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Economic incentives for carbon dioxide storage under uncertainty: A real options analysis

Daiju Narita and Gernot Klepper

No 2002, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Carbon dioxide capture and storage (CCS) is considered to be an important option for reducing carbon dioxide (CO2) emissions. However, there are still concerns about its economic viability, especially if the risk of leakage in the storage site is taken into account. We use a real options approach for assessing the impact of uncertainty on the timing and the profitability of CO2 storage projects. We model an investment decision for a storage site under uncertainty about CO2 leaking from the storage site, about the development of carbon prices, and about the cost of investment. The numerical model results show that investment under these uncertainties requires a much larger price for carbon credits for storage than an investment plan ignoring uncertainty would suggest. We also show under reasonable parameter assumptions that the risk for investing in CO2 storage is dominated by the uncertain development of carbon prices, whereas the risk of carbon leakage has little influence on the investment decision.

Keywords: carbon dioxide capture and storage (CCS); real options analysis; climate policy (search for similar items in EconPapers)
JEL-codes: D81 Q49 Q54 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
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