When to invest in carbon capture and storage technology: A mathematical model

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 r...

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Bibliographic Details
Published in:Energy economics 2014-03, Vol.42, p.219-225
Main Authors: Walsh, D.M., O'Sullivan, K., Lee, W.T., Devine, M.T.
Format: Article
Language:English
Subjects:
Abatement
Air pollution caused by fuel industries
Applied sciences
Carbon
Carbon capture and storage
Carbon floor
Carbon sequestration
Clean technology
Climatology. Bioclimatology. Climate change
Cost
Costs
Earth, ocean, space
Emission Trading Scheme
Emissions trading
Energy
Energy economics
Energy prices
Energy. Thermal use of fuels
Europe
Exact sciences and technology
External geophysics
Financing
General. Regulations. Norms. Economy
Global environmental pollution
Great Britain
Investment
Investment decision
Investments
Mathematical analysis
Mathematical models
Meteorology
Optimization
Pollution
Prices
Real options
Storage
Studies
Technology
Volatility
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Summary: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. •Analytic solution for the critical ETS permit price for optimal investment in CCS•Solution for the optimal time for investment in CCS in GB subject to carbon floor•Time varying investment cost included•Not optimal to invest at current ETS prices•ETS permit price volatility increases the optimal investment threshold
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2013.12.012