If done well, studies following a technology-costing approach can offer insight into larger
economy-wide questions, like the implications of climate agreements. In the attempt, however,
these studies frequently encounter one of several pitfalls, which can make them positively
misleading as a guide to broad policy. Three of these are of particular relevance to this discussion.
2.2 Pitfalls of Technology-Costing
Confusion of Market Failures with Other Market Barriers. Technology-costing
studies usually start with a list of particular technologies, such as energy-saving end-use devices or
low-carbon energy sources, which look attractive but are âunder-used.â An analytical basis for this
judgment is constructed by means of a calculation of net present value (NPV), taking account of
capital and other components of cost and the savings to be realized in energy expenditures.
Examples of such opportunities include highly efficient windows or higher mile-per-gallon cars,
and wind and solar power supplies. If such âgoodâ technologies go wanting something must be
wrong in the economy, so the argument goes. The analysis proceeds to show how much
improvement could be gained at a low cost, or even a net benefit, with only small changes in policy
or perhaps just general encouragement.
The question is, what is the barrier to use of a technology which is to be corrected by policy
intervention? Here it is helpful to distinguish two possible reasons why an apparently attractive
technology may not be quickly adopted. One is appropriately classified as a market âfailureâ; the
other is not attributable to failure in market function but to some inhibiting feature of market
preferences or normal market activity (Jaffe
and Stavins, 1994; Sutherland, 1991). The
Economic
Production
difference between the two circumstances can
A
Possibility
Welfare
be illustrated using Figure 2, which is adapted
Frontier
from the Intergovernmental Panel on Climate
B
Z
Change (1996). An economy cannot produce
everything its citizens want; there are always
C
tradeoffs. Here the textbook choice of âguns
vs. butterâ is restated in terms of some
Emissions Reduction
traditional measure of economic welfare vs.
Figure 2. Tradeoff of Economic Welfare vs.
Reduction in Greenhouse Gas Emissions
climate-related environmental quality. In this
example, the vertical axis includes output of market-priced goods plus all environmental benefits
except those of reducing the risk of climate change; the horizontal axis is the level of greenhouse
gas emissions. The figure thus illustrates the components of a cost-effectiveness analysis of climate
policy, which is the type of calculation being reviewed here. An economy is said to be âefficientâ
when it is not possible to lower greenhouse gas emissions without incurring welfare losses
elsewhere. In the economistâs jargon, an efficient economy is on its production possibility frontier,
at points like A, B or C in the figure.
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