Working Paper: CEPR ID: DP16039
Authors: Derek Lemoine
Abstract: I show that commonly proposed emission taxes are not optimal for controlling climate change: they can achieve zero emissions but cannot induce negative emissions. The first-best policy charges firms period by period for leaving a stock of carbon in the atmosphere, not just for injecting carbon into the atmosphere. I propose a feasible version of this policy that requires emitters to post an upfront bond that finances a transferable asset (a "carbon share"). The regulator reduces this asset's face value as damages accumulate and pays out the asset's remaining face value once its holder removes the underlying unit of carbon from the atmosphere. I show that the optimal bond is equal to the worst-case social cost of carbon, with the carbon share paying a dividend as long as the worst-case is not realized. Quantitatively, a bond that is double the optimal emission tax is sufficient to provide optimal carbon removal incentives in 95% of cases.
Keywords: carbon; climate; externality; emission tax; pigouvian tax; air capture
JEL Codes: G12; H23; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| emission taxes (H23) | zero emissions (Q49) |
| emission taxes (H23) | negative emissions (Q54) |
| carbon share policy (Q58) | emission reductions (Q52) |
| carbon share policy (Q58) | carbon removal (Q54) |
| bond tied to social cost of carbon (H43) | optimal bond (G12) |
| optimal bond (G12) | carbon removal incentives (Q54) |
| bond double optimal emission tax (H21) | carbon removal incentives (Q54) |
| carbon share policy implemented correctly (Q58) | benefits of climate policy (Q58) |
| carbon share policy (Q58) | balanced growth equivalent gain in consumption (F62) |