Pigou’s Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal

Matthias Kalkuhl, Max Franks, Friedemann Gruner, Kai Lessmann and Ottmar Edenhofer

No 10169, CESifo Working Paper Series from CESifo

Abstract: Carbon dioxide removal from the atmosphere is becoming an important option to achieve net zero climate targets. This paper develops a welfare and public economics perspective on optimal policies for carbon removal and storage in non-permanent sinks like forests, soil, oceans, wood products or chemical products. We derive a new metric for the valuation of non-permanent carbon storage, the social cost of carbon removal (SCC-R), which embeds also the conventional social cost of carbon emissions. We show that the contribution of CDR is to create new carbon sinks that should be used to reduce transition costs, even if the stored carbon is released to the atmosphere eventually. Importantly, CDR does not raise the ambition of optimal temperature levels unless initial atmospheric carbon stocks are excessively high. For high initial atmospheric carbon stocks, CDR allows to reduce the optimal temperature below initial levels. Finally, we characterize three different policy regimes that ensure an optimal deployment of carbon removal: downstream carbon pricing, upstream carbon pricing, and carbon storage pricing. The policy regimes differ in their informational and institutional requirements regarding monitoring, liability and financing.

Keywords: carbon dioxide removal; carbon capture; social cost of carbon; climate policy; impermanence (search for similar items in EconPapers)
JEL-codes: D61 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Pigou’s Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal (2023)
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