Higher Carbon Prices on Emissions Alone Will Not Deliver the Paris Agreement

Abstract

Summary Limiting global warming to 2°C by 2100 requires anthropogenic CO2 emissions to reach zero by 2070 and become negative afterwards; therefore, large-scale carbon dioxide removal (CDR) from the atmosphere is critical. We investigate the effectiveness of carbon prices in achieving the deep decarbonization needed in the power system. We find that if only CO2 emitters are penalized, increasing prices to the social cost of carbon is sufficient to achieve a decarbonized system in the medium-term but not maintain it in the long-term. Unless carbon pricing mechanisms are adapted to remunerate CDR services, CDR technologies are not deployed. Incentivizing CDR could mean that lower levels of carbon taxation are needed to meet the Paris Agreement, which in turn lowers electricity costs. However, the deployment of CDR technologies could prolong the use of unabated fossil fuels in a carbon-constrained system, therefore, disincentives must be implemented to prevent this moral hazard from manifesting.