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

61 Pages Posted: 3 Jan 2023

See all articles by Matthias Kalkuhl

Matthias Kalkuhl

Mercator Research Institute on Global Commons and Climate Change (MCC)

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK)

Friedemann Gruner

Mercator Research Institute on Global Commons and Climate Change (MCC)

Kai Lessmann

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: 2022

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

JEL Classification: D610, H230, Q540, Q580

Suggested Citation

Kalkuhl, Matthias and Franks, Max and Gruner, Friedemann and Lessmann, Kai and Edenhofer, Ottmar, Pigou's Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal (2022). CESifo Working Paper No. 10169, Available at SSRN: https://ssrn.com/abstract=4315996 or http://dx.doi.org/10.2139/ssrn.4315996

Matthias Kalkuhl (Contact Author)

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Friedemann Gruner

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Kai Lessmann

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

HOME PAGE: http://https://pik-potsdam.de/members/lessmann

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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