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When to Invest in Carbon Capture and Storage Technology: A Mathematical Model

Author

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  • Walsh, Darragh
  • O'Sullivan, Kevin
  • Lee, William
  • Devine, Mel

Abstract

We present two models of the optimal investment decision in carbon capture and storage technology (CCS)—one where the carbon price is deterministic (based on the newly introduced carbon floor price in Great Britain) and one where the carbon price is stochastic (based on the ETS permit price in the rest of Europe). A novel feature of this work is that in both models investment costs are time dependent which adds an extra dimension to the decision problem. Our deterministic model allows for quite general dependence on carbon price and consideration of time to build and simple calculus techniques determine the optimal time to invest. We then analyse the effect of carbon price volatility on the optimal investment decision by solving a Bellman equation with an infinite planning horizon. We find that increasing the carbon price volatility increases the critical investment threshold and that adoption of this technology is not optimal at current prices, in agreement with other works. However reducing carbon price volatility by switching from carbon permits to taxes or by introducing a carbon floor as in Great Britain would accelerate the adoption of carbon abatement technologies such as CCS.
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Suggested Citation

  • Walsh, Darragh & O'Sullivan, Kevin & Lee, William & Devine, Mel, 2014. "When to Invest in Carbon Capture and Storage Technology: A Mathematical Model," Papers RB2014/1/4, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:rb2014/1/4
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    References listed on IDEAS

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    1. Hoel, Michael & Jensen, Svenn, 2012. "Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy," Resource and Energy Economics, Elsevier, vol. 34(4), pages 680-695.
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    4. John Curtis, Valeria Di Cosmo, and Paul Deane, 2014. "Climate policy, interconnection and carbon leakage: The effect of unilateral UK policy on electricity and GHG emissions in Ireland," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
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    7. Riahi, Keywan & Rubin, Edward S. & Schrattenholzer, Leo, 2004. "Prospects for carbon capture and sequestration technologies assuming their technological learning," Energy, Elsevier, vol. 29(9), pages 1309-1318.
    8. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
    9. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
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    Cited by:

    1. Mo, Jian-Lei & Schleich, Joachim & Zhu, Lei & Fan, Ying, 2015. "Delaying the introduction of emissions trading systems—Implications for power plant investment and operation from a multi-stage decision model," Energy Economics, Elsevier, vol. 52(PB), pages 255-264.
    2. Narita, Daiju & Klepper, Gernot, 2015. "Economic incentives for carbon dioxide storage under uncertainty: A real options analysis," Kiel Working Papers 2002, Kiel Institute for the World Economy (IfW).
    3. Fan, Jin & He, Haonan & Wu, Yanrui, 2016. "Personal carbon trading and subsidies for hybrid electric vehicles," Economic Modelling, Elsevier, vol. 59(C), pages 164-173.
    4. Curtis, John & Devitt, Niamh & di Cosmo, Valeria & Farrell, Niall & FitzGerald, John & Hyland, Marie & Lynch, Muireann & Lyons, Sean & McCoy, Daire & Malaguzzi Valeri, Laura & Walsh, Darragh, 2014. "Irish Energy Policy: An Analysis of Current Issues," Research Series, Economic and Social Research Institute (ESRI), number rs37 edited by FitzGerald, John & Malaguzzi Valeri, Laura.
    5. Lynch, Muireann A, 2017. "Re-evaluating Irish energy policy in light of brexit," Research Notes RN20170201, Economic and Social Research Institute (ESRI).
    6. repec:esr:forcas:qec20172 is not listed on IDEAS
    7. repec:eee:energy:v:149:y:2018:i:c:p:954-966 is not listed on IDEAS

    More about this item

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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