“Pre-pay” carbon policy: how carbon removal enables regulatory alternatives

Today, there is growing bipartisan support for governments across the world to price carbon emissions. Moving from theory to practice, however, has proven challenging, as the two leading approaches to pricing carbon, carbon taxes and cap-and-trade programs, only cover about 12% of all carbon emissions globally today.

Above: the World Bank State & Trends Report Charts Global Growth of Carbon Pricing -- many jurisdictions are considering carbon pricing programs, but only a fraction of all emissions are currently covered under existing regulations.

Besides carbon taxes and cap-and-trade programs, few other approaches to carbon pricing have been proposed. But the development of carbon removal solutions – i.e. processes that remove and sequester carbon from the atmosphere – could provide an opportunity for a new type of “pre-pay” carbon pricing system that avoids many of the pitfalls of today’s carbon pricing proposals.

A “pre-pay” carbon policy might work something like this: before a company extracts a ton of carbon from the ground (be it in the form of oil, natural gas, coal, trees, soil, etc.), it would have to “pre-pay” for a credit demonstrating that the organization (or a third-party) had already removed and sequestered an equivalent ton of carbon from the atmosphere. Accompanied by an open commodity market for such “carbon removal credits,” companies would be able to comply with this policy in an economically efficient manner.

A “pre-pay” carbon pricing policy would have many benefits compared to carbon taxes and cap-and-trade policies. For one, “pre-pay” systems are intuitively fair. If a company removes an equal quantity of a pollutant that it intends to emit before it actually creates that pollution, then the company can make a strong case it is doing no harm to the environment on net. Second, a “pre-pay” policy would be administratively simple. Unlike existing cap-and-trade program designs, a “pre-pay” system has no need for setting rules about allocating emission allowances, banking/borrowing of allowances, and the use of offsets. Third, a “pre-pay” system provides a political middle ground that enables both fossil energy and environmental advocates to achieve their goals, as a “pre-pay” policy would neither kill fossil energy nor enable business-as-usual when it comes to carbon emissions. Instead, a “pre-pay” carbon policy would let the market decide whether it is more economically efficient to transition to non-fossil sources of energy or to pay for removal credits needed to continue using fossil fuels. In this way, a “pre-pay” system would look similar to both an upstream carbon tax and a cap-and-trade system. Finally and best of all, this system would lead to an immediate decarbonization of the economy on net.

A “pre-pay” carbon pricing system would have a number of significant challenges to implement. For one, it would require complex border adjustments to imported goods to ensure carbon emissions aren’t simply shuffled internationally. Second, this program would need to be coupled with strong conservation policies to ensure that ecosystems were not purposefully degraded for the purpose of then “restoring” them for carbon removal credits. Third, removal credits – be they biological or geological – would have to be stringently verified for their permanence and sustainability, requiring significant and potentially complex administration (and potentially additional scientific analyses).

But the biggest challenge and reason that a “pre-pay” carbon policy will remain purely hypothetical for the near future is the cost of carbon removal approaches. Today, many carbon removal approaches are estimated to cost over $100/ton of carbon removed, which is an order of magnitude greater than other major carbon pricing programs across the world (including the EU and California). What’s more, many carbon removal systems have not been built at commercial scale yet, so it is possible that a “pre-pay” carbon policy would even be technically infeasible to achieve in the near-term.

Carbon Removal Costs and Scale
Carbon Removal Costs and Scale

Above: while the estimated scale potential for carbon removal solutions is large, so too are the estimated costs of carbon removal systems.

If carbon taxes and cap-and-trade programs continue to languish as politically infeasible, however, we will need some way to efficiently reduce net carbon emission levels. And even if other carbon pricing systems do take off, a complementary “pre-pay” policy could prove beneficial for stimulating early commercial demand for carbon removal solutions. As such, investing today in research and development to lower the cost of carbon removal approaches and to improve the efficiency of monitoring and verification efforts would have an enormous payoff if it led to a politically feasible “pre-pay” carbon policy.