How markets should be designed for non-permanent carbon removals

Carbon dioxide removal technologies are becoming increasingly important for climate action, but their differing storage times matter for policy design. A new study published in Environmental and Resource Economics by the Potsdam Institute for Climate Impact Research (PIK) provides guidance based on economic principles. While non-permanent carbon storage plays a valuable role as economies transition away from fossil fuels, its contribution is less valuable than permanent storage; this should be reflected in carbon pricing schemes that aim to incentivise the ramping-up of removals.

Carbon dioxide removal captures CO₂ from the atmosphere and stores it for some length of time, depending on the method. Afforestation projects, for example, can store carbon for decades to centuries in trees, while extracting CO₂ via air filters or bioenergy plantations and depositing it underground in geological formations can be considered as permanent. Greenhouse gases can remain in the atmosphere for centuries to millennia. In the long run, then, non-permanent removals cannot compensate for emissions in the same way that permanent removals can. 

“Policies that set incentives for removal need to take into account the duration of storage,” says PIK researcher Max Franks, lead author of the study, “but until now, there has been little to no research pinning down rational principles for this”. The analysis shows how the difference in value arises, and discusses practical challenges and potential solutions for designing non-permanent carbon removal policies. “What we find is that, as a society, we should be willing to pay more for permanent removals than for non-permanent ones.”

A liability for future generations

In the paper, the authors derive a mathematical formula to calculate the price difference in a transparent way. If, for example, the stored carbon in an afforestation project falls by 50 percent every 50 years, it is only half as valuable as a removal project that stores carbon permanently.

“A problem with permanent removal technologies is that they are still at different stages of readiness and not yet deployed at scale,” warns PIK researcher Kai Lessmann, co-author of the study. “Non-permanent removals, which are cheaper and more readily available, will thus have an important bridging role to play while permanent options develop further. The more non-permanent removals we deploy in the near term, though, the more we burden future generations with recapturing the carbon that will eventually be released again. It’s just like the never-ending task of Sisyphus in Greek mythology.”

Accurate monitoring and verification are essential

Beyond the pricing issue, the study also looks at other aspects of policy design. “The tricky part with non-permanent storage projects is that they might create liabilities and adverse incentives over time,” explains Ottmar Edenhofer, PIK Director and co-author of the study. “Enterprises could, for example, promise large amounts of removal to receive subsidies, but then strategically declare bankruptcy without managing their storage site with due diligence.”

Thus, the authors have also analysed various options for taxing or subsidising firms to ensure the effectiveness of carbon removal incentives. Edenhofer concludes that “accurate monitoring and verification of removals and released carbon are absolutely essential for providing transparency to regulators and the wider market”.