Policy Studies Federal Government Affairs

Opportunities for Competitive Policy Mechanisms to Improve Carbon Dioxide Removal

by Philip Rossetti AND Nick Loris

Oct 24, 2022

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Authors

Philip Rossetti

Resident Senior Fellow, Energy

Nick Loris

Vice President of Public Policy, C3 Solutions

Key Points

We are seeing a burgeoning demand for carbon capture and removal technology for both public and private benefit, but these technologies are nascent and it is important to get the policy mechanisms correct so that we improve rather than inhibit innovation among the many competing technology types.

We know from other programs focused on innovation that the market is a much better tool for rewarding outcomes over political decision. While policymakers are keen on putting public funds towards these efforts to capture potential benefits, they should have a preference for policies that enable choice rather than replace choice.

Policy mechanisms like reverse auctions are ideal for stimulating market entry and innovation for carbon capture or removal technologies, as they allow the most efficient technologies to claim the most profit. While we do not estimate the appropriate size of such a program, a reverse auction would be a much better tool for garnering innovation in carbon dioxide removal technology than technology-specific subsidy.

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Introduction

Advances in carbon dioxide removal (CDR) technology are generating new debate around the role of government in their adoption. To date, public policy mechanisms like grants and tax credits have subsidized this technology, but questions linger about whether improved policy mechanisms could accelerate the adoption of CDR at a lower cost to the public. There is also debate regarding the extent to which government should spur CDR technology. Conventional economic theory notes that the presence of private-sector demand for a new technology should diminish the need for public support, but the commodity provided by CDR—reduced pollution— is a public good, which forces considering whether public support is warranted to best capture the benefits.

In this paper, we explain the benefits of CDR technology, its potential future role in both the public and private sectors, and how best to maximize its benefits. Importantly, this paper focuses on discerning whether there are reasonable motivations for public policy regarding CDR technology, and, if so, what structure of policy would yield the greatest benefits at the lowest cost. We focus particularly on reverse auction mechanisms, which traditionally have been highly effective at reducing commodity market costs.

Press Release: Carbon dioxide removal can help the climate-if only the government can enable competition