Carbon Capture by Fossil Fuel Power Plants: An Economic Analysis

39 Pages Posted: 8 Aug 2009 Last revised: 28 Mar 2015

See all articles by Ozge Islegen

Ozge Islegen

Independent

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2009

Abstract

For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in CO2 emissions. We examine the break-even value for CCS adoptions, that is, the critical value in the charge for CO2 emissions that would justify investment in CCS capabilities. Our analysis takes explicitly into account that the supply of electricity at the wholesale level (generation) is organized competitively in some U.S. jurisdictions, while in others a regulated utility provides integrated generation and distribution services. For either market structure, we find that emissions charges in the range of $25-$30 per tonne of CO2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The corresponding break-even values for natural gas plants are substantially higher, near $60 per tonne. Our break-even estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly. CCS capabilities effectively put an upper bound on the rise in electricity prices. We estimate this bound to be near 30% at the retail level for both coal and natural gas plants. In contrast to the competitive power supply scenario, however, these price increases materialize only gradually for a regulated utility. The delay in price adjustments reflects that for regulated firms the basis for setting product prices is historical cost, rather than current cost.

Keywords: cost accounting, regulations, environmental protection

JEL Classification: Q3, Q4

Suggested Citation

Islegen, Ozge and Reichelstein, Stefan J., Carbon Capture by Fossil Fuel Power Plants: An Economic Analysis (December 19, 2009). Stanford University Graduate School of Business Research Paper No. 2033. Available at SSRN: https://ssrn.com/abstract=1443478 or http://dx.doi.org/10.2139/ssrn.1443478

Ozge Islegen

Independent

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Stefan J. Reichelstein (Contact Author)

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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HOME PAGE: http://www.CESifo.de

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