Carbon price and optimal extraction of a polluting fossil fuel with restricted carbon capture - Working Paper Series no. 322

Among technological options to mitigate greenhouse gas (GHG) emissions, Carbon Capture and Storage technology (CCS) seems particularly promising. This technology allows to keep on extracting polluting fossil fuels without drastically increasing CO₂ atmospheric concentration. We examine here a two-sector model with two primary energy resources, a polluting exhaustible resource and an expensive carbon-free renewable resource, in which an environmental regulation is imposed through a cap on the atmospheric carbon stock. We assume that only the emissions from one sector can be captured. Previous literature, based on one-sector models in which all emissions are capturable, nds that CCS technology should not be used before the threshold has been reached. We nd that, when technical constraints make it impossible to capture emissions from both sectors, this result does not always hold. CCS technology should be used before the ceiling is reached if non capturable emissions are large enough. In that case, we nd that energy prices paths must differ between sectors reflecting the difference of social cost of the resource according to its use. Numerical exercise shows that the initial carbon tax should equal 52$/tCO₂ and that using CCS before the ceiling is optimal. (authors)