While prominent international organizations have argued that Carbon Capture and Storage (CCS) is pivotal in ensuring a cost-efficient solution to the climate change problem, to date there is no market for CO2 storage. CCS may be linked to power stations or manufacturing plants in a selection of industries. Also, in the future CCS may be linked to fossil-fuel based production of (“blue”) hydrogen. To date there is, however, no significant market for hydrogen in Europe.
To develop markets for both CO2 and hydrogen, a classical coordination problem has to be overcome: A blue hydrogen producer may not be willing to invest in facilities prior to having a reliable solution for storage of CO2. Likewise, an actor considering to develop a storage site may not be willing to invest before being confident that there are clients with captured CO2 demanding CO2 storage. For blue hydrogen producers, the coordination problem is double sided: the potential producer of blue hydrogen may not be willing to invest before knowing that there will also be demand for hydrogen.
The project has studied the coordination problem for CCS under three alternative assumptions on market structure: i) the price for storage services is regulated by the Government, ii) the storage actor sets the price for storage services, and iii) the supply of storage services and the supply of transport to the storage site are coordinated by a cartel. In our study, it is assumed that firms investing in carbon capture facilities pay for transport from the firm to a regional terminal that receives that captured CO2 and uses pipes to transport the captured CO2 to the storage site.
We find that if the social cost of CO2 is less than 57 euro/tCO2, then it is not socially beneficial to establish a CCS value chain in Northern Europe. If the carbon tax is at least 69 euro/tCO2, then a CCS value chain will be established in Northern Europe in all three market cases, but the level of investment in capture facilities, transport facilities and storage will deviate from the first-best social outcome. To ensure the first-best outcome, the government has to use policy instruments, for example, a subsidy to storage services and a tax on terminals. The net benefit of using such instruments to correct the market outcome is greater the greater the potential market of CCS services.
While prominent international organizations have argued that Carbon Capture and Storage (CCS) is pivotal in ensuring a cost-efficient solution to the climate change problem, to date there is no market for CO2 storage. A variety of firms that currently emit CO2 may in the future invest in carbon capture and thus demand CO2 storage services. Likewise, fossil-fuel based hydrogen production combined with carbon capture will, if it materializes, also demand storage of the removed CO2. This research project investigates how to develop robust value chains for both CO2 storage and fossil-based hydrogen with CCS, and examines policy implications of their interlinkages.
The project is structured around four work packages (WPs). In WP 1, we study how two types of social acceptance—public and political acceptance—might be barriers to developing a CO2 value chain, and how learning, for example, about the risk of leakage from CO2 storage, may impact social acceptance. These factors are important for demand for CO2 storage. WP 2 focuses on supply of CO2 storage from competing storage actors, all enjoying economies of scale and all being capable of obtaining positive learning effects from industrial projects.
Typically, development of value chains involves both private actors and the government. In WP 3, we examine risk sharing schemes between the private and public sector, i.e., business models, from an economic and legal perspective. We identify government support schemes that provide incentives for private investment in the different parts of the CO2 value chain that are socially warranted. Finally, in WP 4 we study jointly the CO2 value chain and the hydrogen value chain, using information from the previous WPs. We examine how government policy may ensure the development of these two value chains. In addition, we discuss, and illustrate numerically, how EU targets for hydrogen production impact blue hydrogen production and the components in the CO2 value chain.