Carbon leakage from geological storage sites: Implications for carbon trading

A number of studies show that large-scale deployment of Carbon Capture and Storage (CCS) is necessary to limit the increase in global average temperature to less than 2 degrees C by 2100. However, some experts and citizens worry about the integrity of carbon dioxide storage sites due to the possibility of future leakage. We introduce a two period model where two emission mitigation technologies are available to society in the first period: CCS, with a risk of carbon dioxide leakage in the second period, and a riskless mitigation alternative, such as renewable energy. We first solve the model assuming that society does not know what the future rate of leakage will be. We then solve the model assuming that society will eventually learn the actual leakage rate. We find that, in a trading market in period one, reductions of CO2 emissions through CCS should generate a less than proportional amount of CO2 allowances. Estimates from simulations, using a coarse range of parameters, indicate that the discount factor of CCS allowances lies in the range (0.72, 1). Site-specific data is required to determine site-specific risks of leakage and discount factors.