Modelling energy efficiency and carbon dioxide emissions in energy-intensive industry under stringent CO2 policies: Comparison of top-down and bottom-up approaches and evaluation of usefulness to policy makers

Paper in proceeding, 2009

The question of how different climate policies will influence carbon dioxide (CO2) emissions in the energy-intensive industry is complex. It is not obvious that increased costs for emitting CO2 will lead to investments in new, low-emission technologies, since the energy-intensive industry is very capital intensive, and reduced CO2 emissions beyond a certain point require large investments and possibly also radical process changes. Traditionally, either top-down or bottom-up models have been used to analyze the influence of specific policies on energy efficiency and CO2 emissions in industry. Bottom-up models describe technologies in detail, but are not realistic in their characterization of corporate decision-making, e.g., how businesses select technologies and make investments, and fail to depict macro-economic equilibrium feedbacks. Top-down models, in contrast, address these deficiencies by representing macro-economic feedbacks and by estimating parameters of technological change from observations of aggregate market responsiveness to cost changes. However, since top-down models lack technological detail, they are weak in assessing the use of new, low-emission technology. Because of these methodological differences, top-down and bottom-up models often make divergent cost predictions, and consequently suggest different policies, for meeting climate targets. This methodological divide has stimulated exploration of hybrid approaches that integrate the technological explicitness of bottom-up models with the micro-economic realism and macro-economic feedbacks of top-down models. To better understand the dynamics and policy responses of industry, such methods and models need to be further developed and applied. In this paper we analyse and compare top-down, bottom-up, and integrated (hybrid) approaches that have been used for evaluating potentials for CO2 emissions reductions and CO2 policy analysis in energy-intensive industry. We also evaluate the usefulness of these approaches and models to policy and decision makers.