Optimal allocation of the EU carbon budget: A multi-model assessment

Abrell, Jan; Bilici, Süheyb; Blesl, Markus; Fahl, Ulrich; Kattelmann, Felix; Kittel, Lena; Kosch, Mirjam; Luderer, Gunnar; Marmullaku, Drin; Pahle, Michael; Pietzcker, Robert C.; Rodrigues, Renato; Siegle, Jonathan

doi:10.1016/j.esr.2023.101271

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Optimal allocation of the EU carbon budget: A multi-model assessment

Authors

Abrell, Jan
External Organizations;

Bilici, Süheyb
External Organizations;

Blesl, Markus
External Organizations;

Fahl, Ulrich
External Organizations;

Kattelmann, Felix
External Organizations;

Kittel, Lena
External Organizations;

/persons/resource/mirjam.kosch

Kosch, Mirjam
Potsdam Institute for Climate Impact Research;

/persons/resource/Gunnar.Luderer

Luderer, Gunnar
Potsdam Institute for Climate Impact Research;

Marmullaku, Drin
External Organizations;

/persons/resource/Michael.Pahle

Pahle, Michael
Potsdam Institute for Climate Impact Research;

/persons/resource/Robert.Pietzcker

Pietzcker, Robert C.
Potsdam Institute for Climate Impact Research;

/persons/resource/renato.rodrigues

Rodrigues, Renato
Potsdam Institute for Climate Impact Research;

Siegle, Jonathan
External Organizations;

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Citation

Abrell, J., Bilici, S., Blesl, M., Fahl, U., Kattelmann, F., Kittel, L., Kosch, M., Luderer, G., Marmullaku, D., Pahle, M., Pietzcker, R. C., Rodrigues, R., Siegle, J. (2024): Optimal allocation of the EU carbon budget: A multi-model assessment. - Energy Strategy Reviews, 51, 101271.
https://doi.org/10.1016/j.esr.2023.101271

Cite as: https://publications.pik-potsdam.de/pubman/item/item_29166

Abstract

Carbon dioxide removal (CDR) moves atmospheric carbon to geological or land-based sinks. In a first-best setting, the optimal use of CDR is achieved by a removal subsidy that equals the optimal carbon tax and marginal damages. We derive second-best policy rules for CDR subsidies and carbon taxes when no global carbon price exists but a national government implements a unilateral climate policy. We find that the optimal carbon tax differs from an optimal CDR subsidy because of carbon leakage and a balance of resource trade effect. First, the optimal removal subsidy tends to be larger than the carbon tax because of lower supply-side leakage on fossil resource markets. Second, net carbon exporters exacerbate this wedge to increase producer surplus of their carbon resource producers, implying even larger removal subsidies. Third, net carbon importers may set their removal subsidy even below their carbon tax when marginal environmental damages are small, to appropriate producer surplus from carbon exporters.