Policy incentives in carbon capture utilization and storage (CCUS) investment based on real options analysis

Abstract

Carbon capture, carbon utilization and storage (CCUS) technology is an important potential technical support for coal power plants to maintain existing production structure while simultaneously achieving near-zero carbon emissions with the current energy structure in China being dominated by coal. However, CCUS technology is still at the early demonstration stage, and there are many uncertainties in the carbon trading market, technology and policy incentives that the traditional method is no longer able to handle. Based on the binomial tree real option model, this paper establishes a CCUS technology investment evaluation model that incorporates the uncertainties with carbon price, government subsidy, technological progress and carbon dioxide utilization ratios into the model, and investigates the influence of government incentive on CCUS technology investment in two scenarios in China. The numerical results in case study show that (1) If the subsidy is too low, no matter how high the lower limit of carbon price is set, enterprises will not invest. (2) When the proportion of government subsidy exceeds 0.33, a specific and accurate minimum carbon price is given to promote coal-fired plants immediate investment in CCUS technology based on the model. (3) Only the government subsidies cannot stimulate CCUS investment at this demonstration stage. These findings provide a reference for public policy decision-making and promotes the development and large-scale deployment of CCUS technology in China.

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Acknowledgements

We acknowledge that this study is supported by the Ministry of Science and Technology of National Key R&D Program-New Nrban Energy Interconnect System and it's Pilot Application (No.SQ2018YFE96500), the Green & low-carbon Team of Research Center for Economy of Upper Reaches of the Yangtze River in Chongqing Technology and Business University (CJSYTD702) Chongqing Federation of Social Science Circle (2018BS60) and Chongqing Technology and Business University (1953004, 1952008).

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Correspondence to Chunyan Dai.

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Zhang, W., Dai, C., Luo, X. et al. Policy incentives in carbon capture utilization and storage (CCUS) investment based on real options analysis. Clean Techn Environ Policy (2021). https://doi.org/10.1007/s10098-021-02025-y

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Keywords

  • Real options
  • CCUS
  • Investment decision
  • Uncertainty