When to invest in carbon capture and storage technology: A mathematical model

Abstract

We present two models of the optimal investment decision in carbon capture and storage technology (CCS)—one where the carbon price is deterministic (based on the newly introduced carbon floor price in Great Britain) and one where the carbon price is stochastic (based on the ETS permit price in the rest of Europe). A novel feature of this work is that in both models investment costs are time dependent which adds an extra dimension to the decision problem. Our deterministic model allows for quite general dependence on carbon price and consideration of time to build and simple calculus techniques determine the optimal time to invest. We then analyse the effect of carbon price volatility on the optimal investment decision by solving a Bellman equation with an infinite planning horizon. We find that increasing the carbon price volatility increases the critical investment threshold and that adoption of this technology is not optimal at current prices, in agreement with other works. However reducing carbon price volatility by switching from carbon permits to taxes or by introducing a carbon floor as in Great Britain would accelerate the adoption of carbon abatement technologies such as CCS.