Policies to Promote Carbon Capture and Storage Technologies

Rolf Golombek, Mads Greaker, Snorre Kverndokk and Lin Ma ()
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Lin Ma: CICERO–Centre for International Climate Research

Environmental & Resource Economics, 2023, vol. 85, issue 1, No 10, 267-302

Abstract: Asbstract We model the value chain of Carbon Capture and Storage (CCS) by focusing on the decisions taken by actors involved in either capture, transport or storage of CO2. Plants emitting CO2 are located apart. If these invest in carbon capture facilities, the captured CO2 is transported to terminals, which again transport the received amount of CO2 to a storage site. Because of network effects, we may have three equilibria: one with no CCS, one with low investments in CCS, and one with high investments in CCS. In a numerical specification of the model, we find that the market for CCS may be in a state of excess inertia, i.e., even if the social cost of carbon is sufficiently high to justify investment from a social point of view, the market actors may not succeed in coordinating their efforts to reach the equilibrium with high investment. The government should then consider offering economic incentives to investments. In addition to the network effect, several other market imperfections exist, such as market power, economics of scale and the environmental externality from CO2 emissions. We identify policy instruments—in addition to a correctly set carbon tax—that will correct for the remaining market imperfections and bring private investments in line with the first-best levels. Without correction, too many terminals are set up and too few plants invest in capture facilities in our reference market structure.

Keywords: Carbon capture and storage; Indirect network effects; Salop circle; Carbon tax; Market imperfections; Tipping points (search for similar items in EconPapers)
JEL-codes: H23 L13 L51 Q35 Q38 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10640-023-00767-5

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