Biomass and CCS: The influence of technical change

Abstract

The combination of bioenergy production and carbon capture and storage technologies (BECCS) provides an opportunity to create negative emissions of CO2 in biofuel production. However, high capture costs reduce profitability. This paper investigates carbon price uncertainty and technological uncertainty through a real option approach. We compare the cases of early and delayed CCS deployments. An early technological progress may arise from aggressive R&D and pilot project programs, but the expected cost reduction remains uncertain. We show that this approach results in lower emissions and more rapid investment returns although these returns will not fully materialise until after 2030. In a second set of simulations, we apply an incentive that prioritises sequestered emissions rather than avoided emissions. In other words, this economic instrument does not account for CO2 emissions from the CCS implementation itself, but rewards all the sequestered emissions. In contrast with technological innovations, this subsidy is certain for the investor. The resulting investment level is higher, and the project may become profitable before 2030. Negative emission in bioethanol production does not seem to be a short-term solution in our framework, whatever the carbon price drift.