Implications of the EU ETS on the level-playing field between carbon capture storage & utilisation

Abstract

System modelling efforts have shown that carbon capture is a key technology to enable a cost-effective reduction of hard-to-abate emissions in energy-intensive industries. The CO2 that is captured can either be utilised (CCU), or stored with carbon capture and storage (CCS). This paper examines the implications of both European carbon pricing mechanisms (ETS I & ETS II) on the level-playing field between CCS and CCU investments. Our contribution is threefold. First, we develop an equilibrium model that enables us to mimic market outcomes under different regulatory conditions. With a numerical case study applied to a fuel production chain, the model confirms that the current ETS regulation can have an adverse effect on CCU uptake. Especially with zero or low ETS II prices a lock-in effect can occur on CCS, potentially prolonging conventional refinery activities. Second, we propose an alternative approach to better integrate CCUS into the EU ETS. Results show that this approach maintains the level-playing field between CCU and CCS, regardless of any carbon price differentials. That results in a closer to Pareto optimal outcome in terms of welfare and emission abatement. Third, we present an analytic analysis to express the CCUS trade-off from a theoretical point of view. This provides generalised and concrete insights into how EU ETS influences the profitability and likelihood of CCUS. Our results help policymakers to gain a better understanding of the impact of ETS regulations on decarbonisation efforts in the industry.