Emissions trading with clean-up certificates: How carbon debt can increase climate ambition levels

Abstract

This article proposes a policy instrument to scaling-up carbon dioxide removal (CDR) in the form of "clean-up certificates" that bundle an emission allowance with "carbon debt". “Carbon debt” is a binding obligation to remove that carbon from the atmosphere at a later date. This allows industrial emitters covered under an emissions trading scheme (ETS) to emit CO2 in the present, accruing ‘debt’ against a national carbon budget, and compensating for the debt through CDR in the future. The analysis finds that clean-up certificates can be introduced without weakening near-term carbon prices or mitigation incentive. To ensure that carbon debt is repaid, the authors suggest a collateral requirement to address limited liability of entities accruing ‘carbon debt’, in addition to an institutional setting with a carbon central bank as a lender of last resort.