Pigou’s Advice and Sisyphus’ Warning: Carbon Pricing with Non-Permanent Carbon-Dioxide Removal

Carbon dioxide removal from the atmosphere is becoming an important option to achieve net zero  climate targets. This paper develops a welfare and public economics perspective on optimal policies for carbon removal and storage in non-permanent sinks like forests, soil, oceans, wood  products or chemical products. We derive a new metric for the valuation of non-permanent carbon  storage, the social cost of carbon removal (SCC-R), which embeds also the conventional social cost of carbon emissions. We show that the contribution of CDR is to create new carbon sinks  that should be used to reduce transition costs, even if the stored carbon is released to the  atmosphere eventually. Importantly, CDR does not raise the ambition of optimal temperature  levels unless initial atmospheric carbon stocks are excessively high. For high initial atmospheric carbon stocks, CDR allows to reduce the optimal temperature below initial levels. Finally, we characterize three different policy regimes that ensure an optimal deployment of carbon removal: downstream carbon pricing, upstream carbon pricing, and carbon storage pricing. The policy regimes differ in their informational and institutional requirements regarding monitoring, liability and financing.