Biomass Energy, Carbon Removal and Permanent Sequestration - A "Real Option" for Managing Climate Risk

Obersteiner, M. ORCID: https://orcid.org/0000-0001-6981-2769, Azar, C., Moellersten, K., Riahi, K. ORCID: https://orcid.org/0000-0001-7193-3498, Moreira, J.R., Nilsson, S., Read, P., Schrattenholzer, L., Yamagata, Y., & Yan, J. (2002). Biomass Energy, Carbon Removal and Permanent Sequestration - A "Real Option" for Managing Climate Risk. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-02-042

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Abstract

The United Nations Framework Convention on Climate Change (UNFCCC) calls for stabilization of greenhouse gases (GHGs)at a safe level, and it also prescribes precautionary measures to anticipate, prevent, or minimize the causes of climate change and mitigate their adverse effects. In order to achieve this goal, such measures should be cost-effective and scientific uncertainty on threats of serious or irreversible damage should not be used as a reason for postponing them. In this sense, the UNFCCC can be understood as a responsive climate management scheme that calls for precautionary and anticipatory risk management, where in a continuous sense-response mode, expected climate-related losses are in an uncertainty augmented analysis balanced against adaptation and mitigation costs.

In this paper we investigate a component of a wider technological portfolio of climate risk management. In particular, we will investigate the properties of biomass-based sequestration technologies with respect to their potential role in climate risk management. We use the theory of modern asset pricing, commonly known as real option valuation, in order to assess this technology on global and long-term scales. Biomass energy can be used to produce both carbon neutral energy carriers, e.g., electricity and hydrogen, and at the same time offer a permanent CO2 sink by capturing carbon from the biomass at the conversion facility and permanently storing it in geological formations. To illustrate the long-term potential of energy-related biomass use in combination with carbon capture and sequestration, we performed an ex post analysis based on a representative subset of the Intergovernmental Panel on Climate Change (IPCC) reference scenarios developed with the MESSAGE-MACRO modeling framework. The cumulative carbon emissions reduction in the 21st century may exceed 450 gigatons of carbon, which represents more than 35% of the total emissions of the reference scenarios, and could lead, in cases of low shares of fossil fuel consumption, to net removal of carbon from the atmosphere (negative emissions) before the end of this century. The long-run technological potential of such a permanent sink technology is large enough to neutralize historical fossil fuel emissions and cover a significant part of global energy and raw material demand. The economic potential might turn out to be smaller, if the signposts of climate change do not require that negative emissions, as a real option, need to be exercised.

The main policy conclusion is that investments in both expanding the absorptive capacity for carbon (expanding carbon stocks) and research and development (R&D) investments for developing negative emission technologies as a viable technology cluster should not only be (socially) priced against all other mitigation technologies by simple Net Present Value calculation (working only with the average expected loss), but according to a real option valuation given the full uncertainty spectrum of expected (economic) losses due to human induced climate change. The questions of how much and when sinks have to be committed as real options for robust climate management depend on the properties of the climate signal and the nations' degree of risk aversion -both are yet to be fully quantified.

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