Financing Strategies to Incentivise CCS in the United States
Why pay for CCS? The role of coal in the US and the role of CO2 in the production of oil
The United States has large coal reserves that are widely distributed across many states in different regions, with the largest reserves being in Wyoming (40% of total reserves), West Virginia (10%), Kentucky (7.5%), Illinois (7.1%), North Dakota (6.9%), Montana (4.9%), Texas (4.4%) and Pennsylvania (3.3%). Actual production is also dispersed, with the top six producing states being Kentucky, Pennsylvania, Montana, Indiana, Texas and North Dakota. This resource plays a crucial role in US energy generation and industrial production. Nearly half of the electricity generated in the US is produced by coal-fired power stations.
The wide geographic dispersal of coal reserves, production, and use means that the concerns of coal producers and consumers receive important recognition in the US Congress, and especially in the Senate where representation is by State (two Senators per State), rather than by population.
Energy security is also a priority and using domestic coal reserves reduces US dependence on foreign sources of energy, thus decreasing its susceptibility to geo-political tensions which might disrupt supply. The coal industry also generates considerable employment.
However, power plants and industrial installations are the US's primary sources of greenhouse gas (GHG) emissions - mainly carbon dioxide (CO2) and methane (CH4). As reported by the US Interagency Task Force on Carbon Capture and Storage (Report 2010), in the US about 40 percent of GHGs are produced by energy generation and 25 percent from industrial installations.
In addition, in the United States, large quantities of CO2 (around 40 to 50 million tonnes per year) are injected in geologic formations in Enhanced Oil Recovery (EOR) operations, accounting for the production of about 280,000 barrels of oil per day. Studies have indicated that oil production from fields currently viewed as 'depleted' could increase by very large amounts (between 2 and 3 million barrels per day) if additional sources of CO2 were available (see Interagency Task Force on CCS, Report 2010 and Advanced Resources International, White Paper 2010). At present, however, CO2 for EOR projects is in short supply, as recognized by US Interagency Task Force on CCS which noted that 'an important limiting factor in new CO2-EOR projects is a shortage of CO2' (Report 2010).
Due to the extent of its domestic coal reserves, the economic importance of its coal industry and the need for additional supplies of low-cost CO2 to use in EOR operations, the US has been looking with interest at CCS. In the light of pressing calls to mitigate climate change, CCS technologies are increasingly considered by many as a viable option to reduce the climate impact of coal-fired power plants and industrial installations, while ensuring that coal can still play a central role in the US energy mix. While this interest is likely to increase if Congress were to pass legislation putting a price on carbon, the search for additional low-cost supplies of CO2 to support expansion of EOR operations suggests that there will be continuing interest in CCS development even without federal constraints on atmospheric emissions of CO2. For example, of the 10 CCS demonstration projects selected by the US Department of Energy for development by 2016, around 75 per cent of the captured CO2 is expected to be used in EOR operations and much of this potential CO2 supply is already under preliminary contracts for EOR use (Interagency Task Force on CCS, Report 2010 - Table V-2).
What are the major barriers to CCS deployment in the US?
Costs and lack of economic incentives to invest
CCS technologies are not commercially competitive enough for private industry to invest in them without additional incentives. In some jurisdictions, such as the EU, this incentive is provided by an emission trading scheme (see EU emission trading legislation and Financing strategies to incentivise CCS in the EU on this website). So far, comparable federal legislation placing a cap on GHG emissions and requiring the purchase of allowances by emitters within a cap-and-trade system has not been adopted in the US. Regional partnerships establishing cap-and-trade schemes are, however, being implemented by some states; for example, under the Northeast Regional Greenhouse Gas Initiative (RGGI). Other state based programmes are moving towards implementation as well (e.g. the Western Climate Initiative (WCI) and the Midwest Greenhouse Gas Reduction Accord).
It is increasingly argued that without a price on carbon, supported by additional financial incentives from the government, there will not be sufficient economic incentive for investment in CCS in the US. This could jeopardise the achievement of the US government's stated target of initiating 5-10 commercial CCS demonstration projects by 2016 (Interagency Task Force on CCS, Report 2010). The lack of a carbon price thus constitutes a barrier to investment and reduces the economic viability of CCS and other low-carbon technologies.
However, as shown by the EU experience, even when a price on carbon is established, it has to be high enough to make reducing CO2 emissions more economically efficient than releasing them into the atmosphere.
Several legislative proposals for putting a price on carbon have been introduced to Congress, but most have stalled due to political disagreement. Of those proposed, only the American Clean Air and Security Act (the so-called 'Waxman-Markey Act') passed a vote in the House of Representatives in June 2009, but even that failed to be adopted before the end of the 2009-10 session of Congress.
Uncertain legal and regulatory framework for CCS
Together with the lack of climate change legislation, another barrier to investment in CCS is the uncertain legal framework.
In particular, the legal regimes governing long-term liabilities and stewardship for CO2 storage, and property rights are still unclear, particularly if the storage were to take place outside of EOR operations (i.e. if the CO2 injections were treated as some form of waste disposal, rather than a necessary input for the production of oil). Nor is it clear how captured, anthropogenic CO2 volumes stored in the context of EOR operations may be treated under potential cap and trade or similar legislation. Such issues need to be resolved to reduce industry's reluctance to commit to the technology in the near and medium term. Progress has been made at state level, but comprehensive legislation at federal level is still awaited.
Moreover, the Environmental Protection Agency (EPA) still has to finalise the regulatory framework applicable to CO2 injections under the Safe Drinking Water Act and the Clean Air Act that are not related to EOR operations.
Other questions that need to be clarified are those relating to public participation in decision making about CCS, which might have an impact on the investment strategy of some project developers.
What financial mechanisms have been implemented or proposed to incentivise CCS in the US?
The US federal commitment to stimulate CCS technologies has focused on providing financial support for research, development and demonstration (RD&D) activities with a view to acquiring technical knowledge. These activities improve efficiency, reduce costs and provide prima facie evidence of whether the technology actually works at a commercial scale, thus accelerating the full-scale commercial deployment of the technology. For this reason, several CCS RD&D programmes have emerged in the US, supported by government funding in cost-sharing partnership with industry.
Loan guarantees and tax credits for CCS projects have also been created and other important incentives were proposed under the Waxman-Markey Bill, before it lapsed with the end of the 2009-10 Congress.