The Kyoto Protocol has first set a price on carbon dioxide emission (CO2).The energy sector is, due to its nature, particularly afflicted. The combustion of fossil fuels emits massive amounts of CO2 which need to be covered by means of limited emission permits.
Coal is the fossil fuel which on the one hand is provided with the largest reserves (thus assuring future fuel availability at comparably low costs) but is on the other hand emitting the largest amount of CO2 per MWhel. Therefore, technologies to capture and store that CO2 are under development. Those
technologies come with significantly higher capital cost for the plants and high energy losses in
generation. Consequently, high carbon prices are required to incentivize investment into that innovative technology.
But the adoption and diffusion of innovations is not only a question of financial incentives. As on other markets, the market for innovation is characterized by potential failures which may impede or prevent the successful diffusion of advanced technologies.
The following thesis first provides an overview about the innovative technologies to capture CO2 from large scale sources just reaching demonstration phase.
Second, innovation from an industrial organizational point of view is analyzed. The focus here is set on market failures for innovation, in particular with respect to market failures which interact with failures on the market for pollution control.
Third, a model is introduced which simulates the adoption and diffusion of Carbon Capture and Storage (CCS) in a two player Cournot game. The producers are subject to emission control and can choose among several technologies to comply with that constraint.
The analysis shows that producers prefer a significant reduction in output and profit instead of investing into the expensive technology. The situation changes as nuclear energy production is phased out and learning effects are introduced. This indicates that a switch to environmentally friendly
technologies needs strong policy support by stringent emission limits as well as by R&D support and public financed demonstration projects.
In extreme cases in which one player is initially equipped with a high share of coal while the other is nuclear based, no symmetric market shares develop. Then, despite being subject to a higher level of emission control, the fossil fuel based player dominates the market over a long time.
Table of Contents
1 Introduction
2 Carbon Capture and Storage
2.1 Technologies
2.1.1 The Post-Combustion Capture Process
2.1.2 The Pre-Combustion Capture Process
2.1.3 The Oxy-Fuel Process
2.1.4 Long-Term Technology Options
2.2 CO2 Transport
2.2.1 CO2 Storage
2.2.2 Geologic Storage
2.2.2.1 Enhanced Oil Recovery
2.2.2.2 Enhanced Gas Recovery
2.2.2.3 Enhanced Coal-Bed Methane Recovery
2.2.3 Ocean Storage
2.2.4 Mineral Storage
2.2.5 Monitoring
2.2.6 Costs
3 Innovation Economics
3.1 A Definition of Innovation
3.2 Innovation Behavior and the Structure of Markets
3.3 Cournot meets Bertrand: Innovation and the Nature of Competition
3.4 Failures on the Market for Innovation
3.4.1 Knowledge Externalities, Technological Spillovers and Patent Protection
3.4.2 Patenting
3.4.3 The Impact of Knowledge Spillovers on Innovation
3.4.4 Adoption of Technologies
3.4.5 Adoption Externalities
3.5 Innovation under Pollution Control
3.5.1 The Basics of Weitzman
3.5.2 The Nature of Electricity and External Effects in Generation
3.5.3 Incomplete Information
3.6 Innovation and optimal pollution control
3.6.1 Investment Incentives under Emission Permits
3.6.2 Investment into Carbon Capture and Storage
3.6.3 Critical Discussion of the Results
3.7 Patent Race vs. Research Joint Venture under Emission Control
4 The Model
4.1 Model Description
4.2 Scenarios
4.2.1 Base Case Calibration
4.2.2 Scenario 1 – Changing Input Parameters
4.2.3 Scenario 2 – Permit Reduction
4.2.4 Scenario 3: Only Nuclear Capacity Replacement
4.2.5 Scenario 4 – Withdrawal from the Nuclear Energy Program
4.2.6 Scenario 5 – Learning Effects
4.2.7 Asymmetric Players
4.2.7.1 Scenario 6 – Asymmetric Players, no Learning
4.2.7.2 Scenario 7 – Asymmetric Players, Learning
4.3 Conclusion
Research Objectives and Core Topics
The main objective of this thesis is to provide a microeconomic analysis of investment incentives for clean technologies, specifically Carbon Capture and Storage (CCS), within an electricity market subject to emission control. The research investigates how industrial organizational factors, such as market structure and market failures, interact with pollution control policies to influence technology adoption and diffusion.
- Overview of innovative carbon capture and storage technologies.
- Economic analysis of innovation behavior under various market forms and competition types.
- Evaluation of market failures for innovation, particularly in relation to pollution control policies.
- Simulation of CCS adoption and diffusion using a two-player Cournot game model.
- Impact of learning effects, policy support, and nuclear energy phase-out on technological transition.
Excerpt from the Book
2.1 Technologies
All CCS technologies aim on creating a highly concentrated or pure stream of CO2, if possible at high pressure (supercritical > 75 bar), ready for transportation to a storage side (Vallentin, 2007). Applicable technologies depend on the type of fuel and whether the fuel is combusted in a liquid, gaseous or solid state. There currently exist 3 technologies on the market which, at least in small and mid-scale facilities or on components level, are technologically mature and ready for utilization.
Even though all CCS activities were implemented on a commercial scale, there should be distinguished between those applications and large scale facilities like a 1000 MW power plant. The later has not been realized yet and current demonstration projects are still in a planning or construction stage. Similar to e.g. aero plane production, it is not possible to simply scale up facilities. To apply CCS from a technical perspective, new materials are required and different proceedings need to be developed. The higher construction costs and significantly higher fuel consumption of all 3 processes presented below, result in higher generation costs and further environmental damage due to mining and transport as well as for the storage of the CO2. Those impacts need to be taken into account for assessing the suitability of the technologies for efficient global CO2 mitigation.
Summary of Chapters
1 Introduction: Provides an overview of the global energy demand and the necessity of fossil fuels alongside the growing urgency of addressing CO2 emissions through CCS technologies.
2 Carbon Capture and Storage: Details various technical methods for capturing, transporting, and storing CO2, while highlighting economic barriers and cost structures.
3 Innovation Economics: Analyzes the theoretical underpinnings of innovation, market structures, and the failures associated with adopting pollution-controlling technologies.
4 The Model: Introduces a simulation of CCS technology diffusion in a two-player Cournot game and examines various scenarios such as policy changes and learning effects.
Keywords
Carbon Capture and Storage, Emission Control, Innovation Economics, Cournot Competition, Market Failure, Technological Spillovers, Electricity Market, Patent Race, Research Joint Venture, Pollution Control, Learning Effects, Investment Incentives, Environmental Policy, CO2 Abatement, Technology Diffusion
Frequently Asked Questions
What is the core focus of this thesis?
The thesis explores the microeconomic determinants of investment in clean technologies like Carbon Capture and Storage (CCS) under specific regulatory frameworks for emission control.
What are the primary themes addressed in the work?
Key themes include the technical aspects of CCS, the economics of innovation, market failures related to new technology adoption, and game-theoretic modeling of firm behavior in the energy sector.
What is the central research question?
The work seeks to understand how investment incentives are shaped by existing market structures and whether pollution control policies effectively promote the necessary transition to low-carbon technologies.
Which scientific methodology is employed?
The author uses an industrial organization framework, combining theoretical analysis of innovation economics with a dynamic simulation model based on a two-player Cournot game, solved via GAMS.
What aspects of the energy market are covered in the main body?
The main body treats the identification of technical and economic barriers for CCS, the interaction between innovation and pollution regulation, and the simulation of scenarios such as nuclear energy phase-outs.
Which keywords best characterize this research?
The research is defined by terms such as CCS, emission control, Cournot competition, innovation economics, technological diffusion, and market failure.
How do "learning effects" impact the adoption of CCS in the model?
The model shows that learning effects, which lead to efficiency gains and cost reductions over time, are crucial drivers for the diffusion of CCS technology within the simulated energy market.
What conclusion does the author draw regarding the German electricity market?
The thesis suggests that CCS adoption requires stringent policy support, such as firm emission limits and R&D backing, because private incentives alone are insufficient to overcome the high costs and risks associated with these technologies.
- Quote paper
- Johannes Herold (Author), 2008, Microeconomic analysis of investment incentives under emission control, Munich, GRIN Verlag, https://www.grin.com/document/129016
