The Public Economics of Carbon Dioxide Removal

• Applicants: Professor Dr. Matthias Kalkuhl; Dr. Kai Leßmann
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 456947458

Limiting global warming implies limiting atmospheric carbon dioxide. When emission mitigation remains insufficient, regulators may incentivize the removal of carbon dioxide from the atmosphere. In light of the current ambitions of climate policies world-wide, carbon dioxide removal (CDR) through afforestation, bioenergy use with carbon capture and storage, and direct air capture of carbon are not unlikely to become an important option. While existing research on CDR has focused on technological, environmental, and cost aspects, the design of policy instruments to remove carbon from the atmosphere has received next to no attention. A rigorous theoretical and quantitative assessment of policies to remove carbon from the atmosphere is missing. In terms of environmental economics, carbon removal is at its core a clean-up activity. But until now the economic analysis of clean-up technologies and policies has focused narrowly on specific environmental problems and contexts (like geological mine closure) that are hardly transferable to the dynamic problem of global warming and ignore the rich interactions of policies that are known from decades of research in pollution mitigation. This project builds on the environmental and public economics literature to derive optimal and second-best policies for carbon removal in a dynamic setting and subject to pre-existing distortions. The environmental economics literature makes a strong case that policy instrument analysis must go beyond the idealized case of a single externality. Without any further distortions, the same price on carbon for emissions as well as on carbon emissions removed set to marginal damages would suffice. However, in the context of fiscal distortions, distributional considerations, leakage effects and missing international cooperation, optimal rates on carbon removal could differ substantially from prices on carbon emissions. We aim to analyze the implications of these issues for optimal policy design using analytical models as well as calibrated numerical equilibrium models. The outcomes of this project will for the first time characterize to what extent and under what conditions the environmental regulation of polluting emissions and pollution removal should differ - in the price level of the pollution tax and subsidy on clean-up but also in other instruments. The proposed research agenda therefore improves our understanding of the welfare-enhancing potential of optimally differentiated carbon prices for carbon emissions and carbon removal, and expands environmental economic theory of clean-up and carbon dioxide removal.

• DFG Programme: Research Grants
• International Connection: United Kingdom
• Cooperation Partner: Professor Dr. Frederick van der Ploeg