Optimal CCUS Subsidies with perfect and imperfect information
Abstract
Carbon capture, utilization, and storage (CCUS) has been widely recognized for its role in many decarbonization pathways. Emerging technologies like CCUS are often adopted slowly until the technology matures and the implementation costs fall enough for firms to profit. Government planners can induce earlier adoption of new technologies through direct and indirect subsidies. In this paper, we use a stylized Stackelberg game framework involving a government planner and CO2-emitting firm to study the impacts of different subsidy levels on CO2 emissions, firm profit, and social welfare. We analytically derive optimal CCUS subsidy levels under a variety of assumptions and study the conditions under which it is optimal to induce the firm to invest in CO2 capture, and under which emissions could actually increase due to CCUS adoption. We extend our model further by adding uncertainty in the firm’s CCUS investment costs, which leads to a game of incomplete information from the government’s perspective. From this we study the effects of uncertainty on the optimal subsidy level and CO2 emissions. We also apply our findings to a case study of a thermal power plant and make policy recommendations based on the outcome.