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

Overview

The paper develops a welfare economics formulation for optimal climate policy when carbon dioxide removal (CDR) can be deployed in either permanent or non‑permanent sinks. Non‑permanent CDR is treated as an economic instrument that reduces contemporaneous abatement costs while generating a future liability when stored carbon is later re‑emitted. The analysis distinguishes valuation of removals from the conventional social cost of carbon and frames policy tradeoffs in terms of informational and institutional requirements for monitoring, liability assignment, and long‑run financing.

Methods and approach

A dynamic welfare optimization model is constructed to characterize optimal mitigation and removal paths under permanence uncertainty. Non‑permanence is introduced as a parameter governing the eventual release of stored CO2, and social welfare is evaluated by integrating marginal damages over temperature trajectories implied by emissions and removals. Comparative statics determine how optimal carbon prices and removal subsidies respond to the degree of non‑permanence, discounting, and technological availability. Policy regimes are evaluated analytically by mapping their informational and institutional requirements (monitoring accuracy, enforceable liability, and financing capacity) to welfare outcomes.

Results

Non‑permanent CDR reduces near‑term mitigation costs and can be optimal as a bridge technology prior to the deployment of permanent removal options, despite eventual re‑release of stored carbon. Crucially, non‑permanent removals do not lower the optimal long‑run temperature target because their eventual emissions reintroduce atmospheric forcing. Valuation of non‑permanent removal diverges from the standard social cost of carbon: an additional social cost of removal arises from expected marginal damages associated with future re‑emissions, which alters the optimal price path for removals relative to emissions. Three archetypal policy regimes can achieve optimal deployment under different informational constraints: regimes relying on ex‑post liability and verification, regimes using long‑term stewardship financing to internalize future releases, and insurance or bond‑backed crediting schemes that pool permanence risk.

Implications

Carbon pricing architectures should distinguish between emission pricing and removal valuation: pricing removals at the conventional social cost of carbon overcompensates non‑permanent CDR and risks suboptimal temperature outcomes. Institutional investments in monitoring, enforceable liability mechanisms, or durable financing vehicles are prerequisite for welfare‑optimal use of non‑permanent CDR. Policy design ought to treat non‑permanent CDR as an intermediate instrument with explicit provisions for governance of future re‑emissions, recognizing its role in cost containment but its inability to substitute for permanent net negative emissions when long‑run temperature targets are binding.