Modalities and Procedures for the carbon dioxide capture and storage in geological formations as clean development mechanism project activities
Aims
In 2011, after 5 years of work, the Conference of the Parties serving as Meeting of the Parties to the Kyoto Protocol adopted a decision to include CCS within the list of activities eligible under the Clean Development Mechanism (known as CDM). This means that CCS activities meeting the requirements established by such rules and procedures will be able to generate Certified Emission Reduction (normally referred to as CER) units - the carbon credits produced by CDM projects - to account against Annex I mitigation targets under the Kyoto Protocol.
The inclusion aims to contribute to both the achievement of Annex I quantified emission limitation and reduction objectives and the deployment of the technology in non-Annex I countries. This is seen as a crucial element of the full deployment of CCS potential up to 2050 (see IEA estimates). Capacity building and the transfer of technology to emerging economies are also considered as one of the drivers of the decision.
Background to the 2011 decision
The 2011 decision is the result of complex negotiations and a compromise between opposing views. Brazil and the Alliance of Small Islands States (AOSIS) in particular have long rejected CCS eligibility, arguing principally that it will simply encourage the continued use of fossil fuels rather than promote a transition to renewable energy. In that respect it is not consistent with the aims of article 12 of the Kyoto Protocol (sustainable development, stabilisation of GHG emissions, and compliance with Annex I Parties quantified emission limitation and reduction commitments). It was also suggested that its inclusion as a CDM project activity would have destabilised the carbon market.
On the contrary, other Parties, such as the European Union, Australia, Norway and Saudi Arabia, strongly supported the inclusion of CCS. The EU's position was that through '... the CDM and its link into the EU ETS, the carbon market could be one among several means of supporting the demonstration, diffusion and deployment of CCS in the first commitment period and providing useful insights for discussions on CCS deployment post-2012' (European Union Statement, 2008).
At the Copenhagen Climate Change Conference in 2009, the Parties, acknowledged the importance of CCS as a mitigation technology, but highlighted several issues which had to be resolved in order to include it within the CDM project activities. These related to:
non-permanence of emission reductions from CCS projects due to seepage
measuring, reporting and verification
environmental impacts
project activity boundaries
international law
liability
the potential for perverse outcomes
safety
insurance coverage and compensation for damage caused due to seepage or leakage.
Because of these concerns, it was decided that further analysis was necessary.
In December 2010 in Cancun, the Subsidiary Body on Scientific and Technological Advice (SBSTA) put forward conclusions for consideration by the Meeting of the Parties. Solutions to the outstanding issues outlined in Copenhagen (see Decision 2/CMP5) still had to be found, and the question was by whom these should be best addressed. One option was for the SBSTA to consider them at its future meetings, leading to an eventual submission to the Parties for adoption, The alternative was that they would be 'considered and resolved' by the Meeting of the Parties itself. Parties chose the first option, shifting the burden to the SBSTA, as a technical rather than a political body.
After a technical workshop, in Abu Dhabi the SBSTA presented draft modalities and procedures for discussion at the Durban Climate Conference in December 2011. Agreement was finally reached and Parties passed a decision adopting modalities and procedures for CCS under the CDM framework.
Key elements of the 2011 Decision
The 2011 decision on rules to govern CCS within the CDM rely on pre-existing modalities and procedures established for other CDM projects. With some necessary modifications, those are still applicable to CCS projects as CDM activities (for pre-existing modalities and procedures see Decision 3/CMP1 in the documents section below), but new rules are now introduced to address the specificities of CCS projects in the CDM context.
Participation Requirements for the host Country
In order to host a CCS project under the CDM, a non-Annex I State (mostly developing countries) must have adopted laws and regulations to govern:
site selection, characterisation and development;
the right to store CO2 and obtain access to the site;
redress for any significant damage caused by the project;
remedial actions to stop and control any seepage and restore the integrity of the storage site and long-term environmental quality;
liability arrangements for environmental and other damage; and
measures to comply with the obligations to address seepage ('net reversal of storage'), if the host Party has previously indicated its acceptance of such obligations (see below).
Before submitting a validation report to the CDM Executive Board for approval of the project the Designed Operational Entity (DOE)
must assess the fulfillment of the participation requirements of the host Party (above) together with the completion of:
site characterisation and selection
risk and safety assessment
environmental and socio-economic impact assessments
The risk and safety assessment is a requirement unique to CCS projects - it is not a feature of preexisting modalities and procedures for other CDM projects. The DOE must also verify that conditions on liability and financial provision have been agreed upon and put into place. Monitoring provisions must also be established and an account of the environmental conditions in the area must be conducted.
The designed national authority of the host Party (DNA)
must give written confirmation to the designated operational entity:
that the right to store CO2 and the access to the storage site have been conferred;
that the host party agrees the financial provision and accepts allocation of liability and transfer of liability. The decision implicitly considers such transfer is not possible earlier than 20 years after the end of the crediting period (see details below).
whether or not the host Party also accepts the obligation to address a net reversal of storage.
The CCS modalities and procedures clarify the concept of 'project boundary', which was one of the pending issues on the eligibility of CCS within the CDM. The project boundary of a CCS project activity is broad and includes: the capture installation; any treatment facility; transport equipment; reception facility at the injection site; the storage site and all 'vertical and lateral limits of the carbon dioxide geological storage site that are expected when the carbon dioxide plume stabilizes over the long term during the closure phase and the post-closure phase' (para 12 and 13 of the Decision).
CDM Registry and the reserve account
As a new feature of the decision, a new account for CER units must be established within the CDM Registry
when a CCS project is validated. This is a 'reserve account' where 5% of the allocation of CER units resulting from the project is held back to account for any seepage (referred to as 'net reversal of storage'). If that is not sufficient to offset the net reversal of storage, then a set of rules come into play (see below).
The amount of the reserve was a sticking point of the 2011 negotiations. Different figures were suggested (i.e.2%, 5% or 20%). The decision was then adopted to require such reserve to be 5% of the CERs issued.
Verification, certification and issuance of CERs See CDM project cycle
Periodical verification and certification of reduction in emissions is performed, under specific criteria, by the Designed Operational Entity, which reports to the Executive Board for issuance of CERs allowances.
When the report is submitted during the crediting period, the Executive Board is requested to issue allowances equal to the verified reductions resulting from the project. In this case, the CDM registry administrator will transfer 5% of the CERs issued to the reserve account, with the remaining amount credited to the corresponding CDM registry account. Conversely, when the report is submitted after the end of the last crediting period, it constitutes an indication of the amount of net reversal of storage that occurred in the last verification period as a result of seepage from the site (check above).
Accounting for Loss of Emission Reductions due to Subsequent Seepage
The new provisions contains rules about liability for environmental and other damage due to seepage of stored CO2 from the site (discussed below). This section is concerned with the emissions trading regime and which parties should account for losses of emissions reduction due to subsequent seepage (known in the documentation as 'net reversal of storage'). The CCS modalities and procedures define 'seepage' as the transfer of CO2 from beneath the ground surface or seabed ultimately to the atmosphere or ocean.
In the case of net reversal of storage, the following rules will apply:
An amount of CERs equivalent to the amount of net reversal of storage will be cancelled from the reserve account of the project. If this is not enough, then
CERs will be cancelled from the pending account, which is the main account in the CDM registry. This is 'the account where CERs are issued upon instruction by the EB' and therefore contains all those units that have been issued and not yet forwarded to the holding accounts of project participants (UNFCCC, 2012 - for more details on this account, see Types of Accounts). If this is not sufficient,
the CDM Registry administrator will proceed to the cancellation from the accounts of the project participants (normally defined as 'holding accounts' - for more details on this account, see Types of Accounts). If the CERs are still not sufficient to offset the emissions seeped,
the project participant must transfer an amount of other allowances (AAUs, CERs, Emission reduction units (ERUs) and removal units (RMUs) equivalent to the outstanding amount to a cancellation registry established for these purposes.
If the project participant does not comply with this obligation or there is still a balance on the emissions offsets, then the appropriate amount of CERs are transferred to the cancellation account by either
the host Party, if he has accepted the obligation to address net reversal of storage, or
the Annex I Parties which holds the CERs issued by the project in their national account, if the host party has not accepted the obligation to address the net reversal of storage
The decision of the host party to accept or not accept this residual obligation must be indicated at a time of approval of the project. It is important to stress that the decision rests with the host country whether to accept this liability or pass it on to the Annex I Party and the decision can change from project to project. This option is a characteristic element of these CDM rules and the result of a political compromise, mainly between the EU and Brazil.
Requirements for financial provisions
Financial provision must be established by the project participants in order to:
fulfill their obligations under the relevant laws of the host Party established to regulate CCS operations as CDM project;
enable the safe operation of the site;
address risk of project participant insolvency;
provide redress to affected communities and ecosystems in the case of seepage from the site; and
to enable the host party to discharge its obligations in connection with the transfer of liability.
The financial provision is intended to cover:
the cost of ongoing monitoring, verification and certification for at least 20 years after the end of the last crediting period of the CDM project or after the issuance of the last CERs has ceased (whichever occurs first);
in the event of a seepage, the cost associated with the cancellation of the credits as a result of the non-permanence;
the cost associated with carrying out remedial actions required under the host Party's national legislation; and
the cost of fulfilling any other requirement determined by the host party at the time of project approval and included in the project design document.
Such financial provision is then transferred to the host Party in compliance with the host party laws and regulation or in case of insolvency of the project participants.
Environmental liability
The decision draws a distinction between the obligations for surrendering allowances to account for net reversal of storage (ie. Seepage) and the wider environmental liability from the CCS project, including damage to properties and personal injuries.
The modalities and procedures define 'liability as 'any legal responsibility arising from the CCS project activity or the relevant geological storage site, [...] including all obligations related to the operation of the storage site (monitoring, remedial measures, etc.), to compensate for or remedy any significant damages, including damage to the environment, such as ecosystem damage, other material damages or personal injury' (para.1 (j)).
These rules do not apply to 'obligations arising from the net reversal of storage' (see section on Accounting for Emissions Reductions above).
In the project design document, project participants must indicate how the environmental liability obligations arising from both the project activity and the storage site, are allocated across the operational, closure and post-closure phases. Such liability must also be addressed by the host Party's laws and regulations governing the activity.
During the operational phase and at any time before the transfer of liability, liability rests with the project participants.
Transfer of liability from the project participant to the host Party can only happen after the monitoring has ceased ( not earlier than 20 years from closure of storage site) and the host Party has verified than the conditions set up in the letter of approval of the project and in domestic laws and regulations have been fulfilled.
A lot of discretion is left to the host Party to develop environmental liability rules (including material damage and personal injury) and no minimum standards are set up for the determination of the liability regime (e.g. whether fault-based or strict liability regime), nor are there any rules governing the conditions of transfer of liability apart from an implicit 20 year limitation). Leaving the host party to determine the details of these liabilities rather than seeking a common framework was a deliberate decision of the Parties.
Key legal issues
The inclusion of CCS as an UN-backed technology confirms its legitimacy as a credible climate change mitigation technology. At a minimum, this is a step-forward for the deployment of this technology not only at international level, but -maybe more importantly- at national and regional level.
These modalities and procedures guarantee a high level of environmental integrity and are widely informed by past legal experience of the European Directive and international marine legislation on CO2 storage. However, the inability to take a clear decision on the allocation of obligations resulting from net reversal of storage leaves room for uncertainties and variations at project level. It is clear that this solution stems from impossibility of regulating this matter at international level to reach a one-size-fits-all political compromise. This is significant where a top-down regime might have caused inconsistencies with pre-existing national laws. But such uncertainty might eventually undermine project developers' confidence and constitute a barrier to the expected level of investment.
Despite their importance in the long-run, a decision on the eligibility of transboundary CCS projects and on a dispute resolution mechanism has been postponed to 2012 negotiations in Doha. But this does not seem a major concern for the time being, giving the early stage of CCS as CDM project activity.
The decision on the establishment of a global reserve of CERs in addition to the reserve established at project level has also been postponed to the 2012 negotiations, due to high political disagreement on the fate of the 5% reserve at the end of the project life cycle.
A periodical review for these modalities and procedures has been established, with the first review due no later than 5 years (2016). Such revision will be based upon recommendations from the Executive Board and the Subsidiary Body on Implementation , and on the technical advice of SBSTA. In any case, the review will not impact on project activities already registered.
Despite the progress made with this decision, a crucial question concerns the use of credits produced by CCS projects as CDM activities. The 2009 EU ETS Directive establishes that, in absence of an international agreement establishing the use of the flexibility mechanisms under the Kyoto Protocol after 2012, only CERs from projects undertaken in Least Developed Countries (referred in the Directive as 'LDCs') will be accepted in the EU ETS (Article 11 a(4)). However, the 2009 EU ETS Directive does permit credits from countries who are not LDCs to be accepted in the EU ETS if an agreement to that effect is concluded between the EU and the relevant third country (Article 11 a(5)-(6)). The effect of these provisions is that unless non-Annex I countries who are not LDCs (e.g. China, South Africa, Brazil, Malaysia, Mexico) conclude enabling agreements with the EU, they will be prevented from producing credits that can be traded in the EU ETS market, the larger one for CERs. These countries have the highest potential for attracting CCS projects and the above limitation risks undermining the deployment of CCS as a CDM project activity.
A key feature of this decision is that no liability solution is imposed on the host Party, which enjoys flexibility and discretion in the ways it addresses it. It was felt that it was not up to the Parties to interfere in the domestic law-making process. However the lack of minimum standards might prove counter-productive as it will leave Host Party without uniform benchmarks, resulting in competition between more permitting regimes to secure projects and foreign investment. At a minimum, a lack of harmonised CDM standards for liability might also pose a question of credibility of the different national systems in the host Parties.