Carbon Capture and Storage in the European Emissions Trading Scheme

Abstract

Carbon Capture and Storage (CCS) is a new combination of technologies that may become available to firms that emit CO2 under the European Union’s emissions trading scheme (EU ETS). An example is an electricity producer that captures its CO2 and transports it to a depleted gas field where it is permanently stored. In the short term, CCS is more expensive than either buying emission rights on the market or reducing emissions within the firm itself. Therefore, the EU provides for substantial subsidies of several billions of euros to installations under the EU ETS that apply CCS. Although it is to be applauded that the EU has avoided several uneconomical alternatives, our analysis shows that these subsidies are inefficient. First, the EU ETS was created to let emitters choose the least-cost option to comply with their emission targets. Policymakers should not undermine this market by picking winners: the CO2 price should and can determine when CCS becomes attractive. Second, we question the design of the CCS subsidies. For instance, emission rights will be taken from the new entrants reserve to fund CCS projects, which creates a barrier to entry, and allowance auction revenues will be given to CCS users, whereas it is more efficient to use that money for reducing distortionary taxes (such as taxes on labour). Nevertheless, we find it economically reassuring that the EU restricts the subsidies both in scope and in time, which significantly limits the associated inefficiency.

Keywords: carbon capture and storage, emissions trading, European Union, incentives, subsidies, auctioning

JEL Classification: D21, D62, K32, Q48, Q54