Optimal Pricing for Carbon Dioxide Removal Under Inter-Regional Leakage

Max Franks, Matthias Kalkuhl () and Kai Lessmann
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Matthias Kalkuhl: Mercator Research Institute on Global Commons and Climate Change, University of Potsdam

No 43, CEPA Discussion Papers from Center for Economic Policy Analysis

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.

Keywords: carbon pricing; trade; unilateral climate policy; terms-of-trade effects; removal subsidies (search for similar items in EconPapers)
JEL-codes: F18 H23 Q37 Q5 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ene, nep-env, nep-his, nep-int and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://doi.org/10.25932/publishup-53808 (application/pdf)

Related works:
Journal Article: Optimal pricing for carbon dioxide removal under inter-regional leakage (2023)
Working Paper: Optimal pricing for carbon dioxide removal under inter-regional leakage (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pot:cepadp:43

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