May 30, 2023
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Opinion: A better way to pay for carbon emissions


By Marcus Thomson

The recent extreme heat in the Western United States and Canada is remarkable. But events like these are made more likely, and more severe, because of the contribution of greenhouse gas emissions to climate change.

We should expect the consequences to be far-reaching, with mainly negative impacts on land and ocean ecosystems, plant and animal biodiversity, farming, and even how we build cities and the cost of maintaining basic infrastructure. We should make every effort to limit its severity, because severe climate change raises the likelihood of dangerous and irreversible socioeconomic and ecological damage to humanity and the planet.

This is the aim of the 2015 Paris Climate Agreement: to limit the increase in the long-term global temperature to no more than 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, above its pre-industrial average. Under the Paris Agreement, countries pledge to limit their emissions based on what is politically and economically feasible and engage in an ongoing process to ratchet up these pledges over time, which are not yet sufficient.

If we continue to emit greenhouse gases at the present rate, we will add enough carbon dioxide to the atmosphere to surpass 1.5 degrees Celsius of warming in about a decade. Passing this threshold would amount to severe climate change.

It is a challenging problem. Put simply, emissions need to come down and the concentration of CO2 in the atmosphere must be reduced over time, starting immediately.

Reduction is key: Mainstream climate scenario projections include active carbon removal that scales up quickly over time. The most desirable carbon removal solutions, at least in principle, are not yet available at the scale required or at low enough cost.

Insufficient or delayed action raises the risk that future generations will be unfairly burdened with massive carbon cleanup while suffering the consequences of an overheated world. In short, in spite of near universal agreement on the need to achieve net-zero emissions, there remains a significant challenge to operationalize concerted action.

A part of the solution are carbon trading schemes, such as the European Union’s Emissions Trading System (EU-ETS) and California’s Cap-and-Trade Program. These permit private sector investors to participate in, and profit from, the social imperative to reduce emissions. They work by issuing allowances to emitters based on a pre-planned schedule, and the emitters can decide later to use these to offset their own emissions, or sell them to other emitters.

Carbon trading schemes provide emitters with strategic flexibility while capping total contributions to the global carbon budget. Ideally, the schemes are structured to incentivize investments in novel carbon removal technologies, but in practice many companies find it less risky to just postpone carbon removal, even if their commitment to eventually do so is sincere.

While this makes good financial sense for the emitter because the per-ton marginal cost of carbon removal declines over time, it is enormously risky for everyone, because atmospheric carbon dioxide concentration continues to increase in the near term, and could trigger irreversible changes in the climate system.

Moreover, as the atmospheric concentration of CO2 reaches its allowed maximum for the Paris target, emissions caps would become more restrictive. For EU-ETS, for instance, this would mean reducing the quantity of currently scheduled emissions allowances, which risks making the whole scheme economically and politically unfeasible.

In a research article just published in Nature, lead author Johannes Bednar of the International Institute for Applied Systems Analysis in Austria and several co-authors (myself included) suggest a remedy. We propose that emitters “rent” space in the atmosphere to temporarily store their emissions, but maintain the legal responsibility for removing them through instruments we call Carbon Removal Obligations (CROs).

Instead of paying a tax or carbon price now — which is an up-front expense that may be insufficient to compensate for the eventual cost of warming — an emitter takes out a CRO and pays interest on their “carbon debt” until an equivalent quantity is removed.

Because debtors ultimately carry the risk of default, they would manage the interest rate, like a mortgage from a bank. CROs treat carbon debt like financial debt, with the interest imposed on carbon debt like a rental fee for temporarily storing CO2 in the atmosphere.

Because it is a good bet that carbon removal will become cheaper over time, emitters should prefer CROs to other schemes.

Instead of burdening future generations with excessive debt, CROs imply a more equitable distribution of financial flows and costs over time. Rapidly rolling out CROs, with their interest on carbon debt, should incentivize large-scale near-term CO2 removal on top of conventional emission reductions. This would help to minimize carbon debt and its associated risks, and consequently facilitate a more rapid path to net-zero than what is scheduled by most countries.

We anticipate that CROs will have broad appeal across public and private sector actors, because they plug into existing carbon regulatory regimes and can be readily understood by investors and capital markets.

• Marcus Thomson is a postdoctoral scholar at the National Center for Ecological Analysis & Synthesis at UC Santa Barbara.