The Impact of Carbon Capture on Electricity Prices

This study examines the impact of carbon capture and storage (CCS) on electricity prices, an essential aspect of decarbonization in the power sector. While prior research has analyzed CCS's economic feasibility and environmental implications, the direct effects on electricity prices remain largely unaddressed. This study employs a profit-maximization model within a Cournot oligopoly framework, integrating Monte Carlo simulations to evaluate how production costs, policy incentives, and energy demand influence the percentage of carbon captured by power generators and the resulting electricity prices. The analysis incorporates key factors such as carbon taxes, renewable energy, and CCS subsidies, production and abatement costs, and consumer preferences for greener energy. The findings suggest that when mixed-asset power generators optimize carbon abatement to maximize profits, the relationship between the percentage of carbon captured and electricity prices varies by energy source. Carbon capture can lower non-renewable electricity prices to a certain threshold, driven by net benefits from CCS subsidies and tax-saving effects. In contrast, the price of greener electricity sees a modest increase due to the net costs of shifting production from renewable to non-renewable assets. Despite this, renewable electricity remains the more cost-effective option for consumers. Additionally, the result from the Monte Carlo simulations reveals that policy parameters, particularly CCS subsidies, effectively incentivize carbon capture but may also shift production dynamics, leading to nuanced effects on electricity pricing. For example, the study shows that with mixed-asset power generation, the price of non-renewable electricity could be higher than greener electricity, where higher CCS subsidies could drive up renewable electricity prices while lowering non-renewable electricity prices. These findings have important implications for energy policymakers. While CCS adoption is essential for reducing emissions, its potential to impact electricity prices presents affordability concerns, especially in price-sensitive markets. These shifts in price signals could disrupt price stability, making it challenging to ensure equitable energy access. Therefore, policymakers must carefully balance CCS incentives with support for renewable energy to avoid unintended price distortions. Within a well-designed framework that assesses price impacts, policymakers could encourage a hybrid energy strategy that facilitates the transition to renewables while leveraging carbon capture as a bridging solution. In this regard, future studies should explore the long-term effects of CCS on electricity price volatility, further examining how different market structures, regulatory environments, and technological advancements can mitigate or exacerbate price fluctuations, ultimately contributing to more sustainable and equitable energy systems. Future research could also incorporate heterogeneous firm behavior and dynamic investment decisions to refine the understanding of CCS pricing effects further.