“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

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.

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

  1. Noah,

    I find this idea to be interesting on multiple counts. I would like to, however, offer a few comments and suggestions.

    [ND1] 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.

    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. (My highlight)

    [MH1] Finding a simplistic method for FF companies to comply with any carbon credit plan is an important factor in gaining industry/policy support. However, not all carbon has equal value due to the variances in the effects of the carbon within various biomes and/or the eventual utilization value and sequestration verification of the removed carbon. The issues are complex.

    In the latter case, biochar is a prime example of a carbon capture, utilization and sequestration (CCUS) method which keeps on sequestering even more carbon over many years (while also addressing multiple other critical needs such as soil health, increased food productivity etc.). Thus, from a CCUS perspective, biochar should be viewed as the ‘gold standard’. To date, no other method of CCUS, which can achieve such high levels of combined utilization and sequestration value, has been proposed (much less demonstrated).

    In the prior case of carbon’s overall degree of negative effect(s) within differing biomes. A prime example of this value differentiation can be found within the strategic question of; From a total planetary environmental viewpoint, is it more valuable to the overall effort to remove the carbon from the ocean waters (and thus directly addressing ocean acidification) or removing the carbon directly from the atmosphere (thus directly address planetary warming).

    Obviously, the above question is a fertile field for extensive debates between marine biologists and atmospheric scientists. And, it is important to keep in mind that both methods should be highly supported as both are of critical importance. Yet, the result(s) of that important debate would, most likely, establish the view that one method is more critical, and thus valuable, than the other. Other such examples of ‘environmental valuation of CDR’ are available yet the above hopefully makes the point.

    And thus, the phrase of “an equivalent ton of carbon from the atmosphere” should possibly be better worded to reflect an environmental priority/value of the exact CDR method. This overall ‘CDR priority’ issue has been a long-term low level debate within the geoengineering community and should be resolved concerning current CDR proposals and periodically reviewed as new/different CDR methods are brought to the table. In general, most all rules and regulations need some degree of flexibility and this CDR valuation/priority factor can provide such flexibility as the environmental, socioeconomic and policy matrix shifts (as it always will).

    [ND2] 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.(My highlight)

    [MH2] The above highlighted statement assumes that FFs have no other “harm to the environment on net”. In the example of coal, ignoring that there are many types of coal and thus many levels/degrees of harm involving non-carbon issues such as H3C-HG+, there would need to be a means and method of giving such non-carbon damage issues some weight in the valuation formula if a ‘no harm’ shield is to be given to the FF actor.

    [ND3] 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.

    [MH3] The above statement may need further clarification as the logic that the a) simplicity in administration; b) lack of need for ‘rule setting’ of allowances; c) no need for banking etc. are not overly apparent as many of those functional aspects would still be needed in any form of carbon collateralization scheme.

    [ND4] 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.

    [MH4] The ability to reach a “political middle ground that enables both fossil energy and environmental advocates to achieve their goals” is not apparent as both sides are highly fragmented. And, the underlying (and extremely wide spectrum of issues) can be, and will be, viewed from starkly different value systems.

    Also, It is not clear which “market” is being referred to in the second highlighted statement. Some market ‘sectors’ are diametrically opposed to one or more other ‘sectors’ and thus reaching a collective ‘market’ consensus may not be realistic. Even viewed from the hypothetical consumer’s view, there is no actual ability to form such a global consumer consensus on such a vastly complex problem set.

    However, the attempt to find a middle ground between as many actors as possible should always be a high priority concerning any carbon collateralization scheme. Yet, generalization beyond practical policy implementation should be avoided.

    [ND5] 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.

    [MH6] The logic of the above highlighted statement is not apparent.

    [ND6] 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.

    [MH6] Again, the logic of the above highlighted statement is not apparent. What is exactly meant by “border adjustments”? And, if the carbon is ‘pre-paid’, what relevance would the carbon foot print of a market item be to this scheme?

    [ND7] 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.

    [MH7] The above statement does not address who or whom would investigate, judge and enforce such prohibitions. Yet, the goal of such a prohibition against ‘gaming the system’ is obviously a needed practicality.

    [ND8] 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).

    [MH8] Again, the above statement does not address who or whom would investigate, judge and enforce such a pivotal factor. Also, the reliance upon scientific consensus would need some means/method to adjudicate the more than expected differences of scientific opinion(s) on a wide spectrum of issues and factors.

    [ND9] 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.

    [MH9] The logic of the above highlighted statement is not apparent as Biochar is currently a global scale commercial effort; REDD is being widely employed and supported at the UN level; Point source CO2 capture, utilization and sequestration is becoming a robust industry sector in of itself (a)(b)(c)(d)(etc.).

    [ND10] Carbon Removal Costs and Scale

    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.

    [MH10] What is being proposed may be a form of carbon collateralization scheme remotely akin to what Ecuador attempted, which was not overly successful. However, there are multiple positive aspects of a ‘pre-pay’ collateralization scheme once foundational issues are further developed and or resolved. To summarize the primary areas of concern:

    1) Need for environmental needs based carbon valuation scale

    2) Need for scaled weight of non-carbon environmental risk factors

    3) Need for clarity in the actual value exchange means and methods

    4) Refinement of what is and is not politically practical

    Good work Noah,

    Michael

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