On the economics of carbon capture
Creators: name: Stemmler, Joseph Augustin
Publisher: name: The University of Texas at Austin
Year: 2023
Subjects: Carbon capture
Environmental economics

description: The four chapters of this dissertation study carbon capture, utilization, and sequestration (CCUS) in a variety of settings. In each chapter, I analyze the behavior that different carbon policy instruments elicit from a polluting firm with CCUS technology available to capture their emissions generated in the production process. In particular, I examine the difference in outcomes between a carbon tax on net emissions and a subsidy system for technologically sequestered carbon representative of recent carbon legislation in the United States (Internal Revenue Code 45Q). In the first chapter, I motivate the study of subsidies in the context of carbon sequestration by considering a dynamic setting in which a firm that sequesters generates future benefits through learning. These future benefits stem from own-learning effects (reducing the cost of sequestration) as well as demonstration effects (other firms learn by observing the viability and profitability of sequestration, and subsequently undertaking it). Using a simple framework, I illustrate the shortcomings of addressing an emerging climate technology solely with carbon-pricing initiatives. I show that when future benefits of these learning "spillovers" are not accounted for, there is a divergence in the societal and private benefits. The additional market failure of the positive learning externality can be accommodated fully by using both carbon pricing and a sequestration subsidy. When only a subsidy is available, as in the case of 45Q, I demonstrate that the early subsidization of sequestration is valuable due to these learning spillovers and the nascency of sequestration technology, and a regulator would be willing to subsidize sequestration even if the sequestration technology initially leads to an increase in net emissions (the technology is "perverse"), so long as the future benefits outweigh the damages from increased net emissions. This chapter establishes the notion of a "perverse" sequestration technology (causing a "cobra effect") and the importance of subsidies for nascent technologies, which is studied extensively in the subsequent chapters. In the second chapter, I study how a carbon tax and a sequestration subsidy alter a polluting firm's production decisions, as well as how much (if any) sequestration the firm decides to undertake. Using a static framework in which a firm imposes a negative emissions externality on society, I investigate which components of the ongoing debate about subsidizing sequestration hold water, and ask ``When subject to a sequestration subsidy, is it possible that net emissions may actually increase?" I find that the answer to this question is "yes," and provide conditions for the pollution intensity of the firm and the cost structure for sequestration technology necessary for this perverse outcome to arise. In the third chapter, I extend the setting of the second chapter by including two market failures: a negative emissions externality from production, and market power within the regulated industry. I characterize the production and sequestration behavior of imperfectly competitive firms subject to either a carbon tax or a sequestration subsidy, and determine whether emissions outcomes tend to worsen or improve when the industry in question is imperfectly competitive. I find that despite producing less aggregate net emissions than their more competitive counterparts, the oligopolists are just as (if not more) prone to the same perverse incentives to over-emit in response to a sequestration subsidy. In the fourth and final chapter, I survey the existing literature on carbon policy with a particular focus on CCUS and subsidy systems. I provide an overview of the current state of the subsidies literature in the realm of environmental economics, and enumerate gaps within the literature that serve as avenues for future research. I find that the literature on environmental subsidy systems beyond the domain of solar and wind energy is thin, and is primarily concentrated within rather dated theory papers. In contrast, the literature on CCUS is almost entirely restricted to engineering or engineering-economics due to large-scale commercial application of CCUS being relatively recent. As a result, there is ample work to be done on evaluating the impact of recent sequestration policy within the US, both in theory as well as empirically as the data from CCUS facilities currently in construction emerge as they are put to use.