Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture

Renaud Coulomb and Fanny Henriet

Working papers from Banque de France

Abstract: Among technological options to mitigate greenhouse gas (GHG) emissions, Carbon Capture and Storage technology (CCS) seems particularly promising. This technology allows to keep on extracting polluting fossil fuels without drastically increasing CO2 atmospheric concentration. We examine here a two-sector model with two primary energy resources, a polluting exhaustible resource and an expensive carbon-free renewable resource, in which an environmental regulation is imposed through a cap on the atmospheric carbon stock. We assume that only the emissions from one sector can be captured. Previous literature, based on one-sector models in which all emissions are capturable, finds that CCS technology should not be used before the threshold has been reached. We find that, when technical constraints make it impossible to capture emissions from both sectors, this result does not always hold. CCS technology should be used before the ceiling is reached if non capturable emissions are large enough. In that case, we find that energy prices paths must differ between sectors reflecting the difference of social cost of the resource according to its use. Numerical exercise shows that the initial carbon tax should equal 52$/t CO2 and that using CCS before the ceiling is optimal.

Keywords: Nonrenewable Resources; Externalities; Carbon Capture. (search for similar items in EconPapers)
JEL-codes: Q31 Q38 Q41 Q54 Q55 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture (2010)
Working Paper: Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:322

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