An affordable backstop climate policy

A Carbon Takeback Obligation (CTBO) is a supply-side mitigation policy requiring extractors and importers of fossil fuels to recapture and permanently store a progressively increasing fraction of the CO2 generated by their activities and products. Using a new emulator we compare a CTBO to conventional mitigation scenarios for the first time. We discuss the outcomes below, showing that a CTBO policy is cost comparable to traditional IAM scenarios driven with carbon pricing, while offering significant benefits in transparency, administration simplicity and public acceptability. A CTBO applied with modest demand-side policy provides a low risk and reliable pathway to net-zero emissions by 2050.

Model world and reality

In the world of climate policy modelling integrated assessment models (or IAMs) are the go to source of information on how to achieve the rapid emissions reductions required in order to achieve the ambitious goals set out in the Paris Agreement. IAMs are driven with a carbon price—a price attached to the production of one tonne of carbon dioxide (CO2)—and in response work out the CO2 emissions associated with the various sectors of a modern economy as that price impacts on production and consumption through the 21st century. These carbon prices shouldn’t be thought of as a tax applied to every producer of CO2, but instead as representing a myriad of demand-side policies applied to an economy, which have an overall economic impact equivalent to a charging everyone who produces CO2 a set cost. Note that in this context we use the term ‘demand-side’, referring to policies which target consumers of the products producing CO2.

The carbon price representing a given suite of policies is used in an IAM to drive abatement (a reduction in emissions output compared to if no policy at all was applied). The mantra of IAM modellers is that carbon pricing is the ‘first best approach’ to achieve a mitigation outcome, meaning it will always provide the most cost-effective pathway to decarbonisation.

But while carbon pricing may be economically optimal in model world, it is also challenging to implement in practise, resulting in a complex structure of regulation and administration to correctly track and price produced CO2 from every consumer in the various sectors of an economy – a governmental nightmare. This is the first problem with policy as designed in a typical IAM.

The second is that IAMs assume perfect foresight, meaning they will always invest in the cheapest mitigation option at any point in time. This produces early rapid reductions in emissions, but also means that models fail to address a bottleneck later down the line: a lack of adequate CCS capacity in the middle of the 21st century. In response to this, models then achieve sufficient demand reduction / CCS investment with a huge rise in carbon prices (in excess of $1000/tCO2 on average at the time of Net Zero). To put that in perspective, direct air capture (DAC) with CCS is estimated at $200-$600/tCO2 stored.

This lack of adequate early investment in CCS capacity is a single point of failure for IAMs at present, but the same policy blindness is also playing out in the real world too. The aim is to achieve the joint goals of early and long-sighted CCS investment, whilst also designing policy which ultimately stops fossil fuels contributing to global warming. With these two targets, what alternatives to conventional mitigation policy are there, and can they achieve the same outcomes whilst remaining cost-competitive? 

The Carbon Takeback Obligation

A Carbon Takeback Obligation (CTBO) requires extractors and importers of fossil fuels to recapture and geologically store a progressively rising fraction of the CO2 contained within their products. Doing so ensures that 100% of the CO2 produced by the use of products containing fossil carbon is recaptured and geologically stored by a pre-determined Net Zero date, and sponsors the development of a carbon capture and storage industry.

The simplest way to implement a CTBO is at the point of extraction, targeting only 4 products: oil, gas, coal, and the limestone used for cement. Although there is a range of industrial and commercial uses for these four products, only a very small fraction of the carbon within these products is not immediately emitted as CO2. And even considering the small remaining fraction of carbon in plastics and other forms, this still can’t be considered stored carbon over geological timescales. Therefore, a policy requiring the recapture and storage of an equivalent quantity of CO2 as is in the originally extracted product offers a simple and practical solution.

Figure 1 shows the broad interactions of a CTBO when applied to a jurisdiction. The government produces and regulates a certificate system (green arrows) obliging extractors and importers of fossil fuels to recapture and store a fraction of the CO2 generated by their activities and embedded within their products. This stored fraction starts out small (e.g. 1%) and rises so that by middle of the 21st century all of the CO2 within their products is recaptured and geologically stored. In order to fulfil the obligation extractors and importers must pay for geological carbon storage (pink arrows). The additional costs are passed to consumers by embedding them in the products sold in the wider economy (red arrows). These costs reduce the willingness of consumers to invest in products containing fossil carbon, feeding back onto levels of CO2 production. 

Blue arrows show the flow of CO2 through the system. CO2 is extracted from the geosphere (in the form of carbon contained in oil, gas, coal, and the limestone used for cement), and sold on to the wider economy where it is either released as CO2 emissions or recaptured and stored.

Initially the CTBO has a small stored fraction, meaning that only a small amount of the produced CO2 is recaptured and stored (in panel (a) most CO2 ends up in the atmosphere). When the stored fraction reaches intermediate levels (around 50%) more CO2 is recaptured and stored (panel (b)), but some is still emitted. These intermediate stored fractions mean a larger geological carbon storage industry has developed, and higher costs to consumers mean CO2 production is reduced compared to panel (a). Finally in panel (c) the stored fraction reaches 100%, so all of the COextracted from the geosphere is returned to geological storage. The embedded costs in products containing CO2 are now quite high, and result in even lower levels of CO2 production compared to panels (a) and (b). Absolute production levels are discovered by the market, not limited by emission quotas.

Figure 1: Pictural description of a CTBO policy, applied with various stored fractions onto an extractor/importer in a jurisdiction. Actors are split into broad groups: Government, Extractor/Importer of fossil CO2 products, Industrial Point Source, Consumers (who represent the wider economy), GCS Operators, and DAC Operators (with the atmosphere also represented as an additional actor). Arrows show the interactions introduced by a CTBO policy: green reflects regulatory and administrative interactions with Government, red demonstrates the direction of costs realised by fulfilling the CTBO, pink shows the direction of payments for GCS and from the storage operator to CO2 suppliers, and blue shows the flow of CO2 from the point of extraction/importation around the system. Panel a) shows a CTBO applied with a low stored fraction (e.g. 10%) and no DAC. Panel b) shows a CTBO applied with a 50% stored fraction some of which is supplied by DAC. Panel c) shows a CTBO applied with 100% stored fraction. The weight of arrows reflects the relative size of the flow (of costs, payments and CO2). The overall quantity of CO2 extracted/imported in the form of coal, oil, gas, and the limestone for cement is reduced as the stored fraction increases as a result of increased costs passed onto the consumer. 

What does a CTBO offer?

A CTBO provides a backstop policy which guarantees, regardless of our ability to reduce demand for fossil fuels in the mid-century, that by the time of Net Zero fossil fuels will no longer contribute to global warming. It does this by requiring 100% of the carbon contained within fossil fuel products is recaptured and geologically stored.

We can model the impact of such a policy using an IAM emulator. We do this in full in a new paper (read it here), but for this summary we focus in on a simple example. Figure 2a shows a conventional mitigation scenario, with CO2 produced in dark blue, CO2 emitted in light blue, and CO2 stored the shaded grey region between the two lines. This pathway is achieved by employing a global carbon price (panel c), which rises to well in excess of $1000 per tonne of CO2 produced by the time of Net Zero.

Now consider an alternative pathway driven predominantly with a progressively increasing stored fraction under a Carbon Takeback Obligation (yellow in panel b). This policy reaches Net Zero in 2050, meaning that CO2 emissions reach zero in that year (yellow in panel a).

Requiring extractors and importers of products containing fossil carbon results in additional costs to the consumer, which are modelled in panel c. Also in the gold line of panel c are modest and constant demand-reduction measures, implemented alongside the CTBO costs in order to encourage early reductions in CO2 production, while the CTBO’s stored fraction is still at relatively low levels.

Between them, this combination of modest demand-reduction policy applied on the demand-side and a supply-side CTBO drive production down to approximately the level of CO2 production in the conventional mitigation policy at the time of Net Zero, while mandating that all CO2 produced is stored after that time. Because the CTBO creates long-sighted investment opportunities, a geological carbon storage industry can develop and provide adequate storage capacity at the time of Net Zero — no more need for $1000 carbon prices to push demand down further.

Figure 2: Demonstrating the application of a CTBO, with modest conventional demand-side policy, in order to achieve a 1.5C-compatible mitigation scenario, reaching net-zero in 2050. The conventional mitigation scenario is shown in panel a, with produced CO2 (dark blue) emitted CO2 (light blue) and the CO2 stored (grey shaded region). This scenario has a stored fraction which rises as is shown in panel b, and is driven by a carbon price shown in panel c (rising well in excess of $1000/tCO2 at the time of Net-Zero). The CTBO produces the same climate outcome by mandating storage following the curve in panel b (gold), resulting in a similar outcome for CO2 production, emissions and storage (panel a), all whilst keeping the effective carbon price capped around the cost of DAC (panel c).

A call to action

All continued fossil fuel use that is not explicitly linked with a proven and scalable CO2 storage capability contributes to the risk of exclusionary carbon prices well in excess of the cost of achieving carbon capture and geological storage through this century, and adds to the very real threat of a disorderly transition when we approach the ambitious goals set in the Paris Agreement. All scenarios suggest some amount of carbon capture and storage is necessary in the second half of this century, but rely on politically-infeasible high carbon prices to achieve the necessary mitigation.

The unique value of the CTBO is to create a market for CO2 storage by requiring extractors and importers to recapture and store the waste CO2 produced from the use of their products, spreading the cost of reducing this transition risk over all current fossil fuel users through a straightforward regulatory framework. It can be implemented alongside existing climate measures such as emission trading schemes and other forms of carbon pricing. A CTBO, combined with these demand-reduction measures in the near-term, would deliver a viable and low-risk pathway to achieving net zero emissions.

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This blog article refers to a research article recently released with Joule. Figure 1 is reproduced from the article, while figure 2 here presents a simplified version of the gold CTBO+ scenario in figure 2 of the main article text. Read the full article here.

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