Optimal pricing for carbon dioxide removal under inter-regional leakage

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CEPA discussion papers. - Potsdam : Center for Economic Policy Analysis, University of Potsdam, ISSN 2628-653X, ZDB-ID 2969685-9. - Vol. No. 43

Gesehen am 11.02.2022

Carbon dioxide removal (CDR) moves atmospheric carbon to geological or land-based sinks. In a first-best setting, the optimal use of CDR is achieved by a removal subsidy that equals the optimal carbon tax and marginal damages. We derive second-best subsidies for CDR when no global carbon price exists but a national government implements a unilateral climate policy. We find that the optimal carbon tax differs from an optimal CDR subsidy because of carbon leakage, terms-of-trade and fossil resource rent dynamics. First, the optimal removal subsidy tends to be larger than the carbon tax because of lower supply-side leakage on fossil resource markets. Second, terms-of-trade effects exacerbate this wedge for net resource exporters, implying even larger removal subsidies. Third, the optimal removal subsidy may fall below the carbon tax for resource-poor countries when marginal environmental damages are small.

10.25932/publishup-53808 [DOI]

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