Carbon Storage and Climate Policy in a Growth Model with Innovation

We study the implications of the carbon capture and storage (CCS) technology availability on the optimal use of polluting exhaustible resources and on optimal climate policies. We develop an endogenous growth model in which the accumulated stock of greenhouse gas emissions harms social welfare. Since CCS technology allows reducing the effective pollution for each unit of resource use, extraction and pollution are partially disconnected. CCS accelerates the optimal extraction pace, though it may foster CO2 emissions for the early generations. Moreover, it is detrimental to output growth. Next, we study the implementation of a unit tax on pollution. Contrary to previous results of the literature, its level here matters, as it provides the right incentives to CCS effort. The optimal growth rate of this carbon tax is positive, though we indicate that this climate policy instrument can be interpreted ex-post as a decreasing ad-valorem tax on the resource