Carbon capture, utilisation and storage: Incentives, effects and policy

Abstract

• We develop a model of carbon capture and utilisation where a firm invests in carbon capture and sells a proportion of its captured CO 2 emissions in the market for CO 2 . • We investigate the environmental effect of the ensuing increase in the supply of CO 2 on the behaviour of firms that use CO 2 as an input. • The increase in production of these firms has a ’rebound effect’ that counteracts the initial CO 2 emission reduction associated with CO 2 capture. • We discuss policy interventions to support carbon capture while accounting for this rebound effect. We develop a model to explore the incentives, consequences, and policy implications related to utilising captured carbon. Our model incorporates the decision by a firm considering investing in carbon capture technology, as well as the market for CO 2 . By including the latter, we investigate the effect the increase in supply of CO 2 (from captured sources) has on the equilibrium price, allowing us to accurately understand the revenue the investing firm will receive. More importantly, it also allows us to understand the implications for the behaviour of firms that use CO 2 as an input: the reduction in the price of CO 2 lowers their marginal cost of production, encouraging them to produce more. By accounting for this offsetting ‘rebound’ effect, we can accurately understand the environmental consequences of carbon capture and utilisation. We also explore the policy implications of our analysis.