Carbon capture, utilisation and storage: incentives, effects and policy

We develop a model to explore the incentives, consequences, and policy implications related to utilising captured carbon. Our model incorporates the decision by a firm considering investing in carbon capture technology, as well as the market for CO2. By including the latter, we investigate the effect the increase in supply of CO2 (from captured sources) has on the equilibrium price, allowing us to accurately understand the revenue the investing firm will receive. More importantly, it also allows us to understand the implications for the behaviour of firms that use CO2 as an input: the reduction in the price of CO2 lowers their marginal cost of production, encouraging them to produce more. By accounting for this offsetting 'rebound' effect, we can accurately understand the environmental consequences of carbon capture and utilisation. We also explore the policy implications of our analysis.