Perspective Needed To Assess Carbon Prices And Carbon Dioxide Removal

For decades, economists have recommended raising the price attached to emitting carbon dioxide into the atmosphere. Because this recommendation has largely gone unheeded, the global community must now rely on new technologies to reverse the trend and remove atmospheric carbon dioxide. Climate change stakes are high, and therefore it is important to know where things stand in respect to both carbon pricing and CDR.

In this post, I discuss two bodies of work that provide perspective on where things stand. The first is the integrated assessment model developed by the economics Nobel laureate William Nordhaus. The second is a framework developed by Mark Carhart, Bob Litterman, Clayton Munnings, and Olivia Vitali, which has been applied by Kepos Capital.

Assessing The State Of Climate Change

Four critical variables for assessing the state of climate change are:

1. The atmospheric concentration of carbon dioxide;

2. The annual rate of industrial atmospheric emissions of carbon dioxide;

3. The annual growth rate of industrial atmospheric emissions of carbon dioxide; and

4. The increase in the global average atmospheric temperature relative to pre-industrial times.

Nordhaus’ IAM from 2015 provides a structural model for tracking and assessing these four variables. Assessment involves the comparison of actual values to three of the model’s theoretical benchmarks. The three benchmarks are a business-as-usual policy with no response to the threat posed by climate change, Nordhaus’ recommended policy, and a stronger policy advocated by economist Sir Nicholas Stern. The Nordhaus policy calls for emissions to peak at mid-century, with net zero emissions occurring early in the next century. In contrast, the Stern policy calls for net zero emissions to occur around 2045.

Consider some key statistics:

1. The atmospheric concentration of carbon dioxide currently stands at 422.7 parts per million. This is much lower than the BAU counterpart of 438, the Nordhaus counterpart of 434, and the Stern counterpart of 423. Relatively speaking, this is good news.

2. The annual rate of industrial atmospheric emissions of carbon dioxide in 2024 was 37.4 Gigatons. This compares to the BAU counterpart of 42, the Nordhaus counterpart of 35, and the Stern counterpart of 14. Relatively speaking, this is concerning, especially as the Nordhaus policy is a weaker benchmark than that of Stern.

3. The annual growth rate of industrial atmospheric emissions of carbon dioxide in 2024 was 1.1%. This compares to the BAU counterpart of 1.7%, the Nordhaus counterpart of 1.2%, and the Stern counterpart of -3.0%. Relatively speaking, this is concerning, if there is a serious desire to achieve net zero emissions around mid-century.

4. The global average atmospheric temperature increase relative to pre-industrial times was 1.35 degrees Celsius in 2024. This compares to the BAU counterpart of 1.19, the Nordhaus counterpart of 1.18 degrees, and the Stern counterpart of 1.17 degrees. The last three temperature variables refer to the end of 2025. Relatively speaking, this is alarming, because temperature increases have much higher than the model predicted a decade ago.

Assessing Global Carbon Pricing Policy

Kepos Capital has been tracking carbon pricing in 25 major countries. Kepos’ pricing methodology combines a variety of inputs such as carbon tax, cap trade programs, fossil fuel taxes, fossil fuel subsidies, feed-in tariffs, and low carbon fuel standards. Kepos calls its approach a “carbon barometer.”

Kepos reports that between 2019 and 2022 the global price of carbon decreased from about $20 per ton to $4.50 per ton. These values compare to the BAU counterpart of $2.45, the Nordhaus counterpart of $43, and the Stern counterpart of $300. The low and declining price of carbon is not good news. Notably, the decline mostly occurred in 2022.

Iran is currently in the news because it is engaged in a serious war with Israel. However, Iran is not in the news, but should be, for having one of the worst records for pricing carbon. Iran’s price for carbon is not just low. It is negative, meaning that Iran is subsidizing atmospheric carbon dioxide emissions. Moreover, the magnitude of the subsidy increased dramatically from 2019 through 2022, as its carbon price fell from -$62 to -$190.

Iran is not alone in being a net subsidizer of carbon dioxide emissions. Saudi Arabia is similar, as is the United Arab Emirates. Being major oil producers, this is not entirely surprising. What is surprising is that between 2019 and 2022, countries such as the Netherlands, Italy, and Mexico went from being net taxers of carbon emissions to being net subsidizers. At the same time, for Belgium, Poland, and the United Kingdom, the price of carbon stayed positive, but dropped dramatically.

A few countries increased the price they attach to carbon. For example, China raised its price from $7 to $19. This is significant, as China emits more carbon dioxide than any other country.

Canada raised its price from $45 to $66. In this respect, Canada had a carbon dividend policy whereby the country taxed carbon at an increasing rate over time, and rebated the tax collected to the Canadian population. Unfortunately, Canadians found the carbon pricing system confusing and distasteful. As a result, its new prime minister, Mark Carney, eliminated Canada’s carbon tax. This is especially important, and worrisome, as Carney has been a longstanding supporter of pricing carbon at its social cost, somewhere between the Nordhaus and Stern recommended values.

The U.S. is second to China in respect to annual emissions, although its contribution is less than half of China’s contribution. Notably, the U.S. carbon price in 2022 was $19, about the same as it was in 2019. At the same time, during the Biden administration the EPA evaluated new projects using a carbon price of about $200 per ton. Given the scale of the climate policy Biden set in motion, the price of carbon would have increased markedly over time, had it continued. However, the Trump administration appears intent on reducing America’s commitment to addressing climate change; and, therefore it is unlikely that the U.S. price for carbon will increase in the near term. In this respect, Trump has withdrawn the U.S. from the Paris Agreement, suspended renewable energy projects, and expanded fossil fuel extraction.

Not all the news about carbon prices is gloomy. This past April, a major international body established a global price for carbon. Specifically, the International Maritime Organization approved a draft emissions pricing framework with the goal of decarbonizing the shipping industry.

Shipping contributes 1.6% of global emissions. Notably, the IMO framework features a two-tier fee structure: a base fee of $100 per ton and a fee of $380 per ton for ships which exceed particular emission thresholds. This is good news, as these values are in line with economists’ recommendations. Shipping is the first industry to institute a global price for carbon; and it has set a good precedent.

Assessing Carbon Dioxide Removal Activities

Climate change has a very strong behavioral economics component. Because the global community lacks the willpower to assign a high price to carbon emissions, emission rates are far too high. For this reason, the community must now rely heavily on carbon dioxide removal in order to cope with rising temperatures.

Both the Wall Street Journal and New York Times have recently focused attention on CDR. The Wall Street Journal discussed two approaches to CDR, respectively called engineered solutions and nature-based solutions. An example of an engineered solution is direct carbon capture, while an example of a nature-based solutions is reforestation. At issue is whether one solution need to be favored over the other. Although some appear to believe that one should be chosen over the other, the Journal discusses reasons for pursing a dual track involving both.

Somebody has to pay for carbon removal. In a market-based approach, companies facing compliance mandates can either reduce carbon emissions directly or pay others to do so. The latter approach can entail paying others to remove carbon dioxide from the atmosphere.

In a market setting, the price buyers are willing to pay will need to cover the cost of production. The Journal mentions that although many buyers appear willing to pay at rates around $100 per ton, for new technologies the cost of carbon removal can be closer to $1,000 a ton. While there are some buyers willing to pay $1,000 a ton, most are not.

The New York Times discusses recent disappointments in the progress made by carbon dioxide removal solutions, after a period of great enthusiasm. There are several factors at work. One factor is that the Trump administration’s Department of Energy terminated almost $4 billion of project awards, many of which involved carbon capture and storage. A second factor is excessive optimism about the rate of technological progress.

Conclusion

Since at least the 1990s, Nordhaus has been urging the global community to price carbon emissions appropriately, at what economists call “social cost.” The reluctance to do so earlier has converted a modest problem into a gigantic problem. Two thirds of all atmospheric carbon dioxide emissions since the dawn of the industrial age have occurred since 1990. Had the global community taken Nordhaus’ advice much earlier, the appropriate price of carbon today would have been much lower than it needs to be.

The cost of procrastination is high. People balked at paying for carbon emissions when its social cost-based price was much lower, and appear just as reluctant to pay now when its social cost-based price is that much higher.

CDR is a nascent technology which is showing promise, but entails many risks. Some risks are technological and others are psychological. Going forward, it will be important to manage both types of risk, in order to mitigate the future costs that climate change will entail. An important part of managing the psychological issues is maintaining perspective by using methodologies such as IAMs and carbon barometers.