Using Floor Price Mechanisms to Promote Carbon Capture and Storage (Ccs) Investment and Co2 Abatement

Abstract

The effect of an EU emission trading scheme (EU ETS) on CO2 abatement technology development is limited, according to many empirical studies. This is the result of an existing low carbon price and the future uncertainty of the development of the carbon market. Carbon price stabilisation mechanisms, especially the carbon price floor, may serve to supplement the ETS and cope with this problem. We are concerned with how the carbon price floor affects the investment in carbon abatement technology, the resulting CO2 abatement, and how to best design such a carbon floor price. In this paper, we focus on carbon capture and storage (CCS) technology by building a CCS investment and operation decision model based on real options theory. We consider investment timing and CCS operation flexibility and we also design a model for carbon price evolution with a carbon price floor using the Monte Carlo simulation method. We determine the floor prices above which immediate CCS investment is occuring, and those at which CO2 emissions can be eliminated. According to the simulation results, the carbon price floor has a significant effect on promoting CCS investment. The marginal effect of an increasing carbon price floor first rises and then falls; when the floor price reaches a threshold value, its marginal effect becomes minimal. Based on the simulation results, the carbon floor price for EU ETS could be set at about 20 EUR/t CO2 to stimulate the CCS investment, while it should be increased to 30 EUR/t CO2 to sufficiently promote CO2 abatement.