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Carbon Sequestration, Economic Policies and Growth

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  • Grimaud, André

    (TSE,IDEI,LERNA)

  • Rougé, Luc

    (TBS)

Abstract

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 flows of pollution whose accumulated stock negatively a¤ects 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 different second-best policies: a carbon tax, a subsidy to sequestered carbon, and a subsidy to labor in CCS. The first 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's 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.

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Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-349.

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Date of creation: 28 Oct 2012
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Handle: RePEc:tse:wpaper:26507

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Keywords: carbon capture and storage (CCS); endogenous growth; polluting non-resources; carbon tax; subsidy to CCS.;

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  1. Acemoglu, Daron & Aghion, Philippe & Bursztyn, Leonardo & Hemous, David, 2011. "The Environment and Directed Technical Change," CEPR Discussion Papers 8660, C.E.P.R. Discussion Papers.
  2. Alain Ayong Le Kama & Mouez Fodha & LAFFORGUE Gilles, 2009. "Optimal Carbon Capture and Storage policies," LERNA Working Papers 09.24.300, LERNA, University of Toulouse.
  3. Groth, Christian & Schou, Poul, 2007. "Growth and non-renewable resources: The different roles of capital and resource taxes," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 80-98, January.
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