With a one-way ticket towards a more carbon constrained world, it is important to conjecture the future composition of energy generation and the roles assigned to different technologies. One technology in this regard that is highly credited by International Energy Agency (IEA) within the future energy mix is carbon capture and storage (CCS). However, without proper carbon markets and a sufficiently high carbon price, this technology may not play its desired role. Besides, even with well functioning carbon markets, technological investments (R&D) may be directed to renewable energy and related technologies.
First of all, considering CCS, one will be investing in a technology that depends on the use of fossil fuels, which are exhaustible in nature. Secondly, one will be investing in a technology that will paradoxically extend the life of fossil-fuel energy use, which we might want to avoid. However, as it seems, the dependence on fossil-fuels will not cease in the decades to come. Given that global warming is a real phenomenon with possibly catastrophic consequences, CCS may very well fit into the picture. The Norwegian moon landing project may thus be quite to the point.
That said, Norwegian public resources that sum up to NOK 14 billion in 2016, before having captured and stored a gram of CO2, it is crucial to incorporate the economic perspective into the picture. If you imagine the alternative use of the 14 billion, it will be easier to see how the economics can be important.
NHH Professor Fred Schroyen and PhD candidate Tunç Durmaz, in a new NHH working paper, evaluate the scope for CCS in the future.
In doing this they assume that a final good called energy is produced via fossil-fuels and renewables, which are close substitutes. An R&D sector can invest in technological change in three areas: CCS, fossil-fuels and renewable energy. Thus the four-sector general equilibrium model: has two sectors producing the final good called energy, a CCS sector, and an R&D sector.[1] They then look for the optimal taxation of the fossil-fuel energy industry, and the resulting energy mix, R&D distribution and levels for CCS for a time horizon of 300 years. In doing this analysis, they also introduce a climate module into the model such that it can mimic global warming that worsens with the rise in CO2 in the atmosphere (i.e. temperature rise). The rise in CO2 due to the use of fossil-fuel energy results in forgone environmental amenities and forgone production.
The results have been somewhat surprising. Even with scenario for CCS with relatively low costs (60$ per ton of CO2) the future energy mix is composed of almost 100% of renewables. Then, with 0% fossil-fuels, there is also 0% CCS). The socially optimal solution necessitates a departure from the use of fossil fuels, and this also directs R&D investments, the cost of producing renewables become relatively low, and thus substitution away from fossil-fuels results.
In order to have a future scenario with an active CCS sector that also attracts R&D investments, they calculated that its cost should be 80% lower than the benchmark level of 60$/tCO2. Also, if global warming is worse than expected, the scope for CCS narrows down, since then the switch from fossil fuels must happen earlier and with a faster pace.
Looking at the results, it may not be unreasonable to ask why 7.3 billion NOK was spent to build the Technology Center Mongstad (which is an hour drive from Bergen). Why invest so much in a technology that may not be made use of in the decades to come? Well, the answer is not that obvious.
It may perhaps be excessively optimistic that renewables expand in the way projected in the model, either because subsidies do not flow as easily, or because costs do not respond that well to R&D in renewables, or because renewables may not actually be expandable to the extent that they can account for such a big part in the energy-mix. For example, for hydroelectricity one cannot outlaw the geographical constraints. For biofuels, it is evident that they are competing for lands that can also be used for food generation. For several renewables, their intermittent nature is an issue, perhaps limiting the share they can take. In such cases, the authorities may find it more rational to impose limits on the carbon emissions in certain industries that can give the right incentives for and spur the development of CCS. Besides, countries that depend on big fossil-fuel economies and at the same time are relatively more concerned about climate change, for example Norway, can be more motivated to reduce the burden these sectors puts on the environment through CCS.
To conclude, although the study limits the role for CCS, it bases this on certain model assumptions and a globally optimal solution and path. Other solutions may come about when one considers setups that do not rely on global optimization, or when other key assumptions are revised can perhaps project more of a role CCS. As the literature in this area is limited, more research is necessary. With the additional efforts put in this direction, various institutions and governments will be more confident in their decision to fund (or not) the CCS technology in the fight against climate change. This way, businesses will also see a clearer picture of the likelihood of the profitability of investments they will make in this respect.
[1] For example a technical change in CCS technology means incurring less cost of capturing and storing CO2.
References
Tunç Durmaz and Fred Schroyen, Evaluating Carbon Capture and Storage in a Climate Model with Directed Technical Change, NHH Department of Economics Discussion Paper No. 14/2013
Strand, T. (2013) 'Forhandler om Mongstad', Bergens Tidende, 18 September, p. 8
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You can view this post also @Reconhub
First of all, considering CCS, one will be investing in a technology that depends on the use of fossil fuels, which are exhaustible in nature. Secondly, one will be investing in a technology that will paradoxically extend the life of fossil-fuel energy use, which we might want to avoid. However, as it seems, the dependence on fossil-fuels will not cease in the decades to come. Given that global warming is a real phenomenon with possibly catastrophic consequences, CCS may very well fit into the picture. The Norwegian moon landing project may thus be quite to the point.
That said, Norwegian public resources that sum up to NOK 14 billion in 2016, before having captured and stored a gram of CO2, it is crucial to incorporate the economic perspective into the picture. If you imagine the alternative use of the 14 billion, it will be easier to see how the economics can be important.
NHH Professor Fred Schroyen and PhD candidate Tunç Durmaz, in a new NHH working paper, evaluate the scope for CCS in the future.
In doing this they assume that a final good called energy is produced via fossil-fuels and renewables, which are close substitutes. An R&D sector can invest in technological change in three areas: CCS, fossil-fuels and renewable energy. Thus the four-sector general equilibrium model: has two sectors producing the final good called energy, a CCS sector, and an R&D sector.[1] They then look for the optimal taxation of the fossil-fuel energy industry, and the resulting energy mix, R&D distribution and levels for CCS for a time horizon of 300 years. In doing this analysis, they also introduce a climate module into the model such that it can mimic global warming that worsens with the rise in CO2 in the atmosphere (i.e. temperature rise). The rise in CO2 due to the use of fossil-fuel energy results in forgone environmental amenities and forgone production.
The results have been somewhat surprising. Even with scenario for CCS with relatively low costs (60$ per ton of CO2) the future energy mix is composed of almost 100% of renewables. Then, with 0% fossil-fuels, there is also 0% CCS). The socially optimal solution necessitates a departure from the use of fossil fuels, and this also directs R&D investments, the cost of producing renewables become relatively low, and thus substitution away from fossil-fuels results.
In order to have a future scenario with an active CCS sector that also attracts R&D investments, they calculated that its cost should be 80% lower than the benchmark level of 60$/tCO2. Also, if global warming is worse than expected, the scope for CCS narrows down, since then the switch from fossil fuels must happen earlier and with a faster pace.
Looking at the results, it may not be unreasonable to ask why 7.3 billion NOK was spent to build the Technology Center Mongstad (which is an hour drive from Bergen). Why invest so much in a technology that may not be made use of in the decades to come? Well, the answer is not that obvious.
It may perhaps be excessively optimistic that renewables expand in the way projected in the model, either because subsidies do not flow as easily, or because costs do not respond that well to R&D in renewables, or because renewables may not actually be expandable to the extent that they can account for such a big part in the energy-mix. For example, for hydroelectricity one cannot outlaw the geographical constraints. For biofuels, it is evident that they are competing for lands that can also be used for food generation. For several renewables, their intermittent nature is an issue, perhaps limiting the share they can take. In such cases, the authorities may find it more rational to impose limits on the carbon emissions in certain industries that can give the right incentives for and spur the development of CCS. Besides, countries that depend on big fossil-fuel economies and at the same time are relatively more concerned about climate change, for example Norway, can be more motivated to reduce the burden these sectors puts on the environment through CCS.
To conclude, although the study limits the role for CCS, it bases this on certain model assumptions and a globally optimal solution and path. Other solutions may come about when one considers setups that do not rely on global optimization, or when other key assumptions are revised can perhaps project more of a role CCS. As the literature in this area is limited, more research is necessary. With the additional efforts put in this direction, various institutions and governments will be more confident in their decision to fund (or not) the CCS technology in the fight against climate change. This way, businesses will also see a clearer picture of the likelihood of the profitability of investments they will make in this respect.
[1] For example a technical change in CCS technology means incurring less cost of capturing and storing CO2.
References
Tunç Durmaz and Fred Schroyen, Evaluating Carbon Capture and Storage in a Climate Model with Directed Technical Change, NHH Department of Economics Discussion Paper No. 14/2013
Strand, T. (2013) 'Forhandler om Mongstad', Bergens Tidende, 18 September, p. 8
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You can view this post also @Reconhub
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