How “clean-up certificates” lead to better climate protection

“Linking emission rights to a removal obligation would not actually be anything fundamentally new,” explains Kai Lessmann, PIK researcher and lead author of the study. “This has long been practised in parts of the economy – for example, in the return of deposit bottles or old electrical appliances. It is the principle of extended producer responsibility: companies stand not only for the quality of their goods, but also for the disposal of their waste. And here we show the potential of this principle for climate protection.”

According to the study, such a combination deal could provide companies with two distinct advantages. Firstly, unlike the initial emission, the removal will only take place in the future, so the costs are discounted at an imputed interest rate when planning investments. Secondly, these costs are reduced by future advances in removal technologies, such as lower energy requirements for filter systems used in direct capture of CO₂ from the air. This creates leeway for regulators. They can balance the scope of the removal obligation relative to the amount of CO₂ emitted, and thus strike a balance between “relieving the burden on the economy” and “cleaning up the atmosphere”.

Future EU contribution to global heating could be halved

To quantify the potential impact of clean-up certificates, the research team uses a mathematical model to map demand and pricing, and then applies it to the climate transition in Europe as an example. Based on a calculation by the EU’s climate advisory body ESABCC, the team assumes that the EU will still be allowed to emit a total of 14 gigatonnes of CO₂ from 2030 onwards, while still maintaining the 1.5°C global heating limit in the long term. In the model, all of the remaining budget is managed through emissions trading, meaning that 14 gigatonnes’ worth of simple emission allowances (without recapture obligation) are in circulation, for which companies pay.

The model-based analysis then addresses the following question, among others: if policymakers do not want to invest additional money in climate action nor place an additional burden on the economy, how can they use clean-up certificates to achieve maximum welfare? The analysis automatically offsets the welfare-reducing damage caused by CO₂ emissions and the resulting climate change.

The answer is that policymakers would have to limit the amount of clean-up certificates to 17 gigatonnes of CO₂ emissions. For every ten clean-up certificates issued, four simple emission allowances should be retired from the market. And by purchasing these clean-up certificates, companies should commit to recapturing a total of 6.8 gigatonnes more CO₂ than they emit. As a result, the burden from CO₂ trading and climate damages would be 4 percent lower than without clean-up certificates, Notably, the fight against global heating would be greatly strengthened: instead of the 14 gigatonnes of CO₂, the EU would then emit a total of only 7.2 gigatonnes of CO₂ from 2030 onwards, including removals in line with obligations. Europe’s contribution to future climate change would thus be almost halved.

Financing for net-negative emissions after 2050

The study also shows that the effectiveness of clean-up certificates can be even greater if politicians abandon the “no additional costs” premise for themselves (but not for the economy), thus placing a greater burden on the national budget for climate action. This would enable an 8 percent reduction in the burden of CO₂ trading and climate damages across the EU, amounting to around 28 billion euros per year, which corresponds to the benefits of the free trade agreement with Canada (as the research team notes by way of illustration). The study also provides guidance on the amount of collateral that buyers of clean-up certificates should deposit, and recommends the establishment of a European Carbon Central Bank for institutional backing.

“Given the potential benefits highlighted in this economic analysis, the EU should seriously consider introducing clean-up certificates,” says Ottmar Edenhofer, PIK Director and Chair of the EU’s climate advisory body ESABCC, who co-authored the study. “The combination of emission right and removal obligation would give the economy important flexibility on the path to climate neutrality. And subsequently, after 2050, it would help finance the net-negative emissions necessary to meet the 1.5°C limit.”