Analysis and News

A Note on Static and Dynamic Costs of Reducing Greenhouse Gas Emissions

BY ARMCORE VPI's Analyst: Chaitram Mohamed

Our economic theories suggest that the most efficient way to reduce greenhouse gas emissions is to reduce emissions to a point where the marginal benefits of the reduction are equal to the marginal costs. 


What is meant by the costs of reducing emissions? The costs of reducing greenhouse gas emissions are the actual abatement costs relating to specific technologies and policy interventions. Generally, these costs are measured in dollars per metric ton (1000 kilograms) of carbon dioxide emissions avoided. There are two types of costs: static costs and dynamic costs. 


The static costs are those that focus on reducing emissions during the lifetime of a project. Relative to existing coal, some static costs of technology may include storage technologies, solar thermal and advanced nuclear technologies. In addition, short term costs of policies may include costs like wind energy subsidies, gasoline taxes, renewable fuel subsidies and agricultural emission policies. One major limitation of short-term costs is that they ignore spillovers. 


While static costs help in informing discussions about climate policy, they do not consider climate change as a long-term problem. Hence, these costs may fail to recognise that actions taken today may minimise the mitigation costs into the future. 


Dynamic costs absorb such spillovers and they are costs that outlive the life of a project. More importantly, dynamic costs recognise that expenditures today can affect emissions in the future, above and beyond direct emissions of the project, (Gillingham and Stock 2018). Spillovers arising from learning by doing, innovation and positive network effects are the essential arguments for the longer-term, dynamic perspective of costs. 


It is also worth noting that actions that have high static costs today can stimulate innovation and learning by doing which leads to a reduction in long term costs. For example, the production of solar panels provides a positive externality (economies of scale) that reduces costs in the future. Another example provided by Gillingham and Stock (2018) is the purchase of electric vehicles; this can encourage the demand for charging stations which will reduce costs for future buyers of electric vehicles. 


Whilst the case for dynamic cost considerations is recognised, they will not always mitigate future costs of greenhouse gas emissions. They are sometimes ignored because of uncertainties.


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