IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Carbon Capture by Fossil Fuel Power Plants: An Economic Analysis

  • Özge \.I\c{s}legen

    ()

    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Stefan Reichelstein

    ()

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Registered author(s):

    For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in carbon dioxide (CO 2 ) emissions. We examine the break-even value for CCS adoptions, that is, the critical value in the charge for CO 2 emissions that would justify investment in CCS capabilities. Our analysis takes explicitly into account that the supply of electricity at the wholesale level (generation) is organized competitively in some U.S. jurisdictions, whereas in others a regulated utility provides integrated generation and distribution services. For either market structure, we find that emissions charges near $30 per tonne of CO 2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The corresponding break-even values for natural gas plants are substantially higher, near $60 per tonne. Our break-even estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly. CCS capabilities effectively put an upper bound on the increase in electricity prices resulting from carbon regulations, and we estimate this bound to be near 30% at the retail level for both coal and natural gas plants. In contrast to the competitive power supply scenario, however, these price increases materialize only gradually for a regulated utility. The delay in price adjustments reflects that for regulated firms the basis for setting product prices is historical cost, rather than current cost. This paper was accepted by Gérard P. Cachon, accounting.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://dx.doi.org/10.1287/mnsc.1100.1268
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 1 (January)
    Pages: 21-39

    as
    in new window

    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:1:p:21-39
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Arrow Kenneth J, 2007. "Global Climate Change: A Challenge to Policy," The Economists' Voice, De Gruyter, vol. 4(3), pages 1-5, June.
    2. Madhav V. Rajan & Stefan Reichelstein, 2009. "Depreciation Rules and the Relation between Marginal and Historical Cost," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 823-865, 06.
    3. Borenstein, Severin, 1999. "Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets," Competition Policy Center, Working Paper Series qt00p2p3wv, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    4. Schmalensee, Richard, 1989. "An Expository Note on Depreciation and Profitability under Rate-of-Return Regulation," Journal of Regulatory Economics, Springer, vol. 1(3), pages 293-98, September.
    5. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-95, August.
    6. William P. Rogerson, 2008. "Intertemporal Cost Allocation and Investment Decisions," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 931-950, October.
    7. Rubin, Edward S. & Chen, Chao & Rao, Anand B., 2007. "Cost and performance of fossil fuel power plants with CO2 capture and storage," Energy Policy, Elsevier, vol. 35(9), pages 4444-4454, September.
    8. Sekar, Ram C. & Parsons, John E. & Herzog, Howard J. & Jacoby, Henry D., 2007. "Future carbon regulations and current investments in alternative coal-fired power plant technologies," Energy Policy, Elsevier, vol. 35(2), pages 1064-1074, February.
    9. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, March.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:1:p:21-39. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.