Public incentives to financing privately-owned negative emissions technologies by integrating them into a single carbon market increase economic inequality of climate policies, which could double in a 1.5°C global warming scenario. New research from CMCC and Politecnico di Milano published in Nature Climate Change proposes alternatives to mitigate this effect, while still ensuring decarbonization at reasonable cost.

Negative emission technologies allow the capture of CO₂ from the atmosphere, and are a fundamental option to reach carbon neutrality.

In scenarios consistent with the Paris agreement, the carbon removal industry might capture more than a billion tons of CO₂ per year and be worth a trillion dollars in the second half of the century. Public incentive is going to be necessary to finance negative emission at this scale, for example introducing negative emissions into a carbon market alongside other emission reduction strategies such as renewable energy.

In the paper “Inequality repercussions of financing negative emissions”, published on Nature Climate Change, Pietro Andreoni, Johannes Emmerling, and Massimo Tavoni from CMCC and Politecnico di Milano show that such incentives might cause an increase in economic inequality in the long term. This happens because the costs of financing carbon removal are paid for by the public and, if these technologies are privately owned, their profit would benefit the few.

In particular, in a 1.5°C scenario, these effects – which are highest around the time of net-zero and in scenarios with carbon budget overshoot – could double the increase in income inequality of climate policy.

“Negative emissions most likely will play a key role in avoiding excessive global warming in the coming decades. Notably technological options could also provide an important business model, which can be seen already looking at the current start-ups in the field of Direct Air Capture. The ownership of the companies benefiting from these potential windfall gains might however have repercussions on the wealth distribution, so that differential carbon pricing and other policy design questions are key”, says Johannes Emmerling, Senior Scientist at CMCC.

Full integration of emission reduction and carbon removal strategies is an appealing option because it allows, in theory, to reach decarbonization at the minimum cost for society, explain the authors. The severity of the inequality increase due to this market structure, however, suggests that alternative policy options should be explored. In this context, authors propose alternative policy provisions or market regulation to mitigate the increase in inequality, while still ensuring decarbonization at reasonable cost.

Within each country, they isolate the factors that drive the inequality increase: (a) the profit margin of negative emission technologies’ companies (b) the concentration of ownership of negative emission companies towards the top of the income distribution (c) the amount of negative emissions in the market. They find that small economies with high carbon removal potential, concentrated equity ownership, and expensive mitigation options are particularly susceptible to the inequality risk. They also analyze how the international distribution of negative emissions potential shapes global inequality, finding that concentrating removal efforts in the global north, or transferring financial resources to the global south, can to some extent offset the increase in inequality at the global level.

For this study, researchers combined a detailed modeling of the income distribution in a highly regionalized Integrated Assessment Model (RICE50+), and included a representative CO₂ removal technology (Direct Air Capture) with heterogeneous international potential for removal and storage and explicit technological learning.

“In this work, we provide a conceptual channel and quantify how financing negative emissions can cause detrimental distributional consequences in the long-run, generating a tension between cost efficiency and equity in the climate transition. This dynamic depends on technology, society, but also on the policy instruments chosen to foster the transition.” says Pietro Andreoni, a PhD student in Management Engineering at Politecnico di Milano and lead author of the paper.

Overall, this study confirms the importance, when designing policies to facilitate the climate transition, on being vigilant on their effect on other societal goals like inequality control.

“The study highlights the importance of adequate policy design to finance large scale CO2 removal. The need to remediate the excessive carbon emitted in the atmosphere is imperative: but so is fairness and opportunity. This study shows that existing policies such as emission reduction markets are unsuited for dealing with new climate strategies such as negative emissions. Alternative policy and market designs are possible and should be further explored” concludes Massimo Tavoni, director of the European Institute for Economics and the Environment at CMCC and professor of climate change economics at Politecnico di Milano.

Link to the article