Post-combustion fossil-fuel CCS in the US: impact of market and policy dynamics

Integrated assessment model simulations are often cited when recommending  carbon capture and storage (CCS) as an important component of decarbonization for the power industry. Here, we use a simplified setting to analyze the economic sensitivity of post-combustion fossil-fuel CCS to a set of parameters including fuel costs, electricity prices, and subsidies. We formulate the model to represent coal and natural gas power plants fitted with CCS. We then ask what level of subsidies are necessary to make CCS profitable for the operator. Our results indicate that: (1) With current US subsidies and under most market conditions, CCS is much more profitable when injected carbon dioxide is used for enhanced oil recovery than for geologic storage. For this reason, CCS is likely to continue to be used for enhanced oil recovery and so will increase system-wide emissions because the combustion of the oil produced emits more carbon dioxide than is injected to produce the oil. (2) CCS subsidies can drop the marginal cost of electricity generation to near zero, making CCS fossil fuel electricity competitive with renewables in the power market, even as these power plants continue to emit a portion of their carbon dioxide. (3) With CCS subsidies, coal-fired power production can become more profitable than natural gas power because coal produces more carbon dioxide and hence harvests more subsidies. To be profitable, natural gas power plants require higher tax subsidies than coal, and their cash flow is more sensitive to changes in the price of power, which disadvantages natural gas plants when coupled to CCS. (4) In the US, subsidies are provided per ton of carbon dioxide stored rather than per ton of carbon dioxide kept out of the atmosphere. Our calculations demonstrate how the effective subsidy per ton of emissions avoided is more than the subsidy paid per ton of carbon dioxide captured unless the grid is completely decarbonized, because of the energy penalty of CCS. (5) The value of natural gas CCS for reducing emissions diminishes as the carbon intensity of the local power grid increases. We recommend that these insights be used in integrated assessment models such that these models more accurately represent the influence of market dynamics and provide better insights for reducing emissions.