The effects of policy uncertainty and risk aversion on carbon capture, utilization, and storage investments

Abstract

Many model-based decarbonization pathways include substantial carbon capture, utilization, and storage (CCUS), and engineering cost estimates suggest that these technologies should be profitable to deploy under current incentives, such as the 45Q tax credits in the United States. However, CCUS investments have been slow to materialize. In this paper, we investigate the extent to which policy uncertainty and investor risk aversion may explain the limited buildout of CCUS infrastructure to date. To do so, we develop a two-stage stochastic programming model for optimal CCUS infrastructure network design that incorporates policy uncertainty and risk aversion as novel features. We then apply it to an empirically parameterized case study of the Texas-Louisiana Gulf Coast region. Our results show that the current 45Q incentive levels make a fair number of CCUS projects profitable even if they were to be discontinued after ten years. Moreover, while future policy uncertainty and risk aversion reduce CCUS development, the maximum effect size is only a 16% decline in expected total CO2 captured. We find policy uncertainty plays a more important role than investor risk aversion in the development of CCUS infrastructure, with increased uncertainty leading to reduced CO2 capture and investment.