  We performed numerical simulations of the common envelope (CE) interaction
between two thermally-pulsing asymptotic giant branch (AGB) stars of 1.7
$M_\odot$ and 3.7 $M_\odot$, and their 0.6 $M_\odot$ compact companion. We use
tabulated equations of state to take into account recombination energy. For the
first time, formation and growth of dust in the envelope is calculated
explicitly, using a carbon dust nucleation network with a gas phase C/O number
ratio of 2.5. By the end of the simulations, the total dust yield are
$\sim8.2\times10^{-3}~M_\odot$ and $\sim2.2\times10^{-2}~M_\odot$ for the CE
with a 1.7 $M_\odot$ and a 3.7 $M_\odot$ AGB star, respectively, close to the
theoretical limit. Dust formation does not substantially lead to more mass
unbinding or substantially alter the orbital evolution. The first dust grains
appear as early as $\sim1-3$ yrs after the onset of the CE rapidly forming an
optically thick shell at $\sim10-20$ au, growing in thickness and radius to
values of $\sim400-500$ au by $\sim40$ yrs. These large objects have
approximate temperatures of 400 K. While dust yields are commensurate with
those of single AGB stars of comparable mass, the dust in CE ejections forms
over decades as opposed to tens of thousands of years. It is likely that these
rapidly evolving IR objects correspond to the post-optically-luminous tail of
the lightcurve of some luminous red novae. The simulated characteristics of
dusty CEs also lend further support to the idea that extreme carbon stars and
the so called ``water fountains" may be objects observed in the immediate
aftermath of a CE event.
