Journal Article

Economic Incentives for Carbon Dioxide Storage under Uncertainty: A Real Options Analysis


  • Klepper
  • G.
  • Narita
  • D.
Publication Date

Carbon dioxide capture and storage (CCS) is considered to be an important option for reducing carbon dioxide (CO2) emissions. However, its economic viability remains a question, especially if the risk of leakage in the storage site is taken into account. We use a real options approach for assessing the impact of uncertainty on the timing and the profitability of CO2 storage projects. We model an investment decision for a storage site under uncertainty about CO2 leaking from the storage site, about the development of carbon prices, and about the cost of investment. The numerical model results show that investment under these uncertainties requires a much larger price for carbon credits for storage than an investment plan ignoring uncertainty would suggest. We also show under reasonable parameter assumptions that the risk for investing in CO2 storage is dominated by the uncertain development of carbon prices, whereas the risk of carbon leakage has little influence on the investment decision.

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JEL Classification
D81, Q49, Q54

Key Words

  • Carbon dioxide capture and storage (CCS)
  • climate policy
  • Real options analysis

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