Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy

We use a two-period model to investigate intertemporal effects of cost reductions in climate change mitigation technologies for the power sector. The effect of cost reductions for CCS depends on how carbon taxes are set. If there is no carbon tax in period 1, but an optimally set carbon tax in period 2, a CCS cost reduction may reduce early emissions. Such an innovation may therefore be more desirable than comparable cost cuts related to renewable energy. The finding rests on the incentives fossil fuel owners face. If future profitability is reduced, they speed up extraction (the ‘green paradox’), and vice versa.

► A simple two-period model that captures the essence of the “green paradox”.
► It allows to analyze impacts of technological improvements.
► Renewable energy improvements worsen intertemporal inefficiency.
► Carbon capture and storage counteracts intertemporal inefficiency.
► Result robust to extensions (increasing extraction cost, endogenous climate policy).