Optimal carbon capture and storage investments under global warming

This paper constructs a dynamic stochastic equilibrium model for climate policies. We allow for three types of economic damages from climate warming. On one hand, rising temperatures damage output and capital stock of both green sector and brown sector. On the other hand, rising temperatures will damage the carbon storage of natural carbon sinks. Given damages, this paper compares two climate policies to mitigate economic damages from climate change. One is the Nordhaus carbon abatement policy which is from the perspective of carbon sources, and we derive the optimal carbon price path under dynamic carbon sinks. The other is the CCS (Carbon Capture and Storage) artificial carbon sink policy, and we address the problem of the optimal CCS investment path in the future. We recommend that future investment in CCS should follow a trend that first increases and then decreases over time. Green investment is projected to overtake brown investment around 2050 and completely substitute it by 2100 driven by the implementation of climate policies. Moreover, we reveal that there is a reverse optimal relationship between the two climate policies and the implementation of carbon sink policies contributes to the stability of the carbon pricing market. In addition, scenario analysis shows that high CCS investment crowds out green investment and leads to partial economic losses compared to lower or no CCS investment.