The Costs of Carbon Abatement in Six EU Countries: Implications of Alternative Baseline Energy Projections*

The on going climate change negotiations explicitly recognize the importance of the participating countries’ starting points. Another central factor for cost estimates of climate change policies is what happens under business as usual. Unfortunately, both factors are extremely uncertain. What are the possible cost implications in the EU of two alternative projections of future energy markets? In an otherwise identical model we contrast the projections reported in a recent study by the European Commission with projections reflecting more conservative assumptions about the future energy markets. We conclude that the alternative projections have a major impact on the magnitude and distribution of abatement costs. Specifically, we find that the optimistic EC projections imply significantly lower abatement costs. The EC projections also imply that country-specific assumptions about energy efficiency improvements and fuel mix changes in power generation may dominate the cost implications of the differential abatement targets currently adopted by the EU member countries.