Carbon sequestration, economic policies and growth / André Grimaud, Luc Rouge

We present a model of endogenous growth in which the use of a non-renewable resource in production yields CO2 emissions whose accumulated stock negatively affects welfare. A CCS technology enables, via some effort, a partial reduction of these emissions.
We characterize the social optimum and how the availability of CCS technology affects it, and study the trajectories of the decentralized economy. We then analyze economic policies. We first 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.
While all three tools foster CCS activity they generally have contrasting effects on resource extraction, carbon emissions, output and consumption. The carbon tax postpones resource extraction whereas the two subsidies accelerate it. Although the tax decreases short-term carbon emissions, the two subsidies can increase them, thus yielding a green paradox. The tax has a negative impact on the levels of output and consumption in the short-term, unlike the subsidies. The tax generally fosters growth whereas the subsidies reduce it; however, when the weight of the CCS sector in the economy is high, these impacts can be reversed.

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