The Economics of an Efficient Reliance on Biomass, Carbon Capture and Carbon Sequestration in a Kyoto‐style Emissions Control Environment

Abstract

This note employs the economics paradigm to sort through the complications of relying simultaneously on biomass fuels, carbon capture with active sequestration and passive carbon sequestration to meet Kyoto‐style carbon emission limits. It does so by exploiting the structure of a tax cum repurchase scheme for carbon. Under such a scheme, the carbon content of fossil fuel should be taxed at the point of purchase at a price that matches the shadow price of the carbon emission limit, but carbon embedded in biomass fuel should go un‐taxed. The price of biomass fuel would, though, have to reflect the marginal cost of any externalities it might cause and the opportunity cost of its land‐use requirements. Captured carbon could be repurchased at a price equal to the shadow price of carbon, net of the cost of active sequestration, itself the sum of private and social marginal costs. Finally, the price of the passive sequestration of carbon should equal the shadow price of carbon, net of the opportunity cost of setting those resources aside. Since a marketable permit system would support direct estimates of the requisite shadow price of carbon, such a system would also provide direct information about base prices for the tax cum repurchase scheme. To support long‐term investment in biomass supply and sequestration, though, changes over time in emission limits must be accomplished in a smooth and predictable manner.