Marginal abatement costs under EU’s effort sharing regulation. A CGE analysis

Norway intends to join the EU’s proposed Effort-Sharing Regulation (ESR) that regulates the emission sources outside the EU Emission Trading System (ETS) – henceforth the NETS sectors. The NETS sectors include domestic transport, agriculture and households, among others, and account for almost 60% of total EU greenhouse gas (GHG) emissions. This analysis estimates the projected 2030 marginal abatement costs (MACs) for reducing CO2 emissions in EU. The proposed ESR provides several flexibility mechanisms. The analysis assumes full, efficient buying and selling opportunities across borders. Flexibilities proposed vis-á-vis the ETS and vis-á-vis the Land Use, Land-Use Change and Forestry (LULUCF) sector are varied. This analysis quantifies the MACs under different assumptions about these flexibility mechanisms, about the reference emissions and about the abatement of other greenhouse gases (non-CO2 GHGs). The basic scenario assumes proportional abatement of all GHGs, disregards flexibilities proposed vis-á-vis the ETS and LULUCF sectors and results in a 9% CO2 cut in the NETS sectors from the 2030 reference scenario in EC (2016). 11 other different combinations of assumptions leave us with cuts between 4% and 18%. Based on the scenarios, we have estimated the MACs for the NETS sectors by means of the global Computable General Equilibrium model SNOW. It can be used to assess the marginal costs for meeting different levels of an emission reduction target in the EU. The resulting MAC estimates are in the range of 25–158 €/t CO2. These moderately low costs partly reflect the relatively low remaining abatement commitments on top of reference projections provided by the European Commission (EC, 2016) and the member states (EU, 2017b). The estimated MAC curve is convex, implying that increasing the abatement ambition in NETS increases the MAC relatively more. To address uncertainty, sensitivity analyses of alternative assumptions and comparisons with related scenarios in other analyses are performed. The SNOW scenarios are within the range of previous findings, and sensitivity analysis indicates relatively small impacts of alternative parameter choices when emission reductions are relatively small, as in the basic scenario. We have analysed two scenarios in detail: the basic 9% scenario and the scenario representing the largest abatement of CO2, the 18% scenario. The MACs of abating 9% and 18% in NETS amount to 64 €/t CO2 and 158 €/t CO2, respectively. In both these