Using public incentives for negative emissions increases economic inequality

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 emissions 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 Politecnico di Milano and CMCC 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.

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 a 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 potentially 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 modelling of the income distribution in a highly regionalized Integrated Assessment Model (RICE50+). They 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, 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, of being vigilant about 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, professor of climate change economics at Politecnico di Milano and director of the European Institute for Economics and the Environment at CMCC.