Kiel Working Papers, Kiel Institute for World Economics
No 1508:
Economic Optimality of CCS Use: A Resource-Economic Model
Daiju Narita
Abstract: CCS (carbon dioxide capture and storage) is an issue which
has received increasing attention in the debate on climate change over the
last several years because of its relative technical simplicity and very
large potential in reducing carbon dioxide emissions. The absence of
secondary benefits and uncertainties associated with this approach,
however, would require analysts to conduct fine cost-benefit comparisons
vis-à-vis other mitigation options. The paper is to provide a perspective
on future cost-benefit discussions of CCS by highlighting the optimality of
CCS use viewed as a non-renewable resource with a limited capacity.
Scarcity of CCS (storage) capacity should involve a shadow price which
could raise CCS’s effective price – this is a fair assumption given the
technological assessments of CCS so far, but no economic study has
explicitly investigated this characteristic before. By using a simple
analytical dynamic optimization model, we examine the optimal paths of CCS
use, CCS’s real price inclusive of the shadow price, and their difference
from the operational price. A particular implication of the model is that
if all else is equal, the shadow price of CCS could make the technology
relatively less attractive than renewable energy due to CCS’s reliance on
scarce reservoirs and the resultant shadow value. This serves as a
justification for giving differentiated incentives to different CO2
reduction options: more precisely, more encouragement should be given to
renewable energy in comparison to CCS
Keywords: Carbon dioxide capture and storage (CCS), climate change, energy, dynamic optimization; (follow links to similar papers)
JEL-Codes: Q3,; Q4,; Q54; (follow links to similar papers)
23 pages, April 2009
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