Grimaud, André and Rougé, Luc (2012) Carbon Sequestration, Economic Policies and Growth. LERNA Working Paper, n. 12.22.379, Toulouse

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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 affects 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.