Economic Modeling of Co2 Capture and Sequestration

As policy makers look for strategies to reduce greenhouse gas emissions, they need to understand what options are available and under what conditions these technologies could be economically competitive. This paper explores the economics of carbon capture and sequestration technologies using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We model two of the most promising carbon capture and sequestration technologies, one based on a natural gas combined cycle (NGCC) capture plant and one based on an integrated coal gasification combined cycle (IGCC) capture plant. The technologies have been fully specified within the EPPA model by production functions and we simulate how they perform under different policy scenarios. The results show how changing input prices and general equilibrium effects can influence technology choice between the coal and gas capture plants and other technologies for electricity production. BACKGROUND AND MOTIVATION The heightened concern about global change has aroused interest in carbon capture and sequestration technologies as a means of decreasing CO2 concentrations in the atmosphere. Projects are already underway to research and implement such technologies in countries like the United States, Japan, Norway, and Great Britain. In the United States, the Department of Energy (DOE) is investigating the economic, technological, and social issues of carbon capture and sequestration technologies. In 1997, the President’s Committee of Advisors on Science and Technology (PCAST) recommended increasing the DOE’s R&D for carbon sequestration. Past research has focused on identifying research needs (for example Herzog et al., 1993) and assessing technical feasibility and engineering cost data (for example David and Herzog, 2000). More recently, economic modelers have sought to integrate knowledge about the economics of carbon capture and sequestration technologies into economic models (for example Eckaus et al.; 1996, Kim and Edmonds, 2000; and Dooley, et al., 1999). This paper summarizes our analysis of two carbon capture and sequestration technologies for power generation, one based on natural gas combined cycle (NGCC) plants and one based on integrated coal gasification combined cycle (IGCC) plants. The term Carbon Capture and Sequestration (CCS) as used here refers only to these fossil power technologies and the subsequent sequestration of the captured carbon dioxide. David and Herzog (2000) identified these technologies as two of the most economically promising power plant options available. A myriad of other sources and capture processes are often considered under the umbrella of carbon capture and sequestration technologies, but these options are not evaluated here. This paper gives a brief overview of the method of analysis and the results obtained. Biggs (2000) describes the research effort in detail. METHOD OF ANALYSIS The MIT EPPA Model This analysis utilizes the MIT Emissions Prediction and Policy Analysis (EPPA) model (Babiker et al., forthcoming). The EPPA model is a recursive dynamic multi-regional general equilibrium model of the world economy that has been developed for analysis of climate change policy. The current version of the model is built on a comprehensive energy-economy data set (GTAP-E) that accommodates a consistent representation of energy markets in physical units as well as detailed accounts of regional production and bilateral trade flows. The base year for the model is 1995, and it is solved recursively at 5-year intervals. EPPA consists of 12 regions, which are linked by international trade; 9 production sectors; and 1 representative consumer for each region (see Table 1). This analysis focuses mainly on the USA region and the electricity sector. Table 1:EPPA Regions and Sectors Regions Annex B (United States, Japan, European Community, Other OECD, Eastern European Associates, Former Soviet Union) and Non-Annex B (Brazil, China, India, Energy Exporting Countries, Dynamic Asian Economies, and Rest of World). Sectors Agriculture, Energy Intensive Industries, Other Industries, Coal, Oil, Refined Oil, Gas, Electricity, and Investment Constant elasticity of substitution (CES) functions are used to describe production and consumption within each region and sector. In each time step the model solves these functions for a set of prices that clears supply and demand across regions and sectors. They describe mathematically how the factors of production can be combined to produce output, and how consumers trade off among goods to maximize utility. Different technologies are represented by production functions that use inputs in different combinations to produce their respective goods. In the EPPA electricity sector, all non-nuclear electricity production technologies are represented by a conventional electricity production function. Specific technologies like coal power or hydroelectric are not explicitly represented. Instead, these technologies are represented by conventional electricity’s ability to switch among inputs of capital, labor and fuels. Nuclear electricity production is explicitly represented as a separate electricity production technology. Implementation of the CCS Technologies Two discrete production functions are specified for the gas and coal capture power generation technologies. The electricity produced by each power technology (conventional, nuclear, and CCS) is assumed to be a homogenous good. The costs of the CCS technologies are specified by the sum of the factor shares in the base period, 1995. Technological advances are considered by changing the base year costs. The costs as implemented into the model are based on the engineering cost analysis performed by David and Herzog (2000) for two cases: costs for today’s technology (TOD) and small technical advances (STI) possible by 2012. Equation 1 describes the total costs (TC) in mills/kWh of power generation technologies, as implemented in the base year of the model. 2 * CO P TC TC × + = κ (1) It is made up of the total costs net of emissions (TC*) and any emissions cost. TC* is the sum of 1) the busbar costs of producing electricity, 2) the cost for transmission and distribution (assumed to be 20 mills/kWh), and 3) for capture and sequestration plants, the costs of sequestering (i.e., transport and injection) the captured carbon dioxide (assumed to be $10/t CO2). The emission costs are calculated by multiplying the carbon price (PCO2) in $/t CO2 times the emissions of the power plant (κ) in kg CO2/kWh. Table 2 describes these parameters for the capture technologies and a reference NGCC gas plant without capture technology. In addition, the carbon price at which the 1 This special database is provided by the Global Trade Analysis Project (GTAP) along with release four of their economy-trade database. For further information on GTAP see Hertel (1997). capture technology and the reference NGCC technology would have the same total cost is also presented. Table 2. Costs of the CCS technologies TOD TC* (mills/kWh) STI TC* (mills/kWh) κ (kg CO2/kWh) Equalizing PCO2 ($/t CO2) Reference NGCC 52.0 51.0 0.37 TOD STI Gas Capture 76.6 69.6 0.04 75 56 Coal Capture 87.1 77.1 0.09 125 93 Capabilities and Limitations The cost comparisons in Table 2, while valid for considering a single plant for a specific set of reference prices, are not valid for considering the economy-wide potential for CCS technologies because prices change for fuels, electricity, capital and labor when a carbon constraint is implemented. Using the EPPA model allows us to investigate how the competitiveness of the capture technologies change as prices in the economy change as well as how the use of capture technologies will change prices, production activity, and general welfare in the economy. Therefore, we introduced a representative gas and coal capture plant in EPPA, including the costs of capture and sequestration. Because of the high level of aggregation, the representation of the electricity sector and the carbon sequestration technologies in the EPPA model has some limitations, which we plan to address in future research (Biggs, 2000). SCENARIOS AND RESULTS The CCS technologies are analyzed under two policy scenarios, Kyoto and Stabilization (see Table 3). The scenarios are based on the Kyoto Protocol and the objectives of the United Nations Framework Convention on Climate Change (UNFCCC). The model results are compared to the business as usual (BAU) scenario and also against Kyoto and Stabilization scenarios without CCS technologies. Table 3: Policy Scenarios Analyzed Scenario Description BAU Business as Usual—No carbon constraints in any regions Kyoto All Annex B countries reduce to Kyoto constraints in 2010 and remain at these levels until 2100. Non-Annex B countries have no emission constraints. Stabilization Atmospheric carbon stabilized at 650 ppmv. All Annex B countries reduce to Kyoto constraints in 2010 and reduce by additional 5% in each subsequent 15-year period. All Non-Annex B countries reduce to 2010 levels in 2025 and reduce by additional 5% in each subsequent 15-year period. Variations With Trading Carbon permits are tradable among Annex B regions No Trading Carbon permits cannot be traded among regions With CCS CCS technologies available No CCS CCS technologies not available Two variations of each scenario are analyzed, one with an international tradable permit system that allows trade among Annex B regions and one without trade among Annex B regions. Under these scenarios the CCS technologies can become economically competitive in the United States. This is 2 This scenario is the same as used in Reilly et al, (1999). understandable given that the partial equilibrium analysis (see Table 2) judges today’s gas capture technology to be competitive at carbon prices of $75/t CO2 and Fig. 1 shows that carbon prices in the United States will increase over time and break the $75/t CO2 barrier in time periods between 2035 and 2055. 0 50 100 150 200 250 300 350 400 19 95 20 05 20 15 20 25 20 35 20 45 20 55 20 65 20 75 20 85 20 95 C ar b o n P ri ce ($ /t C O 2) Stabilization No Trading Stabilization w/ Trading