Carbon Takeback Obligation
Economists widely agree that a uniform price on carbon is the most efficient way to foster decarbonization. I have already discussed that topic here. But there is a pricing mechanism that I did not consider: it is called carbon takeback obligation (CTBO).
What are Carbon Takeback Obligations?
This mechanism for pricing carbon has been proposed in the UK and the Netherlands.
It operates under the assumption that fossil fuel companies are the “causal agent” of carbon emissions: they create the products that cause pollution, so they should be the ones that have to deal with it. To make them do so, proponents want to mandate “geological net zero”. This means to put the fossil fuel companies under the obligation of returning a tonne of carbon dioxide to storage in the Earth’s crust for every tonne that is generated by using fossil fuels. It is not hard to see, where the name of this mechanism stems from.
This is a stricter constraint than simple “net zero”, because it removes any creative accounting on how much and how long carbon sinks like forests really remove CO2 from the atmosphere. In the UK example, companies would be put under a licensing requirement for produced or imported fossil fuels to dispose of a rising fraction of CO2 generated by “their” products, reaching 100% by 2050. The CO2 could be captured at the point of emissions, like coal or gas power plants via CCS, or by direct air capture.
How to ensure that companies do what they are obliged to do?
To create a demand and a price of CO2, the licensees of the CTBOs would be required to buy “carbon sink” or “negative emissions” certificates on an open market corresponding to the amount of CO2 they are obliged to sequester. In theory, this should encourage competition and ensure efficient pricing for any form of carbon sink that verifiably puts carbon into geological storage. The proposal seems to have the storage of gaseous CO2 in abandoned oil and gas fields or even coal seams in mind.
It is not clear to me, whether technologies like “turquoise” hydrogen would also qualify. Here, a thermal process called methane pyrolysis is used in which natural gas is broken down into hydrogen and solid carbon. The hydrogen can be used to produce electricity or in chemical and metallurgical industries. If the solid carbon is not combusted during further processing, but rather put into storage underground, this process is also CO2-neutral, if and only if the thermal energy to split the methane is provided by a carbon-free source, like an advanced nuclear reactor.
It is also unclear to me, whether companies like Running Tide, that try to remove carbon from the atmosphere by growing kelp on bouys that sink after some time to the ocean floor, where they deposit the carbon in the kelp, or Undo that try enhanced weathering of certain rocks to bind CO2, would qualify as “geological storage” for CO2. In a strict sense, they are storing carbon in various chemical forms, not necessarily as CO2 and not necessarily deep underground, but just as permanent.
Given that the required percentage of geological storage is phased in over almost 30 years, companies in the carbon capturing and storing business should be encouraged by the immediate demand and somewhat predictably growing market. Proponents claim that this scheme would not need subsidies, because the burden of satisfying the license requirement falls on the fossil fuel companies.
What would this obligation cost?
The most expensive way to reasonably capture CO2 today is direct air capture. Currently, the price varies between $250 and $600 per tCO2. I guess that price is “just” for capturing CO2 and I suspect that the cost of transporting and actually depositing CO2 in geological storage has to be added. Unfortunately, the startups working on this, like Climeworks, Carbon Engineering or Global Thermostat, have not demonstrated their respective technology at anywhere near the scale that would be necessary - billions of tCO2 per year. These companies are currently removing a combined total 8000tCO2/y.
Natural gas produces about ~0.6 kg of CO2 per kWh of electricity. At a 100% capture rate in 2050, that converts to an additional $0.36/kWh at a price of $600/tCO2, $0.15/kWh at a price of $250/tCO2 and $0.06/kWh at a price of $100/tCO2. Double these figures for coal. For gasoline (2.3kgCO2/liter) we arrive at $5.22/gal, $2.17/gal or $0.87/gal respectively. These prices are in today’s dollars.
A price of $100/tCO2 is what developers deem possible (and even probable) to achieve for DAC via economics of scale. The fossil fuel industry certainly has scale! And it should be highly incentivized to bring the cost of carbon capture technologies down substantially, when it is obligated to take the carbon back. Already, there are nascent technologies for capturing CO2 at large scale emitters at the lower end of that price range. Using the Allam Cycle for example, the costs of sequestering carbon are approximately $110/tCO2 today, and it produces almost pure CO2 at reasonably high pressures for geological disposal.
How does it affect the economy?
I do not know whether I subscribe to the idea put forward by the proponents of the CTBO, that the fossil fuel companies were “responsible” for CO2 emissions. I think that the case is strong, that the end consumers who emit the CO2 to satisfy some local need, like mobility, heating, creating fertilizer of steel etc. share some or even have all “responsibility”. At the very least, they reap the benefits of fossil fuels. Anyway, the fossil fuel companies will try to forward the price to the customers.
From the consumer’s perspective, this scheme will therefore work just like a carbon tax.
But unlike a tax, where the state collects money and can then use it to help poorer households via some form of subsidy, like direct hands outs in the form of dividends or reduced prices for some basic allotment of electricity and heating fuel, the proceeds of CTBOs go to the companies that are selling the “carbon sink certificates”. That is also, why I do not believe that this scheme will not need taxpayer money, especially for poorer citizens of poorer countries.
What are possible pitfalls?
Like with all “negative emission schemes”, it is highly likely that there will be some “fraudulent” actors and the possibility of financial trickery. But I would agree that it should be easier to identify those bad actors than with certificates that do not require geological storage. Depending on the shape of the phase-in curve (linear? logarithmic? exponential?), it could become quite challenging to get enough “real” certificates for the fossil fuel companies to operate even their existing fields and mines. Without sufficient attention to the design of the phase-in, CTBOs could throttle existing production even further. Maybe a price cap of something like $250 or so per tCO2 could be implemented. If fossil fuel companies cannot get certificates below that price, they would have to pay the price cap and the “missing” certificates could be transferred in an interest-bearing “bounty” pool. This pool’s size should not swell too much, given that fossil fuel companies will have to buy certificates only for a small percentage in the beginning years. As soon as carbon removal companies had enough capacity and efficiency, they would claim the bounty at the original price cap plus interest.
CTBOs suffer from the same problems that afflict other carbon pricing schemes. Its effects are highly visible and voter do not tend to like higher energy prices. There is the problem of “leakage”, which occurs when large consumers of energy move to jurisdictions with lower (or no) carbon prices. This could be somewhat fixed via Border Adjustment Taxes that raise the prices of goods based on their embodied carbon content when they are imported. Although there are now tools to track the embodied emissions in goods, it is a rather complex and cumbersome endeavor. A simpler alternative are climate clubs, a group of countries that agree to a mutually negotiated and verifiable carbon price. Such a club does not try to gauge the carbon content of imports accurately, but impose a stiff tariff on all goods that originate from non-member countries. But any such policy aimed at preventing leakage would need to be implemented separately. Similarly, equitability has to be ensured via some other mechanism. Otherwise, the growing burden will fall on poor people, that might for example be forced by increased prices to forgo propane for cooking and instead opt for dung with all the associated harm from indoor air-pollution in poor countries, or might be forced to turn down the temperature in a long winter and suffer from cold-related illness. Hopefully, the former example will be a thing of a less developed past in 2050.
While other pricing scheme try to set the price of carbon based on a “social” price, which tries to trade off the benefits that people get by using fossil fuels and the costs of the CO2 emissions, or rather the CO2 concentration in the atmosphere, the price of carbon set via CTBOs represents a technological price of carbon, namely how much it costs to remove it from the atmosphere. There is a lot of debate about how high the social cost of carbon should be. Part of the reason for that debate is that it is rather difficult to factor in adaption efforts. Building better flood protection for billions could prevent costs of trillions from climate change over long time spans; should you use the former or the latter price? Or what combination of them? Given such difficulties in finding the “true” price of CO2, it is not entirely clear that using the price of removing carbon from the atmosphere is a worse approach, although it appears to try to price carbon incorrectly from a philosophical perspective.
What are the current alternatives?
The “Keep it in the ground”-strategy of activists puts a non-refunded carbon price of infinity on fossil fuels. A decade of so of trying to satisfy this demand has led to underinvesting in fossil fuel production. The effects of this become visible as the “cost of living crisis”, that is putting intense pressure on households everywhere, but especially on poor nations and the poor of every nation. In this environment, CTBOs could be seen as “compromise offer”.
CTBOs offer (especially green) politicians breathing room: they could do what they have to do to save their economies, namely increasing fossil fuel production to get the prices down again. The story of “making the fossil fuel companies pay” might be superficially plausible enough to sell it to the voters. The burden would presumably be tolerable on the people now and only increase over time. If production of fossil fuel grows fast enough, the reduction in prices should easily be greater than the price increase from the storage certificates for a small percentage of the emissions. Politicians could also claim to be bootstrapping a whole new industry of carbon removal and stimulating investments in alternative energy sources, which also makes for good slogans.
In summary, I think CTBOs are a clever idea with some flaws. Sure, on their own they are “less efficient” in a strictly economic sense than the carbon dividends proposal. And given that there is no in-built mechanism to funnel money back to people, I think there is a higher probability of popular resistance. It will help, that the costs are phased-in and the sticker shock will be distributed over a longer period of time. The proposal will definitely not be liked by activists, but most of them will not be satisfied with anything that could be spun as “helping” fossil fuels - which is pretty much any stance towards fossil fuels expect calls for banning it immediately and prosecuting the executives and workers for climate crimes against humanity. CTBOs might create the strongest incentive for a carbon removal sector of any proposal I have yet seen. CTBOs might sound plausible enough for average voters, though, and could help to get us out of the cost of living crisis by offering politician a non-suicidal way of increasing fossil fuel production. If that is what it takes to get energy security, it might be worth it.
Thanks to Margriet Kuijper [@MargrietKuijper] for pointing me towards the idea of CTBOs.