Operationalizing the net negative carbon economy

I am happy to announce that Johannes’ paper, on which I am a co-author, has just been published in Nature. Embargo ended at 8 AM California time today. See the IIASA press release here.

Bednar, J., Obersteiner, M., Baklanov, A., Thomson, M., Wagner, F., Geden, O., Allen, M., Hall, J. (2021). Operationalizing the net negative carbon economy. Nature DOI: 10.1038/s41586-021-03723-9 (link)

Climate context. It is highly likely that we will need to actively remove CO2 (negative emissions, NE) from the atmosphere to avoid +1.5 deg C warming, aka the Paris Targets. NE is already baked into most economic model projections, but these don’t account for climate feedbacks, particularly in the oceans. The feedbacks are what worry climate scientists the most, because of uncertainties in the amount of warming caused by increasing CO2 concentration (the “equilibrium climate sensitivity”) and the length of time it will take the planet to reach a new equilibrium condition (the “transient temperature response”). Basically, we have a pretty good idea of what the climate sensitivity is but not the transient response; i.e., it could be that we warm the planet above +2 deg C for several decades before we bring it back down to +1.5 deg C (called “overshoot”), and we don’t know for sure that it will come back down in the future, even if we lower CO2 to less than it is today. (This is to say nothing about regional climate variability, which we can see in the Pacific NW and Canada, etc., especially in food producing areas and biodiversity hotspots.)

Economic context. Carbon dioxide emissions today are mostly managed through cap-and-trade programs — the biggest being the EU’s emissions trading system (ETS). In a cap-and-trade system, authorities distribute allowances to emit some quantity of CO2 to emitters. If the emitters want to use them to offset their own emissions (rather than pay a penalty) they can do so. If, say, Royal Dutch Shell decides that crude oil prices are too low that it prefers to stockpile oil and not refine it, it can offer to sell its allowances to German coal-fired energy plants who want to take advantage of high energy prices to export electricity in the EU, but need to augment their own allowances to make a profit. The important point is that the overall allowances are capped, and over time this cap is reduced according to a schedule that everyone can see and plan for. An alternative management strategy is to apply a carbon tax, which is simpler. In effect, emitters are paying down the cost of future carbon removal (or future damage caused by climate change); however, the problem is that no one knows how to price this: what’s the cost of destroying Amazonia to future society? …to culture

Finally, the upshot. If an emitter’s main concern is the cost of NE, they will tend to postpone it. This is because of a fundamental rule in macroeconomics related to the rent value of any non-renewable resource (in our case, we see this as the quantity of atmosphere that remains available to take in new CO2 until the concentration limit is reached that will cause us to miss the Paris Targets): things get cheaper over time. Technically, the marginal cost of abatement goes down over time, so the financially responsible thing for a company to do is make money now (which causes emissions) and postpone clean-up (which reduces them). If the accounting sheet shows the carbon budget as balanced whether or not clean-up happens immediately or in a few decades, it’s all the same for the economists. But (because of the transient response and overshoot due to complex Earth system feedbacks mentioned above) no one worth his salt believes that it is the same. Carbon removal obligations (CROs), from our paper, do a few things, but most important are: (1) they bind emitters to removing the quantity of CO2 that they produced; and (2) they accrue interest the longer they fail to do so. In our scheme, emitters would be required to guarantee near-future NE by purchasing CROs, with financing provided first by central banks and later by private investors. The latter point makes these very resilient to some later political process breaking them up, because very big and powerful agents will have put a lot of money into them. (While I don’t like the idea politically, practically it should work.)

Also, in theory, these could be traded just like any other allowances. If so, they would also amount to a huge pot of cash for anyone who figures out a much-improved, cheaper method of NE before they mature. We expect this to spur investment in NE. This is critical because we don’t presently have the NE technologies in place that we need to hit the Paris Targets.