In the light of international policy objectives like the 50% reduction in CO2 emissions by 2050 (compared with 2005 levels) suggested by the Intergovernmental Panel on Climate Change (IPCC) as a minimum target for managing global warming, CCS is increasingly seen as a key element within the wider portfolio of climate change mitigation strategies.
The International Energy Agency (IEA)
has estimated that CCS alone can provide 19% of the CO2 emissions reduction required to meet such a target. In 2008, the IEA concluded that, without CCS, the cost of attaining the 50% reduction would increase by over 70% in the long term.
On the basis of these kinds of calculations, it is widely argued that investment in this technology would make the transition to a low-carbon economy substantially cheaper and more cost-effective. Any monies spent now on helping to get CCS off the ground would, in this scenario, be handsomely repaid in the long-run. However, some NGOs, such as Greenpeace, have criticised public funding of CCS for diverting resources from less carbon-intensive, renewable energy sources, such as wind or solar.
How many CCS projects are needed?
Projections from the IEA indicate that achieving the 50% global emission reduction target (see above) will require deployment of at least 100 commercial scale CCS demonstration projects by 2020, with the number of full-scale CCS plants rising to 850 by 2030 and 3400 by 2050 worldwide. These projects are expected to abate emissions from power generation, industrial and upstream activities, involving not only the coal sector, but also gas, biomass, cement, chemicals, pulp, paper, and iron and steel industries.
How much will CCS cost? How much investment is required?
The following diagram is based upon the IEA figures concerning costs and investment needs associated with the deployment target for CCS projects over the period 2010 - 2050.
What are the major financial barriers to CCS deployment?
A number of factors can be identified as constituting the main financial obstacles to CCS deployment.
First, the costs and risks involved still present a major problem. The initial investment costs needed for CCS are prohibitively expensive in the context of financial returns which are at present too uncertain to attract private sector investors in the near future. Both the still unstable regulatory environment and the technological development risks that accompany any technology in its demonstration phase cause uncertainty with respect to recovery of the initial investment and making a return on that investment in the medium term.
Second, the current carbon price - where there is one - does not provide a sufficient incentive for CCS. This is due to an economic gap between the price of CO2 emission allowances on the carbon market and the marginal cost of abating an equivalent amount of CO2 by means of CCS. Operators thus lack the incentive to invest in CCS.
Current predictions suggest that the carbon price on its own will not create the incentive necessary for private capital to finance demonstration projects and launch a commercially viable CCS industry in the timescale required. Additional mechanisms will therefore be necessary, in the form of public funding or government incentives.
Finally, a further financial barrier arises from the energy penalty inherent in the capture phase of the CCS chain. Since CO2 capture and pressurisation require additional energy, CCS plants are less energy efficient. This raises overall operational costs of CCS plants in comparison with equivalent conventional plants. This energy penalty is seen by opponents, such as Greenpeace, as undermining current efforts to improve energy efficiency, which is itself an essential measure to mitigate climate change.
Continuing uncertainty about the legal framework for CCS is a crucial element in these financial calculations and in investors' reluctance to commit themselves to CCS. This is particularly relevant in areas such as the liability regime for long term storage of CO2.
What methodologies have been proposed to incentivise CCS?
Legal and regulatory strategies are currently being formulated at international, regional and national level in order to overcome the financial barriers to CCS and provide greater incentives for its full-scale commercial deployment.
Policies that can help to encourage CCS implementation include:
creating a value for CO2 emission reductions;
providing public funding, tax incentives or subsidies;
establishing mechanisms to reduce uncertainties, including a firm liability regime; or
making CCS technologies compulsory.
Although not exhaustive, the following overview illustrates how these policies may be implemented by providing brief descriptions of key legal and regulatory mechanisms.
Creating a value for CO2 emission reduction
CCS within an emission trading scheme (ETS) What is it?
If applied to CCS activities, an ETS can allow CCS operators to benefit either by selling unused CO2 emission allowances or through not being required to purchase allowances in the first place. Under an emission trading scheme, the operator will seek to maximise returns by cutting emissions where the price of making those cuts (the marginal abatement cost) is less than that of purchasing allowances on the open market. If the market price of allowances is sufficiently high, the ETS would provide a financial incentive for CCS deployment.
The benefits of an ETS for incentivising CCS have been recognised by the European Union in the form of the revised ETS Directive. The Directive provides that, from 2013, most operators will need to buy allowances at auction to cover their emissions, and surrender them to the administrator at the end of the year. The Directive treats CO2 stored in accordance with the EU CCS Directive as 'not emitted', thereby removing the obligation for operators to surrender the corresponding allowances, which can instead be sold on the open market (Art. 12 (3) (a)). This is intended to provide a strong driver for investment in CCS. However, through the process of buying allowances at auction, the operator is exposed to any potential volatility in the carbon price to the extent that, below a certain price level, there will be no incentive to invest in CCS. Nevertheless, although the EU ETS has not yet delivered its full emission reduction potential, an ETS is in principle supported by many as a promising tool for achieving emissions reductions in the most efficient way (E3G and WWF, 2009; CAN-Europe report, 2010).
CCS within the Clean Development Mechanisms (CDMs)
Established under the Kyoto Protocol, the Clean Development Mechanism (CDM) is a project-based instrument designed to generate emission reduction credits (Certified Emission Reductions or CERs), which may be used by developed countries (Annex I Parties) to comply with their emission reduction commitments. These credits are obtained in return for participants from Annex I countries sponsoring or implementing emission reduction projects in developing or less developed countries (non-Annex I Parties).
To date, CCS projects are not yet eligible for credits under the CDM, because of a series of contentious technical, methodological and legal issues. However, there are continuing negotiations in the context of the United Nations Framework Convention on Climate Change (UNFCCC) to allow CCS projects to become eligible under this or another similar mechanism.
(For more details about CCS under the CDM, click here)
Carbon Tax What is it?
A carbon tax can be imposed either on the use of the most carbon-intensive fuels, making the use of coal or lignite, for example, more costly, or directly on the CO2 emissions generated from combustion processes generally.
In the first case, the tax would stimulate more efficient use of high-carbon fuels or a transition to less carbon-intensive ones, but not necessarily investments in low-emitting coal-based combustion technologies, such as CCS.
In the second case, by imposing a predictable cost for CO2 emissions, this mechanism would not only increase carbon efficiency, but also encourage investment in technologies which abate such emissions, including CCS.
Opinions vary with respect to the advantages and disadvantages of a carbon tax compared with an emission trading scheme. While an emission trading scheme sets a maximum quantity for emissions ('cap') and leaves the determination of the price of carbon to the market, achieving the most cost efficient emissions reductions, a carbon tax raises the price for carbon and leaves the determination of the emissions quantity to the market. A carbon tax has the advantage of providing relative price certainty, but it cannot ensure the achievement of fixed emission reduction targets. Conversely, an emission trading scheme would be able to cut a set quantity of emissions, in principle at the lowest cost, but it is subject to price volatility and the risk of setting an insufficiently stringent cap.
Since 1991, Norway has imposed a carbon tax (nearly US$55 per tonne of CO2) on carbon emissions from offshore oil and gas activities, whose incidence has encouraged CO2 sequestration and whose revenue has been used to support CCS activities. Carbon taxes have also been in force in other countries, including the Netherlands, Finland, Sweden and Denmark.
Public funding mechanisms, tax incentives and subsidies
Investment assistance: Loan guarantees and trust funds
This category encompasses a wide range of mechanisms. Two that have been specifically suggested as tools to stimulate investments in CCS projects are loan guarantees and trust funds.
A loan guarantee would be provided by the government and consists of a promise to repay loan finance if the original borrower defaults. This reduces the financial risks of CCS deployment to investors. However, its ability to stimulate investment in CCS is limited to cases where debt finance is involved. It may assist operators to obtain initial capital, but will have no impact on the other technical, financial and operational risks associated with early deployment of CCS.
A trust fund could be financed by levies on coal-based or fossil fuel-based electricity generation. This fund would then provide capital for commercial deployment of CCS. A trust fund of this kind is generally established for a specific purpose, set out in the law that creates it, and will only be disbursed for that purpose and under certain conditions. This precise targeting is useful when a particular goal, such as reducing CO2 emissions, must be achieved. Some observers have seen trust funds as a more reliable and longer-term source of revenue than a carbon tax. However, they are likely to meet a certain amount of opposition from the parties which have to pay the levies.
Some NGOs, such as Greenpeace, oppose all forms of public funding for CCS, which is seen as allowing the private sector to use coal at the taxpayer's expense. This position has been expressed by noting that '[i]nstead of polluters being asked to pay for these programmes, deployment of CCS envisages a scheme where governments, and ultimately taxpayers, pay polluters to try not to pollute' (Greenpeace, 2008).
For a detailed illustration of the European incentives to stimulate CCS, click here.
Tax incentives What is it?
Tax incentives can stimulate investment in CCS by reducing, in various ways, the tax liability of operators using the technology. However, the efficiency and desirability of tax incentives is controversial. First, different kinds of tax incentives can have different effects on a country's economy, not all of them beneficial in terms of climate change mitigation. Second, they need to be carefully tailored and to take account of the characteristics of that country's investment environment. Generally, tax incentives entail a cost in terms of revenue lost to the exchequer, inefficiency due to market distortions and administrative costs. However, if correctly designed, they can be easily and transparently implemented, and provide a useful tool for securing new investments.
Feed-in tariffs What is it?
A feed-in tariff scheme for electricity generated by CCS power plants would help to overcome uncertainties about operators' revenue streams and also provide transparency and simplicity.
However, a feed-in tariff also has some drawbacks. It requires the authorities to judge correctly the level of the tariff and the guaranteed take of the distribution companies, and could result in either over-compensation of the operator or failure to provide an incentive at all. The additional price guaranteed to the operator has to be paid for by electricity consumers in the form of more expensive energy bills. It is also difficult to decide the appropriate level of tariff where costs are uncertain, as is the case for a new technology such as CCS. However, by providing a guaranteed price for electricity generated by CCS plants and some kind of guaranteed sale of that electricity, this mechanism creates a direct link between the use of CCS and a revenue stream, which could constitute an economic driver for investment in CCS.
Financial assistance from international financial institutions
The establishment of dedicated funds by international financial institutions to support CCS deployment has been suggested, particularly in relation to the Asian Development Bank and the World Bank.
In 2007, the Asian Development Bank established the Clean Energy Financing Partnership Facility (CEFPF), an 'umbrella' fund aimed at supporting investments in clean energy projects in its developing member countries. This includes a multi-donor Clean Energy Fund (CEF) and a series of clean energy trust funds, which are bilateral funds between a donor and the Bank. The Asian Clean Energy Fund, supported by the government of Japan, is one example.
In July 2009, a Carbon Capture and Storage Fund (CCSF) was established under the CEFPF fund, as a result of a trust fund agreement between the Australian government, through the Global CCS Institute, and the Asian Development Bank. The fund has a value of AU$21.5 million and is intended to support the deployment of CCS demonstration projects in Asia, by: promoting projects; improving capacity building; stimulating geological exploration and environmental assessment related to the potential of storage sites; and increasing community awareness of CCS.
Although all developing member countries are eligible to receive funds from the CCSF, priority will be given to projects in China, India, Vietnam and Indonesia.
In December 2009, the Government of Norway and the Global CCS Institute launched a Carbon Capture and Storage Trust Fund (CCS TF), a World Bank-administered multi-donor trust fund, to support CCS deployment in developing countries. The fund has five main objectives: 'integrating CCS into sustainable development plans and/or low-carbon strategies and policies; building in-country management skills and expertise; structuring legal and regulatory frameworks; developing financing mechanisms; and assessing environmental impacts'. This initiative will be implemented via traditional World Bank assistance mechanisms, including investment loans, credits and guarantees, development of policy operations, and advisory tools.
The fund is fully operational and has a current value of US$8 million, as a result of the contributions of the Norwegian Government and the Global CCS Institute. Regional issues will also be addressed, with the aim of informing developing country policymakers and Bank staff about (a) the technical, environmental, regulatory and socio-economic issues associated with developing CCS in regional energy infrastructures, and (b) existing and future financing methods for promoting CCS in developing countries.
In order to support CCS within the EU, the European Investment Bank has also been playing an important role in the context of EU funding mechanisms for CCS projects. (For more details on the European Investment Bank's role, see section on EU financing mechanisms.)
Establishing mechanisms to reduce financial uncertainties
Liability provisions
Uncertainty regarding the extent of the operator's liability for damage caused by CCS technologies represents a contentious barrier to private sector investment in the technology.
In order to overcome this barrier, clear provisions on liability for CCS need to be adopted to address the legal and financial consequences of events which trigger the liability of the operator across all CCS phases. This issue has been addressed in many jurisdictions, including in the EU, where mandatory financial security and a system to transfer liability to the Member State once certain conditions are fulfilled, have been introduced by the European CCS Directive.
(For a more detailed analysis, see the section on Environmental Liabilities in this website.)
Insurance and financial security products
Exposure to the multiple risks associated with the operational, closure and post-closure phases of the CCS chain is a disincentive to private investment in CCS. The range of possible risks is wide and may potentially include property damage, bodily injuries, environmental damage and economic loss, all of which entail liability and financial exposure of the CCS operator for compensation and remediation. In this context, there is scope for the insurance and financial services markets to address these risks and reduce uncertainties by means of specialised CCS products. Such products could play a key role in reducing an operator's exposure to risks associated with CCS activities. Other potential benefits of financial security cover for CCS operations include: the provision of appropriate price signals for the risks involved, encouragement of good risk management practice and pre-funding potential financial loss.
One of the first providers to enter this market is Zurich Financial Services which has set up a tailor-made insurance package for CCS, composed of two products: CCS Liability Insurance and Geological Sequestration Financial Assurance (GSFA). During the operational phase, the CCS Liability Insurance is designed to provide coverage for liability arising from pollution, transportation, out of control wells, geomechanical events and business interruption. For the closure and post-closure phases, the GSFA will cover risks related to increased implementation costs, accelerated closure and cost over-runs.
However, as yet, there seem to be no products available to cover the critical risk associated with long-term liability for CO2 seepage under the EU emissions trading scheme. That means that the operator would bear the cost of purchasing allowances to cover CO2 emissions released as a result of any leakage from the storage site, if it occurs before responsibility is transferred, post-closure, to the competent authority.
Mandating CCS technologies
CCS obligation (Carbon Capture Readiness) What is it?
In order to accelerate investment in CCS technologies, they could be made compulsory for all coal- and fossil fuel-fired power plants. Such a requirement could eventually be extended to the industrial sector as a whole.
The imposition of such an obligation at present, however, even confined to power plants, would pose serious challenges given the current state of development of CCS. If such a course is to be followed, it might be preferable to phase it in gradually. For example, as a first step a requirement can be placed on new power plants that they are 'carbon capture ready', as this allows for easier retrofit once the technology is sufficiently developed. Some environmental NGOs (Greenpeace, WWF, RSPB, Friends of the Earth) have pointed out that, because CCS has not yet been proven at commercial scale, requiring new power stations to be 'capture ready' today does not provide any guarantee that CCS equipment will be installed later on. They argue that this would be a burden upon taxpayers as well as easing the creation of new coal-fired power installations, whose emissions will then be released. They recommend a stricter commitment to demonstrate the technology rather than simply mandate a readiness to install it at some future date.
If existing plants are also to be required to retrofit CCS, a longer compliance deadline can be set to allow for commercial development of the technology or for the plant to be replaced in the normal cycle of business.
Although it would certainly increase investment, mandating CCS technologies is a controversial solution for industry and arguably would not allow operators to abate emissions in the most cost effective way.
Emission Performance Standards (EPS) What is it?
An emission performance standard for CO2 would require installations covered by the measure to limit the level of their CO2 emissions within a maximum value. If applied to the energy sector, an EPS can be applied to new power plants, to existing plants or to both, with different consequences in terms of efficiency, costs, emissions reduction and impact on innovation. In order to stimulate CCS, an EPS could be set at a level which would only be achievable by using CCS technologies. The level chosen could also determine whether only plants burning certain fossil fuels needed to adopt CCS or all fossil fuel-powered facilities had to do so.
If applied to all existing and future power plants at a level that required CCS, it would allow relatively rapid emissions reduction to be achieved; prevent non-CCS power plants from being built and provide a strong incentive to invest in technological innovation. An EPS is also familiar to, and understood by, industry as a method of regulation, due to its widespread use in controlling other pollutants (e.g. sulphur dioxide, nitrous oxide, particulates). Some NGOs have expressed their support for an EPS limiting CO2 emissions from both new and existing power plants, to be progressively tightened as soon as the technology is proven.
However, those benefits would be achieved at a higher cost than under a market-based instrument and a stringent standard also has the potential to deter investment in the fossil fuel sector as a whole with a consequent effect on innovation, which may be problematic as fossil fuels are likely to remain a major part of the energy mix for the foreseeable future. Other disadvantages of an EPS include the need for an administrative decision to set the value which, once it has been achieved, removes any incentive for further reductions until another administrative decision is taken. The constant incentive to achieve further emissions reductions provided by a market mechanism is therefore not secured by an EPS.
An EPS also entails problems in assessing the right stage in the technical development of CCS for such mechanism to come into force; or in deciding which sectors of the economy have to be covered by the EPS scheme for it to be effective.
Moreover, too stringent an EPS is likely to result in a sharp increase in the price of electricity due to both a restriction in supply and an increase in generator costs as a result of the energy penalty suffered by CCS plants.
The imposition of an EPS on new sources could also have a retarding effect on new plant construction (and the innovation that goes with it), as operators may retain old assets past the point when they would have been replaced, in order to avoid the extra costs associated with installing the required emission control technology.
In the US, an EPS on CO2 emissions was introduced in California in 2007 and then adopted by other states (Illinois, Montana, Washington, Oregon and New Mexico). In the EU, an EPS was initially excluded from the framework established by the CCS Directive, as it was considered premature because of the demonstration state of the technology. However, the CCS Directive requires that, by 2015, the Commission conduct a review, assessing, among other things, 'whether it is needed and practicable to establish a mandatory requirement for emission performance standards for new electricity-generating large combustion installations' if key aspects of the CCS chain are considered to be 'sufficiently demonstrated' (Art. 38).
In principle, CO2 performance standards are compatible with emission trading schemes and can be combined with them. This solution is particularly supported by Greenpeace, which considers that an EPS would help to control emissions while the price of carbon is still too low for an ETS to effectively stimulate investment in clean energy technologies.
However, within the EU, the introduction of an EPS for those greenhouse gases covered by the ETS Directive, such as CO2, is still controversial. Article 9 (3) of the Integrated Pollution Prevention and Control (IPPC) Directive prohibited the imposition of an EPS on gases covered by the ETS, unless it is 'necessary to ensure that no significant local pollution is caused'. This was inserted in order to preserve the incentive effect of the emission trading scheme, from the suppressive effects a mandatory EPS would have upon the carbon market. The IPPC Directive is now being replaced, however, by the Industrial Emissions Directive (IED) (2010/75/EU), which entered into force on 6 January 2011. During the development of the IED, the extent to which the IPPC Directive prohibited Member States from imposing national EPSs for CO2 emissions was challenged, as a result of which the new Directive, in its Preamble, expressly confirms that Member States are not prevented from maintaining or imposing their own greenhouse gas emission requirements, provided they are compatible with the EU Treaties and notified to the European Commission. At the end of 2010, the UK Government confirmed that it planned to introduce an EPS for CO2 emissions.
Low-Carbon Portfolio Standard What is it?
If applied to CCS, a low-carbon portfolio standard would mandate that a proportion of electricity from one or a group of power plants, or of electricity sold by an electricity supplier, originates from CCS power plants. This approach has the advantage of creating a reliable demand for low-carbon energy and providing clear signals to investors, thereby increasing confidence and certainty. A CCS portfolio standard could also be an effective way of allowing coal to remain a key component of the energy mix, which might be an appealing solution for countries whose energy sector is heavily reliant on coal.
What is the role of law?
Some or all of the policy mechanisms mentioned above would typically be included in laws and regulations, either specific to CCS or covering a wider range of measures addressing climate change and investment in clean technologies. An extremely useful summary of country-specific legal and regulatory instruments to promote CCS is provided by the Carbon Sequestration Leadership Forum incentive registry, which is an online database of information about measures undertaken in different jurisdictions worldwide to support CCS deployment.
N.O. Keohane, 'Cap-and-Trade Is Preferable to a Carbon Tax', in R.B. Stewart, B. Kingsbury, B. Rudyk eds., Climate Finance. Regulatory and Funding Strategies for Climate and Global Development, New York University Press, 2009.
E. Woerdman, O. Couwenberg, 'CCS in the European Emissions Trading Scheme', in M. M. Roggenkamp, E. Woerdman, Legal Design of Carbon Capture and Storage, Developments in the Netherlands and EU Perspective, Intersentia, 2009.