Beyond emissions trading to a negative carbon economy: a proposed carbon removal obligation and its implementation

According to most climate mitigation scenario assessments, limiting global warming to 1.5-2 degrees C in the long run will not be possible without the extensive deployment of carbon dioxide removal (CDR) from the atmosphere. CDR is required for drawing down and achieving net-zero CO2 emissions by mid-century. Thereafter, CO2 removals will likely need to exceed residual CO2 emissions, resulting in net negative emissions. A policy framework based on 'carbon removal obligations' (CROs) has been proposed to respond to concerns about the financial and fiscal viability, the lack of incentives for CDR uptake, as well as the physical and technological risks associated with any climate mitigation scenario that relies on large scale CDR. Here we propose an updated and improved CRO policy framework, consisting of two core elements: the 'principal CRO mechanism' obliges emitters of a tonne of CO2 to remove a tonne of CO2 at the time of maturity of the CRO. On top of this obligation, CRO holders need to pay a fee for the temporary storage of CO2 in the atmosphere. This 'CRO pricing instrument' is used by regulators to steer the carbon emissions and removals pathways independently. Our update suggests that markets for CDR under the CRO framework should operate independently from markets for emission reductions. We propose a blueprint for legal implementation where CROs are integrated akin to private financial borrowing and debt mechanisms. By aligning CROs with established financial systems, we leverage familiar institutional roles, seamlessly integrating climate mitigation into the core economy. The proposal applies the polluter pays principle to the costs of carbon removal from the atmosphere, whilst providing legal guarantees that the removals will materialize.By placing climate change mitigation pricing levers in the hands of the traditional managers of financial stability, that is, central banks, better account is taken of the externality of carbon emissions as part of core economic and financial management, with the corollary that climate change mitigation response management is better integrated into the economic mainstream.Establishing a standard for the creation of removal units by CDR projects facilitates a more efficient market by reducing transaction costs and enhancing price discovery.Early action by government to put in place legislative measures indicating the direction of policy, and a timetable for introducing CROs, would enhance private sector confidence and engagement in the CDR project sector.