The combination of carbon markets and carbon dioxide removal technologies that are financed by governments could exacerbate economic inequality. Proactive policymaking can help mitigate this risk.
In August, the US Department of Energy awarded $1.2 billion to a pair of groups that will develop direct air capture facilities in Texas and Louisiana. Direct air capture is a type of carbon dioxide removal (CDR) technology that absorbs carbon dioxide from the atmosphere and stores the gas underground. The award is the “largest investment in engineered carbon removal in history,” according to the agency. The Department of Energy also announced funding for the purchase of CDR credits, which certify that a certain amount of carbon dioxide has been removed from the atmosphere; in other words, the federal government will pay companies to remove carbon dioxide from the atmosphere and help create a market for CDR credits.
The agency’s investment in direct air capture is part of a larger trend of investments in CDR technologies. But an attempt to create a market for CDR credits and incorporate that market into existing carbon markets may have implications for the distribution of wealth and public support for climate policy.
Massimo Tavoni, director of the RFF-CMCC European Institute on Economics and the Environment, shares insights about the niche that CDR technologies fill in global decarbonization efforts and the potential effects of incorporating CDR technologies into carbon markets.
Resources: How does carbon dioxide removal (CDR) fit into the larger suite of strategies for combating climate change? What niche does CDR fill?
Massimo Tavoni: The most recent report from the International Panel on Climate Change shows that CDR is an essential strategy for meeting the goals in the 2015 Paris Agreement to keep global temperature rise below 2°C or 1.5°C. CDR will complement other strategies to abate greenhouse gas emissions, such as installing renewable energies and increasing energy efficiency, but we really need CDR to address two issues.
The first issue is that, as we continue down a path toward net-zero carbon dioxide emissions, some sectors will continue emitting carbon dioxide, or some activities will be too expensive or too difficult to abate due to fewer available technologies. We’ll have to sequester carbon dioxide from the atmosphere to compensate for these sectors of the economy. However, we should not use CDR to procrastinate on the abatement of fossil fuels in activities for which alternative energy sources exist. (And many of these opportunities do exist.)
The other issue is that our current rate of emissions likely will ensure that we will exceed the Paris Agreement temperature goals. We’ve been delaying emissions reductions for too long, and, as a consequence, we have to sequester this extra carbon dioxide that we’ve emitted to bring the concentration of carbon dioxide in the atmosphere back toward acceptable and safe levels. The only possibility for reducing this concentration is to achieve net-negative emissions—not just net-zero emissions. So, CDR is an essential technology, but also a risky one.
What role might governments play in the development, financing, and deployment of CDR technologies like direct air capture?
This question is exactly one of the questions we are trying to address in a new publication because, right now, we don’t know yet. CDR technologies are a niche market. These technologies are growing, but they are far from reaching a large scale.
For now, these technologies mostly are driven by private interests and private businesses, and the market is growing quite rapidly, due to government subsidies or expectations that governments soon will provide subsidies. Many expect CDR to potentially become a trillion-dollar market opportunity. But a question that comes naturally is the extent to which such CDR technologies should be handled by governments.
Investments in CDR technologies rapidly have increased in recent years, and some discussions about carbon markets have heated up, as well. Can you give a brief overview of how carbon markets work and how carbon markets might interact with publicly financed CDR?
Carbon markets are market-based instruments for decarbonizing the economy and trying to keep the cost of decarbonization relatively low. In these markets, a regulatory body allocates a limited number of permits to emitters, and each permit allows a set amount of emissions; for example, one permit may allow a firm to emit one ton of carbon dioxide. The regulatory body can reduce the total number of permits that are allocated over time, thereby reducing emissions, too. The most famous example of a carbon market might be the EU Emissions Trading System, which is the largest carbon market in the world. Other carbon markets exist in China and other countries, for example, but the EU example is the most important so far and essentially sets a target for reducing emissions.
The European Union has binding targets for 2030 and 2050 and is discussing targets for 2040 right now. The EU carbon market allows market players to trade permits for emitting carbon dioxide among themselves while meeting the EU emissions-reduction cap. To what extent can this market be amended to accommodate CDR? The answer currently is unclear; the European Commission itself is discussing the extent to which CDR can be brought into the EU carbon market.
One of the things that my coauthors and I address in our article is a risk of combining CDR and carbon markets. If we combine CDR and traditional emissions-reduction strategies in a single carbon market, then, when CDR technologies become competitive and mature, we have a potential risk of creating windfall profits for CDR companies that will benefit the few and not serve society well.
Turning this around, how would the increased availability of CDR technologies, like direct air capture, potentially affect carbon markets?
The effects depend on how CDR technologies will evolve. If CDR technologies such as direct air capture experience big advances, the costs of these technologies will come down, and the technologies will become more widespread and more available. Then, CDR technologies could in turn influence the prices of carbon in these markets and bring those prices down, as well.
However, if carbon markets still are related to traditional emissions-reduction strategies, the prices in carbon markets still may be quite high, because decarbonizing sectors such as aviation or agriculture is hard. If the price of carbon is high but CDR technologies (such as negative-emissions technologies) are cheap, this price gap could lead to the windfall profits that I mentioned earlier. These profits would not be good, in the sense that the financial rewards would benefit the owners of the CDR technologies, which mostly are private companies.
How could policymakers mitigate potential downsides, such as widening economic inequality, that are associated with a publicly financed CDR industry, while still achieving emissions-reduction goals?
We want to achieve emissions-reduction goals at low cost, which is why carbon markets exist. But, at the same time, we don’t want to increase inequality.
We have to think about intelligent designs of policy, and regulatory frameworks for financing emissions-reduction technologies such as CDR, to achieve this balance between cost, emissions-reduction goals, and mitigating inequality. For example, policies could create separate markets for CDR and conventional emissions-reduction technologies, caps on the price of carbon, caps on the profits that are expected in these markets, or a more active role for governments in the ownership of CDR technologies.
Many open questions remain. The regulatory framework that will be the best still is unclear, and the best framework probably will depend on the context. One framework may emerge in some countries, and other frameworks may emerge in other countries. But the important implication of our research is that we have to think ahead, before the potential for increasing inequality creates problems.
How could any widening economic inequality that is associated with CDR affect the public acceptance of, or support for, climate policy in general?
This question is common and very valid. Widening economic inequality that is associated with CDR could jeopardize the support for action on climate policies. We should not take for granted that people accept and are willing to do what it takes to get carbon out of our energy and economic systems—even in places such as Europe, where climate policy is more progressive.
Especially if people believe that new technologies and new markets that are associated with climate policy will increase inequality and benefit a few privileged groups, the willingness to support climate policy will decrease. That’s a big risk from a political-feasibility point of view. Plus, we want the transition to be just and efficient from a fairness point of view and from a desirability point of view. We have to achieve both goals—justice and efficiency—for climate policy to serve society well.