Modeling CO2 Pipeline Systems: An Analytical Lens for CCS Regulation

Carbon Capture and Storage (CCS) is regularly depicted as a crucial technology to reduce the social cost of achieving carbon neutrality. However, its deployment critically depends on the installation of CO2 infrastructures. As the regulatory procedures governing their provision are yet to be clarified, this paper aims to assess the social and environmental impacts of such regulations. We show how the engineering equations of a CO2 pipeline implicitly define a Cobb-Douglas production function. We then infer that the resulting cost function exhibits economies of scale and verifies the technological condition for a natural monopoly. As the possible exertion of market power is a concern, we evaluate the social distortion of the unregulated monopoly and the average-cost pricing solution, which we compare to the outcomes of the welfare-maximizing solution. While the deadweight loss obtained under average-cost pricing remains lower than 5% compared to the first-best solution, our findings indicate that allocative efficiency is an issue, with more than a quarter of the CO2 emissions not being transported. This analysis will usefully inform the emerging regulatory policy debates on CCS by providing the first analytically determined cost function of a CO2 pipeline.