Economic Optimality of CCS Use: A Resource-Economic Model

CCS (carbon dioxide capture and storage) is an item that has increased itsrecognition in the debate of climate change over the last several years forits relative technical simplicity and very large potential in reducingcarbon dioxide emissions. The shortage of secondary benefits anduncertainties associated with this approach, however, would require analystsfine cost-benefit comparisons vis-à-vis other mitigation options. This studyis to provide a perspective to future cost-benefit discussions of CCS byconducting an optimality analysis of CCS being a non-renewable resource witha limited capacity. Scarcity of CCS (storage) capacity should involve ashadow price which could raise CCS's effective price - this is a fairassumption given the technological assessments of CCS so far, but to ourknowledge, no economic study has explicitly investigated this characteristicbefore. By using a simple analytical dynamic optimization model, we examinethe optimal paths of CCS use, CCS's real price inclusive of the shadowprice, and their difference from the operational price. A particularimplication of the model was that if all else equal, the shadow price of CCScould make the technology relatively less attractive than renewable energydue to CCS’s reliance on scarce reservoirs and the resultant shadow value.This serves as a justification for giving differentiated incentives todifferent CO2 reduction options: more precisely, more encouragement shouldbe given to renewable energy in comparison with CCS.