The cost of reducing CO2 emissions: Integrating abatement technologies into economic modeling

We explore two methods of incorporating bottom-up abatement cost estimates into top-down modeling: an economy-wide method and a sector-specific method. Carbon emissions generally depend on technology and scale. Given the technology options, abatement is possible without a substantial reduction in scale. Otherwise the change must come purely through a reduction in demand. Our analysis shows that the cost of environmental policy is considerably overestimated by top-down models if a bottom-up abatement cost curve is not included. Using the data for the Swiss economy, we demonstrate two techniques of representing an abatement function explicitly in a computable general equilibrium model: a traditional and a hybrid (discrete technology modeling) approach. The results suggest that the current climate policy in Switzerland will not be able to move the economy towards the required 10% CO2 reduction. Both approaches provide virtually the same results when the calibration process is precisely executed, which contradicts the results of previous studies.