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Getting ready for future carbon abatement under uncertainty – key factors driving investment with policy implications

Mo, Jianlei, Schleich, Joachim and Fan, Ying (2018) Getting ready for future carbon abatement under uncertainty – key factors driving investment with policy implications. Energy Economics, 70. pp. 453-464. ISSN 0140-9883

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Identification Number: 10.1016/j.eneco.2018.01.026

Abstract

Carbon capture and storage (CCS) is considered a key technology option for abating CO2 emissions in carbon-intensive sectors, e.g. the power sector. However, high investment costs and risk hinder the diffusion of CCS. To avoid stranded assets or high future costs for retrofitting, new plants can be made carbon capture ready (CCR) to enable them to accommodate future CCS retrofitting at low additional costs. Current CCR investment decisions are closely related to future CCS retrofitting and CCS operation decisions in subsequent stages, all of which would be affected by uncertainties. We develop a three-stage CCR investment decision model under multiple uncertainties which allows for investment and especially operating flexibilities. Applying this model to China shows that CCS operating flexibility under the carbon-pricing scheme may actually lower the probability of investing in a CCR plant, and neglecting it may overestimate the propensity for investing in CCR. Moreover, learning effects, which reduce the costs of future CCS retrofitting, may be detrimental to CCR investment, indicating that the policy support for research on, development of, and deployment of CCS to reduce CCS costs should be coordinated with CCR investments. Although higher electricity prices can increase the value of an investment opportunity, it may restrain CCR investment. Finally, CCR investment does not appear to be economically viable under current conditions in China because of low carbon prices, high carbon price risks, high CCR investment costs and the high opportunity costs of CCS operation

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/energy-econo...
Additional Information: © 2018 Elsevier B.V.
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GF Human ecology. Anthropogeography
H Social Sciences > HD Industries. Land use. Labor
JEL classification: L - Industrial Organization > L5 - Regulation and Industrial Policy
L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities
O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics
Date Deposited: 13 Mar 2018 15:18
Last Modified: 13 Sep 2024 13:12
URI: http://eprints.lse.ac.uk/id/eprint/87193

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