Scaling Carbon Capture Requires Competitive Policy Mechanisms

Author: Philip Rossetti, Resident Senior Fellow, Energy at R Street Institute

View on: OurEnergyPolicy's Energy Insights Forum

There is an increasing disconnect between the sort of climate objectives that are advocated for politically (1.5 degrees Celsius, net-zero emissions by 2050, etc.) and the feasibility of achieving a massive global clean energy transition within the ever-shrinking carbon budget. This widening gap is reflected in seminal “transition scenarios” like the International Energy Agency’s (IEA) Net-Zero Emissions Report, or the International Renewable Energy Agency’s (IRENA) 1.5 Pathway report attempting to lay out a roadmap to these hoped-for climate objectives. The kicker is that these studies can’t make the math work without leaning heavily on huge amounts of carbon capture that are barely demonstrated at this point.

The notable IEA and IRENA studies both estimated about 7-8 gigatons of carbon capture, utilization, and storage would be needed annually by 2050, in addition to major changes in how the globe consumes energy. For context, this is equal to about a fifth of current annual greenhouse gas (GHG) emissions—not an optional element for reaching hoped-for climate targets. But carbon capture currently is only about 44 megatonnes annually, and despite a smattering of private interest in both the production and consumption sides of the economics, there is not much of an expectation that the massive industry growth outlined in transition scenarios is going to happen with a business-as-usual approach. This has fomented a lot of policy discussion, which often focuses on how much subsidy politicians are willing to impart on an industry they seek to prop up. But in a recent paper, my co-author Nick Loris and I suggest a better way of stimulating carbon capture.

The barriers to carbon capture growth are fundamentally economic, not technological. There have been recent breakthroughs in demonstrating how to effectively capture, remove, and sequester carbon dioxide to reduce atmospheric concentrations of GHGs, especially for carbon dioxide removal (CDR). But these technologies suffer from the fact that their costs of around $400 per ton usually outweigh their benefit, and there isn’t any practical reason to expect these technologies to be in high demand (and thus profitable) under current market conditions. To date, the biggest buyers of credits for CDR are large companies trying to improve their public image, which is an admittedly limited market. To reach the sort of scale that the IEA and IRENA think is necessary, carbon removal is probably going to have to fall in cost dramatically to a hoped-for $100 per ton. 

Loris and I point out a policy that we think could achieve exactly that. One of the best ways to slash costs is to ensure that markets are competitive, and that any public support given rewards innovation rather than political preferences. The benefit of competition is that firms can increase profits by improving their productivity, producing more for less. The disadvantage of conventional subsidies is that they can ironically slow innovation since a firm that is profitable because of subsidy is shielded from competition and sees less benefit from cutting costs.

A policy like a reverse auction, Loris and I note, would be perfect for stimulating market entry and competition in CDR because firms would be able to claim a greater share of an offered subsidy if they’re able to remove carbon dioxide at a lower cost than competitors. And since a reverse auction does not preclude private purchase of CDR, it has the advantage that when private companies are willing to pay more for CDR than the public, those firms can simply sell to the private sector instead, ending the need for public support.

While Loris and I make no claims as to the appropriate size of such a policy—we leave that to policymakers—we note that this form of public support is likely far more efficient than alternative methods of subsidy, and would reduce costs to taxpayers while maximizing their benefits. Even better, because carbon removal is a public good, jump starting a private market creates hope for future public benefits that private buyers pursue for their own interests.

All in all, the design of public policy matters, and conventional subsidy approaches that fail to support innovation are going to be insufficient for meeting their hoped-for outcomes. Alternatively, policy design that embraces sound economic principles is far more likely to succeed.