At present, we lack a carbon market that effectively incentivizes emissions reductions at the scale needed to limit global warming to below 1.5 degrees Celsius. Tethering the carbon price to the cost of carbon dioxide removal provides a pathway to effectively determine the value of carbon emission reductions.

Humanity is not on track to contain global warming below the 1.5 degrees Celsius threshold, a limit that scientists argue is critical for averting catastrophic climate change. The world has struggled for decades with what is routinely quoted as the most effective tool in fighting carbon emissions: a realistic price for carbon emissions. To arrive at such a price with purely political measures has not fully succeeded.

The most effective tool: A global price on carbon

While dire scientific forecasts serve as warning bells, the core issue stems from a lack of motivation to act. Both at the national and corporate levels, as well as among individuals, there’s an absence of compelling incentives to make essential emissions reductions. The missing component? A robust, global carbon market with a realistic pricing mechanism.
Creating such a market is easier said than done. This may explain why society, on the whole, has struggled to establish a global carbon market. Instead, we witness a transatlantic divide, with the US opting for a voluntary market, while Europe stresses a compliance-based model informed by lessons from a failed clean development mechanism.

Established markets could provide a blueprint

This op-ed does not intend to dissect the shortcomings of existing carbon markets in minute detail. Nor does it propose specific solutions to rectify these issues. Instead, it champions a fundamental shift in our thinking: we need to stop treating the pricing of carbon as solely a political exercise carried out via subsidies or taxes. We should draw lessons from markets that have thrived by setting tangible prices for goods and services.

Take the waste management sector in the northeast US, where people pay an average of $69 per ton for municipal waste removal. People in the northeast US do not pay $69 because their government has deemed it a suitable amount for waste management. They pay this amount because it is the market-based cost of removing their trash from their doorsteps, and leaving it there is simply not an option. Also, think of global commodities like oil, aluminum, and others — the prices are determined by physical realities and not by political negotiations.

With recent technological advancements in carbon dioxide removal (CDR) technologies — a collection of techniques that capture CO2 from the atmosphere and permanently store it — society now has the opportunity to tether the carbon price to a concrete cost. Given that the destruction of our habitat and the foundation of our wealth is not an option, we should begin to tie the carbon price to the actual cost of removing carbon from the atmosphere.

The price of CDR should serve as the price of carbon

Anchoring the carbon market to the true cost of removal offers manifold benefits. Primarily, it will spur financial incentives for radical emissions reductions: the price of durable carbon removal is predicted to be around $200-350 per tonne by 2030, which automatically assigns a great and predictable value to decarbonization efforts.

Secondly, we would be working within a market structure that is time-tested and well-established. It only makes sense to draw upon the foundations of existing multi-billion dollar markets, especially when aiming to establish a multi-trillion-dollar industry.

Lastly, such a market could be open to suppliers from around the world, igniting innovation, fostering healthy competition, and driving down technology prices. However, it’s important to note that these benefits are likely to manifest in the long term. In the short term, implementing a price floor for carbon based on CDR cost may increase the cost of carbon mitigation significantly — reflecting the urgency. It’s a necessary step towards fully recognizing the cost of carbon pollution.

Crucially, linking the price of carbon to the actual cost of its removal doesn’t automatically mean that governments would lose their influence over pricing, just as consumers (polluters) wouldn’t be exempt from paying in specific regions. Similar to the way governments or intergovernmental bodies can influence prices in regular commodity and services markets, they could opt to subsidize carbon removal for specific geographic areas. This is a potent instrument for addressing climate justice and holding industrialized countries in the northern hemisphere accountable for their historical responsibilities.

Navigating practical challenges

Naturally, numerous practical questions arise when considering the implementation of such a market, even if we set aside the issues of political will and the necessary legal framework for its establishment. Perhaps the most significant question revolves around which specific carbon removal technologies to link the price to, given the differences in terms of quality. These differences primarily arise due to uncertainties (how to compare those technologies around dimensions like permanence, delivery, measurability) surrounding some CDR solutions.

In this context, we can draw upon analogies from existing markets to find solutions. In the renewable energy sector, different technologies, such as solar, wind, or hydro, received varying feed-in tariffs during their initial phases of development. They are still treated differently by the markets, but all deliver kilowatt-hours of electricity. Similarly, it will be necessary to assign different credit multiples to different CDR technologies based on the aforementioned dimensions until sufficient volumes are reached. This step is crucial in ensuring that there is a robust ramp-up of durable CDR volumes to establish a globally functioning market. At a later stage, the market will be able to perform its price discovery without such interventions, as we’re seeing in renewable energy. Still, countries might tax and subsidize CDR technologies for all sorts of reasons — something we see in all markets from healthcare to commodities.

Charting a path forward

There were grim revelations at the last COP conferences, making it ever more important to innovate toward a catalytic carbon price. COP’s global stocktake underlines the urgency of arriving at a price for carbon not bound to specific national interpretations. A global carbon price based on physical CDR is intuitive and within reach.