Carbon sequestration, economic policies and growth

Carbon sequestration, economic policies and growth / André Grimaud & Luc Rouge. Toulouse : Institut d’Economie Industrielle (IDEI), October 2012, 36 p. (Worldking paper ; n° 751)

The possibility of capturing and sequestering some fraction of the CO2 emissions arising from fossil fuel combustion, often labeled as carbon capture and storage (CCS), is drawing an increasing amount of attention in the business and academic communities. We present here a model of endogenous growth in which the use of a non-renewable resource in production yields ‡ows of pollution whose accumulated stock negatively affects welfare. A CCS technology allows, via some effort, for the partial reduction of CO2 emissions in the atmosphere. We characterize the social optimum and how the availability of the CCS technology affects it, and we study the decentralized economy’s trajectories. We then analyze economic policies. We …first characterize the …first-best policy. We derive the expression of the Pigovian carbon tax, and we give a full interpretation of its level, which is unique. We then study the impacts of three di¤erent second-best policies: a carbon tax, a subsidy to sequestered carbon, and a subsidy to labor in CCS. The fi…rst two tools foster CCS activity; so does the third, but only if it is coupled with one of the other two. While the tax postpones resource extraction, the two subsidies accelerate it –possibly yielding a rise in short-term CO2 emissions. The effects on growth are more complex. If the weight of the CCS sector in the economy is high, the tax will generally be detrimental to output growth, while the subsidies can foster it in the long-term. Finally, the carbon tax has a negative impact on the output level in the short-term, contrary to the subsidies. (© André Grimaud & Luc Rouge)

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