Optimal Pricing for Carbon Dioxide Removal Under Inter-Regional Leakage

  • 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.

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Author details:Max FranksORCiDGND, Matthias KalkuhlORCiDGND, Kai LessmannORCiDGND
Title of parent work (English):CEPA Discussion Papers
Publication series (Volume number):CEPA Discussion Papers (43)
Publication type:Working Paper
Date of first publication:2022/02/09
Publication year:2022
Publishing institution:Universität Potsdam
Release date:2022/02/09
Tag:carbon pricing; removal subsidies; terms-of-trade effects; trade; unilateral climate policy
Number of pages:12
RVK - Regensburg classification:AR 28300, QT 800, QT 000, MK 8900
Organizational units:Extern / Extern
Zentrale und wissenschaftliche Einrichtungen / Center for Economic Policy Analysis (CEPA)
Wirtschafts- und Sozialwissenschaftliche Fakultät / Wirtschaftswissenschaften / Fachgruppe Volkswirtschaftslehre
DDC classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL classification:F International Economics / F1 Trade / F18 Trade and Environment
H Public Economics / H2 Taxation, Subsidies, and Revenue / H23 Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Q5 Environmental Economics
Q Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Q3 Nonrenewable Resources and Conservation / Q37 Issues in International Trade
Peer review:Nicht referiert
Publishing method:Open Access / Bronze Open-Access
License (German):License LogoKeine öffentliche Lizenz: Unter Urheberrechtsschutz
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