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Optimal Pricing for Carbon Dioxide Removal Under Inter-Regional Leakage

Author

Listed:
  • Max Franks

    (Potsdam Institute for Climate Impact Research, Technische Universität Berlin)

  • Matthias Kalkuhl

    (Mercator Research Institute on Global Commons and Climate Change, University of Potsdam)

  • Kai Lessmann

    (Potsdam Institute for Climate Impact Research)

Abstract
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.

Suggested Citation

  • Max Franks & Matthias Kalkuhl & Kai Lessmann, 2022. "Optimal Pricing for Carbon Dioxide Removal Under Inter-Regional Leakage," CEPA Discussion Papers 43, Center for Economic Policy Analysis.
    • Handle: RePEc:pot:cepadp:43
    DOI: 10.25932/publishup-53808
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    References listed on IDEAS

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    Cited by:

    1. Gruner, Friedemann, 2024. "Strategic Residual Emissions in Net Emission Targets," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302391, Verein für Socialpolitik / German Economic Association.
    2. Matthias Kalkuhl & Max Franks & Friedemann Gruner & Kai Lessmann & Ottmar Edenhofer, 2022. "Pigou’s Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal," CESifo Working Paper Series 10169, CESifo.
    3. Ottmar Edenhofer & Max Franks & Matthias Kalkuhl & Artur Runge-Metzger, 2023. "On the Governance of Carbon Dioxide Removal – A Public Economics Perspective," CESifo Working Paper Series 10370, CESifo.

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    More about this item

    Keywords

    carbon pricing; trade; unilateral climate policy; terms-of-trade effects; removal subsidies;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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