1, 1997, pp. 29-56. doi:10.1016/S0140-9883(96)01006-7
 J.-C. Hourcade and J. Robinson, “Mitigating Factors: Assessing the Costs of Reducing GHG Emissions,” Energy Policy, Vol. 24, No. 10-11, 1996, pp. 863-873.
 US Energy Information Administration (EIA), “Kyoto Protocol: Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity,” Energy Information Administration, Office of Integrated Analysis and Forecasting and US Department of Energy, Washington DC, 1998.
 M. Grubb, J. K?hler and D. Anderson, “Induced Technical Change in Energy and Environmental Modelling: Analytical Approaches and Policy Implications,” Annual Review of Energy and the Environment, Vol. 27, pp. 271-308. doi:10.1146/annurev.energy.27.122001.083408
 K. Gillingham, R. G. Newell and W. A. Pizer, “Modeling Endogenous Technological Change for Climate Policy Analysis,” Resources for the Future, Washington. DC, 2007, pp. 7-14.
 K. J. Arrow, “The Economic Implications of Learning by Doing,” Review of Economic Studies, Vol. 29, No. 3, 1962, pp. 155-173. doi:10.2307/2295952
 L. Barreto and S. Kypreos, “A Post-Kyoto Analysis with the ERIS Model Prototype,” International Journal of Global Energy Issues, Vol. 14, No. 1-4, 2000, pp. 262-280.
 A. Manne and R. Richels, “The Impact of Learningby-Doing on the Timing and Costs of CO2 Abatement,” Energy Economics, Vol. 26, No. 4, 2004, pp. 603-619.
 L. H. Goulder and S. H. Schneider, “Induced Technological Change and the Attractiveness of CO2 Abatement Policies,” Resource and Energy Economics, Vol. 21, No. 3-4, 1999, pp. 211-253.
 L. Barreto and S. Kypreos, “Endogenizing R&D and Market Experience in the ‘Bottom-Up’ Energy-Systems ERIS Model,” Technovation, Vol. 24, No. 8, 2004, pp. 615-629.
 R. E. Lucas Jr., “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, 1988, pp. 3-42.
 P. M. Romer, “Endogenous Technological Change,” Journal of Political Economy, Vol. 98, No. 5, 1990, pp. S71-S102. doi:10.1086/261725
 G. M. Grossman and E. Helpman, “Endogenous Innovation in the Theory of Growth,” Journal of Economic Perspectives, Vol. 8, No. 1, 1994, pp. 24-44.
 R. Boyd, K. Krutilla and W. K. Viscusi, “Energy Taxation as a Policy Instrument to Reduce CO2 Emissions: A Net Benefit Analysis,” Journal of Environmental Economics and Management, Vol. 29, No. 1, 1995, pp. 1-24.
 W. A. Pizer and D. Popp, “Endogenizing Technological Change: Matching the Empirical Evidence to Modelling Needs,” Resources for the Future, Washington DC, 2007, pp. 7-11.