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Getting ready for future carbon abatement under uncertainty – key factors driving investment with policy implications

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  • Mo, Jianlei
  • Schleich, Joachim
  • Fan, Ying

Abstract

Carbon capture and storage (CCS) is considered a key technology option for abating CO2 emissions in carbon-intensive sectors, e.g. the power sector. However, high investment costs and risk hinder the diffusion of CCS. To avoid stranded assets or high future costs for retrofitting, new plants can be made carbon capture ready (CCR) to enable them to accommodate future CCS retrofitting at low additional costs. Current CCR investment decisions are closely related to future CCS retrofitting and CCS operation decisions in subsequent stages, all of which would be affected by uncertainties. We develop a three-stage CCR investment decision model under multiple uncertainties which allows for investment and especially operating flexibilities. Applying this model to China shows that CCS operating flexibility under the carbon-pricing scheme may actually lower the probability of investing in a CCR plant, and neglecting it may overestimate the propensity for investing in CCR. Moreover, learning effects, which reduce the costs of future CCS retrofitting, may be detrimental to CCR investment, indicating that the policy support for research on, development of, and deployment of CCS to reduce CCS costs should be coordinated with CCR investments. Although higher electricity prices can increase the value of an investment opportunity, it may restrain CCR investment. Finally, CCR investment does not appear to be economically viable under current conditions in China because of low carbon prices, high carbon price risks, high CCR investment costs and the high opportunity costs of CCS operation

Suggested Citation

  • Mo, Jianlei & Schleich, Joachim & Fan, Ying, 2018. "Getting ready for future carbon abatement under uncertainty – key factors driving investment with policy implications," LSE Research Online Documents on Economics 87193, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:87193
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    File URL: http://eprints.lse.ac.uk/87193/
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    Citations

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    Cited by:

    1. Mo, Jianlei & Cui, Lianbiao & Duan, Hongbo, 2021. "Quantifying the implied risk for newly-built coal plant to become stranded asset by carbon pricing," Energy Economics, Elsevier, vol. 99(C).
    2. Huang, Li & Kelly, Scott & Shi, Xunpeng & Lv, Kangjuan & Lu, Xuan & Giurco, Damien, 2022. "Maximizing the effectiveness of carbon emissions abatement in China across carbon communities," Energy Economics, Elsevier, vol. 106(C).
    3. Compernolle, Tine & Welkenhuysen, Kris & Petitclerc, Estelle & Maes, Dries & Piessens, Kris, 2019. "The impact of policy measures on profitability and risk in geothermal energy investments," Energy Economics, Elsevier, vol. 84(C).
    4. Tu, Qiang & Betz, Regina & Mo, Jianlei & Fan, Ying, 2019. "The profitability of onshore wind and solar PV power projects in China - A comparative study," Energy Policy, Elsevier, vol. 132(C), pages 404-417.
    5. Hu, Junfei & Chen, Huanyue & Zhou, Peng & Guo, Peng, 2022. "Optimal subsidy level for waste-to-energy investment considering flexibility and uncertainty," Energy Economics, Elsevier, vol. 108(C).
    6. Zhang, Xinhua & Hueng, C. James & Lemke, Robert J., 2023. "Using a price floor on carbon allowances to achieve emission reductions under uncertainty," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1096-1110.
    7. Fan, Jing-Li & Li, Zezheng & Ding, Zixia & Li, Kai & Zhang, Xian, 2023. "Investment decisions on carbon capture utilization and storage retrofit of Chinese coal-fired power plants based on real option and source-sink matching models," Energy Economics, Elsevier, vol. 126(C).
    8. Yang, Zhenbing & Zhao, Ziyi & Shao, Shuai & Yang, Lili, 2023. "Carbon regulation and enterprise investment: Evidence from China," Energy Economics, Elsevier, vol. 128(C).
    9. Thomas Aspinall & Adrian Gepp & Geoff Harris & Simone Kelly & Colette Southam & Bruce Vanstone, 2021. "Estimation of a term structure model of carbon prices through state space methods: The European Union emissions trading scheme," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3797-3819, June.
    10. Xiao, Bowen & Fan, Ying & Guo, Xiaodan, 2018. "Exploring the macroeconomic fluctuations under different environmental policies in China: A DSGE approach," Energy Economics, Elsevier, vol. 76(C), pages 439-456.
    11. Dahlen, Niklas & Fehrenkötter, Rieke & Schreiter, Maximilian, 2024. "The new bond on the block — Designing a carbon-linked bond for sustainable investment projects," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 316-325.
    12. Ruhnau, O. & Bucksteeg, M. & Ritter, D. & Schmitz, R. & Böttger, D. & Koch, M. & Pöstges, A. & Wiedmann, M. & Hirth, L., 2022. "Why electricity market models yield different results: Carbon pricing in a model-comparison experiment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 153(C).
    13. Tu, Qiang & Mo, Jianlei & Betz, Regina & Cui, Lianbiao & Fan, Ying & Liu, Yu, 2020. "Achieving grid parity of solar PV power in China- The role of Tradable Green Certificate," Energy Policy, Elsevier, vol. 144(C).

    More about this item

    Keywords

    Carbon capture ready (CCR); Carbon pricing; Greenhouse gas (GHG)Investment under uncertainty; Dynamic programming;
    All these keywords.

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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