The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation

Abstract

This paper takes the ‘policy failure’ in establishing a global carbon price for efficient emissions reduction as a starting point and analyzes to what extent technology policies can be a reasonable second-best approach. From a supply-side perspective, carbon capture and storage (CCS) policies differ substantially from renewable energy policies: they increase fossil resource demand and simultaneously lower emissions. We analyze CCS and renewable energy policies in a numerical dynamic general equilibrium model for settings of imperfect or missing carbon prices. We find that in contrast to renewable energy policies, CCS policies are not always capable of reducing emissions in the long run. If feasible, CCS policies can carry lower social costs compared to renewable energy policies, in particular when second-best policies are only employed temporally. In case fossil resources are abundant and renewable energy costs low, renewable energy policies perform better. Our results indicate that a pure CCS policy or a pure renewable energy policy carry their own specific risks of missing the environmental target. A smart combination of both, however, can be a robust and low-cost temporary second-best policy.

Appendices

Appendix 1: First-Order Conditions of the CCS Sector

Maximizing the associated Lagrangian with $\lambda _X$ as co-state variable for $X$, we obtain as dynamic first-order conditions:

$$\begin{aligned} \lambda _{X,t}&= p_{X,t} - h(X_t) \end{aligned}$$

(9)

$$\begin{aligned} \lambda _{X,t-1} (1+ (r_t - \delta )) - \lambda _{X,t}&= - \left( \frac{\partial h(X_t)}{\partial X_t} R_{X,t} + \delta _X \tau _R \right) \end{aligned}$$

(10)

$$\begin{aligned} \lambda _{X,t} X_{t+1}&= 0 \end{aligned}$$

(11)

Appendix 2: Parameters

Population $L$ grows exogenously from $L_0$ to $L_{max}$ according to $L_t = L_0 (1 - q_t) + q_t L^{max}$ with $q_t = 1 - \exp (- ft)$. Labor productivity $A_Y$ grows exogenously at the variable rate $[1-g_0 \exp (-\zeta t)]^{-1}-1$ implying for $g_0=0.026$ and $\zeta =0.006$ an initial growth rate of 2.7 % which decreases to 1.5 % in 2100 (Table 2).

Table 2 Parameters used for the numerical model

Appendix 3: Sensitivity Analysis

See Table 3.

Table 3 Mitigation costs (in BGEs) and additional second-best costs (relative to optimal mitigation costs) for several policies