Uncertainty of the Role of Carbon Capture and Sequestration within Climate Change Mitigation Strategies

The optimal strategy and the implied costs of a stringent climate protection objective are uncertain and potentially large. The uncertainties arise from the growth and flexibility of energy demand and of low carbon energy supply. Carbon capture and sequestration is an option to reduce the economic costs of ambitious climate protection strategies, when energy demand and supply turns out to be inflexible with respect to the reduction of CO2 emissions. Unfortunately, the main characteristics of carbon capture and sequestration are uncertain, too. We use the integrated assessment model MIND to assess this issue. The model couples climate and economy. It computes the socially optimal extents and timings of the magnitude and structure of energy investments. In the base case 117 GtC are captured and sequestered until 2050. Reduction of economic losses due to CCS are small relative to the overall economic losses. We assess the robustness of this result with respect to key parameters. For this purpose we use sensitivity and Monte Carlo analysis. Introduction There is some consensus that macro-economic mitigation costs increase substantially if ambitious climate protection goals should be achieved in order to avoid dangerous climate change. CO2 emissions from the combustion of fossil fuels is a major cause for climate change. In general, there are three technology routes to decrease CO2 emissions from the energy sector. First, to increase the efficiency of energy transformation and use. Second, to decrease the ratio of CO2 emissions per primary energy by shifting to carbon free energy technologies. Last, to capture CO2 at large scale industrial point sources and to store it in geological formations. We use the model MIND to assess these options and the associated uncertainties. In especially, we explore the economic significance of CCS within this portfolio of mitigation options. In the first part we introduce the model MIND to the extent that is indispensable for this study. In the second part we investigate the optimal climate protection strategy and the rationale of balancing the mitigation options intertemporally. In the third part we analyse how robust these results really are. The paper ends with the conclusion. The Model MIND In the following we give a description of the model MIND, the Model of Investment and Technological Development. Model parameters that will be part of the uncertainty analysis are indicated with mathematical symbols. As far as numbers are explicitly mentioned in this section they are the default parameters of the base case. The base case serves as a reference that will be analysed in the next section. A more detailed description of the model and the justification of parameters can be found in [1]. The MIND model is a Ramsey-type growth model with endogenous technological development. It couples the economic system with the climate system by modelling the fossil energy sector and its carbon emissions explicitly. The energy demand can be reduced by either substituting it with capital and labour in a macro-economic production function or an endogenous increase of the energy productivity. The energy mix is determined by investments into the fossil and renewable energy sectors. The efficiency of investments into renewables increases through learning ___________________ Corresponding author: Tel. (++49) 331-288 2535, Fax. (++49) 331-288 2642, Email: [email protected]. We want to thank Claus Rachimow, Michael Flechsig and Uwe Böhm for the development and support of SimEnv and Michael Pahle for Matlab support. Additionally, we want to thank Marian Leimbach and Kai Lessmann for inspiring discussions. by doing. Alternatively, the carbon emissions can be captured and stored in geological formations, which are subject to leakage. The model determines optimal investment strategies into several capital stocks according to a social welfare function which depends on the stream of discounted utility per capita weighted with the population number. The population evolves exogenously and stabilises at 10.4bil. in 2100. Utility per capita depends on consumption per capita with diminishing returns. The investment paths are chosen as far as the resulting returns in terms of welfare improving consumption in the future are high enough. The task is to balance current and future interests via consumption-investment decisions. Production of gross domestic product (GDP) requires the production factors labour, capital and energy. The three production factors are combined via a production function with a constant elasticity of substitution σ =0.4. The supply of labour is not determined endogenously within the model and equals the population. The main source of economic growth comes from investments in knowledge capital that improves the productivity of labour. The growth rate of labour productivity depends on the endogenous specific investment share devoted to this purpose The parameter L α influences the overall productivity of the investment share. It is calibrated in order to reproduce a benchmark: when 2.5% of the GDP is devoted to these investments, then the labour productivity increases by L α %. The productivity of energy is increased by an equivalent mechanism, but E α is calibrated to the benchmark of a 1% GDP share. In both functions there are diminishing returns of productivity. The third production factor is capital, which is accumulated by investment and decreased by exponential depreciation. Secondary energy supplied to the economy can be produced from fossil and renewable energy sources. The fossil energy sector demands capital and fossil primary energy carriers, which have to be extracted with capital. Moreover, there is an exogenous path of traditional non-carbon energy that comprises traditional renewables, large hydro and nuclear power. The extraction sector is subject to learning. The learning potential , res l is limited to a doubling of the capital productivity relative to the present-day level. The learning effect competes with the scarcity effect that implies a decreasing capital productivity. When cumulative resource extraction reaches χ =3500 GtC, the capital productivity is a sixth of its initial value. The initial capital stocks in the fossil energy 0 fos K and extraction sector are assumed to be 6 tril.$US and 5 tril.$US, respectively. 0 K