Timing is everything: a real options approach for CCUS investment in the presence of market and technology uncertainty

Abstract

Carbon Capture and Storage and Carbon Capture and Utilization are essential solutions to reduce GHG emissions worldwide and to mitigate climate change effects. While CCS is mature and ready to install, CCU is still in the R&D phase. The rising CO2 prices in the EU Emission Trading System encourage firms to invest in emission abatement technologies. To find the optimal timing to invest in CCS and CCU, we employ a real options approach that allows for flexibility in the timing of the investment decision. This study shows how the investment in CCS is delayed, compared to traditional investment analysis, due to the anticipated CCU arrival and the CO2 price uncertainty. Surprisingly, the expected arrival rate of CCU barely affects the current investment threshold for CCS. The trend and variance of the CO2 price, on the other hand, significantly influence the CO2 price threshold triggering investment in CCS and CCU. The real options model developed in this study can also be adapted to reflect multiple CCS and CCU adoption strategies, using the steps described in this article.

Keywords: real options, Carbon Capture and Utilization, Carbon Capture and Storage, technological uncertainty, R&D