The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation

This paper takes the ‘policy failure’ in establishing a global carbon price for efficient emissions reduction as a starting point and analyzes to what extent technology policies can be a reasonable second-best approach. From a supply-side perspective, carbon capture and storage (CCS) policies differ substantially from renewable energy policies: they increase fossil resource demand and simultaneously lower emissions. We analyze CCS and renewable energy policies in a numerical dynamic general equilibrium model for settings of imperfect or missing carbon prices. We find that in contrast to renewable energy policies, CCS policies are not always capable of reducing emissions in the long run. If feasible, CCS policies can carry lower social costs compared to renewable energy policies, in particular when second-best policies are only employed temporally. In case fossil resources are abundant and renewable energy costs low, renewable energy policies perform better. Our results indicate that a pure CCS policy or a pure renewable energy policy carry their own specific risks of missing the environmental target. A smart combination of both, however, can be a robust and low-cost temporary second-best policy.