According to IEA (2018), there is a huge gap between the first-best social optimal utilization of Carbon Capture and Storage (CCS) technologies to lower global CO2 emissions and the current, negligible diffusion of this technology. This calls for a financial support mechanism for CCS. We study to what extent promotion of CCS in Europe should be through subsidizing development and production of CCS technologies—an upstream subsidy—or by subsidising the purchasers of CCS technologies—a downstream subsidy. This question is examined theoretically in a stylized model and numerically by using a new approach that integrates strategic trade policy with an economic model of the European energy markets. The theory model suggests that upstream subsidies should clearly be preferred, and this is confirmed by the numerical simulations. For the European power market, the numerical simulations suggest that subsidies to CCS coal power should exceed subsidies to CCS gas power.
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