Modeling CCS policy support: Implications for market performance, net emissions, and welfare

Carbon capture and storage (CCS) is critical for addressing climate change. While governments are increasingly exploring different policy tools to incentivize its adoption, this topic has been under explored in the academic literature from a game-theoretic perspective. We examine a stylized model of CCS given different regulatory and market structure regimes to examine the incentive effects and social welfare implications of proposed policy interventions. Specifically, we examine a simple linear economy model of a wholesale electricity market in the context of a Cournot duopoly where one firm’s generation process entails CO 2 emissions while the second firm’s process does not. The first firm can capture and sequester 90 % of its generated emissions with CCS. We consider two possible policy interventions: a tax on net emissions and a subsidy for CCS where a firm that undertakes CCS receives a subsidy payment based on the amount of CO 2 sequestered. We find that CCS decreases CO 2 emissions relative to the case of no CCS, but without a strong enough CO 2 tax, a high enough sequestration subsidy can increase net emissions, relative to a lower subsidy, because of the imperfect capture rate. Interestingly, we find that CCS can lead to increases in both producer and consumer welfare while reducing net emissions. As such, we suggest that the adoption of CCS may provide a unique tool in simultaneously addressing two market failures characteristic of wholesale electricity markets: the exercise of market power and the negative externality of CO 2 emissions. • A stylized Nash–Cournot model is developed to analyze potential CCS policy support. • Examine the effect of both a CCS subsidy and an emissions tax on a wholesale electricity market. • Demonstrate how policy interventions impact net emissions and welfare. • A numerical case study illustrates impact of CCS policy support on market performance, welfare, and net emissions. • CCS may simultaneously combat market power and negative externality market failures.