The Economics of Carbon Dioxide Removal

Carbon dioxide removal (CDR) is an emerging topic in climate policy. We review the nascent economic literature on the governance of CDR and discuss policy design and institutions. We first assess the role of CDR in climate policy portfolios that include abatement and adaptation. Cost-saving technological progress could make CDR a game changer in climate policy: CDR creates new sectoral, intertemporal, and international flexibilities, which reduce overall costs and allow a return to a temperature target after temporary overshooting. Moreover, CDR can reduce the problem of international cooperation due to substantially lower supply-side leakage via fossil fuel markets. A key challenge lies in its governance and incentive structure, which are complicated by the nonpermanence of carbon storage and default risks of the firms committed to future CDR. For CDR governance, we survey approaches that incentivize removals by price instruments or include CDR in (modified) emissions trading schemes.