CO2 storage or utilization? A real options analysis under market and technological uncertainty

Carbon Capture and Storage (CCS) and Carbon Capture and Utilization (CCU) are considered essential solutions to reduce greenhouse gas (GHG) emissions worldwide. A crucial difference between the two is that CCS is already a mature technology, while CCU is still in the R&D phase. Hence, firms are confronted with a dilemma, where they have to choose between either the mature CCS, the emerging CCU, or the installation of both in a Carbon Capture Utilization and Storage (CCUS) system. In this study, we analyze different strategies that the firm can pursue and determine the optimal investment timing. In doing so, we take into account both technological uncertainty, i.e. the unknown time-to-market of CCU, and market uncertainty, i.e. the CO2 price. Three different CCUS value chains in the cement industry are analyzed. We find that the anticipated arrival of profitable CCU technologies in the future does not delay investments in CCS in the current period. Investments in CCS and CCU can be accelerated by reducing the volatility of the CO2 price, or by increasing the growth rate of the CO2 price. Finally, we find that a higher fraction of CO2 emissions that can be used in CCU, results in sooner adoption of CCS today.