Carbon capture and storage (CCS) is interesting as a case study of a CO2 mitigation technology that maintains considerable political and fiscal support even though its long-term economic viability is dependent on high carbon prices and even though its implementation will in many cases require that U.S. states and Canadian provinces enact new legislation and regulations. This article considers the current legislative debate in the U.S. and examines the ways in which the absence of federal climate change legislation in the U.S. and Canada affects both the price of carbon and the implementation of carbon abatement technologies. It also identifies regulatory gaps that must be addressed before CCS can be widely implemented.
Introduction to CCS
CCS involves the capture, compression, transportation, and underground injection of high volumes of CO2 emissions, which would otherwise be released into the atmosphere by industrial greenhouse gas (GHG) emitters. CCS is a promising technology that may enable certain emissions-intensive industries to reduce CO2 emissions while still maintaining reliance on fossil-fuels or emissions-intensive processes. The North American oil and gas industry has captured and injected CO2 into existing reservoirs to displace oil and enhance recovery (known as enhanced oil recovery or EOR) since the 1970s, and also captures CO2 in connection with international natural gas processing, where the high pressure-produced acid gas must be stripped of contaminants to meet pipeline specifications. Higher cost opportunities also exist to capture CO2 from flue gas at refinery and petrochemical operations, and also in the steel, ammonia, and ethanol production industries. Finally, electricity generators have a stake in the success of CCS as they are major emitters and can incorporate CCS technologies into both existing and new coal-fired or gas-fired operations to reduce the release of CO2.
There has been substantial political support and fiscal incentives for multiple demonstration projects of CCS, and, in fact, this technology is widely recognized by governments, research institutions and industry as an essential tool for the reduction of GHG emissions and a cornerstone in climate change policy. As detailed in past ETCC Updates, Canadian governments have provided approximately $3 billion of funding for CCS in Canada, in connection with research, development, and demonstration of CCS. Nonetheless, there are several significant hurdles to the widespread implementation of CCS.
Part I: The Economic Viability of CCS and the Cost of Carbon
Cost is one hurdle to the widespread implementation of CCS. While not a legal issue per se, carbon pricing (and, by extension, the economic viability of CCS) is affected by legislative measures, e.g. cap-and-trade or a carbon tax. For CCS to be economically viable, the market price for carbon would need to exceed $90 per tonne1 of CO2, by some estimates, compared to a market price in compliance-based markets of around $20 per tonne in Europe and $8-13 (Cdn.) per tonne in Alberta (which is subject to a price cap of $15 per tonne). Without sufficiently high pricing, CCS will be dependent on subsidies. The International Energy Agency (IEA) has indicated that $20 billion of immediate support is required to establish CCS technologies within the next decade. Its Executive Director has also suggestedthat thirty new projects would need to be constructed annually to stabilize GHGs and that one quarter of global power generation would need to incorporate CCS by 2050 to meet reduction goals. A recent audit by the Global Carbon Capture and Storage Institute found that only 62 of 213 active or planned projects were fully integrated commercial-scale projects, of which only seven were actually operating. The scarcity of viable projects is largely attributable to high cost, even with subsidies. For example, in early March 2010, one of the largest electricity generators in the U.S. cited economics when it pulled out of a $700 million CCS project in Alabama that was earmarked for $295 million in federal funding.
Update on Proposed Federal Carbon Pricing Legislation in Canada and the United States
In North America, the price of carbon is currently determined on voluntary markets, various exchanges, or by local compliance-based legislation. No federal legislative framework exists, such as emissions quota or a carbon tax, and it appears unlikely that any such framework will be developed this year. On February 1, 2010, Environment Minister Jim Prentice announced that Canada intends to harmonize its legislation and policies with those of the United States. Following the December 2009 global climate change talks in Copenhagen, Canada filed with the U.N. an emissions reduction target of 17% from 2005 levels by 2020, matching that of the United States. Canada's target had previously been to cut Canada's GHG emissions 20% by 2020 from 2006 levels. Minister Prentice further indicated that Canada would only be willing to implement cap-and-trade or a regulatory regime when the U.S. signalled that they would do the same.
As discussed in greater detail in our December 2009 update, recent months have seen considerable activity in the U.S. Congress on the climate change front. Several bills have been proposed, including two cap-and-trade bills (the Waxman-Markey bill and Kerry-Boxer bill) that have since failed to garner enough support to pass in the Senate. In response, Senators Joseph Lieberman, John Kerry and Lindsey Graham are developing a bipartisan climate change bill that would strike a compromise between existing approaches. The bill, which is intended to be released in mid-April, proposes a carbon tax on transportation fuels and cap-and-trade for electricity-generating utilities. On March 9, U.S. President Barack Obama met with key senators at the White House to discuss climate change efforts in the Senate and reemphasize its priority. Meanwhile, an effort is underway in the U.S. House of Representatives to delay or block the Environmental Protection Agency (EPA) from regulating GHGs. Reports indicate that executives and investors are increasingly questioning whether the U.S. climate change debate will be resolved this year.
Carbon Markets in the U.S. and Canada
Amid legislative uncertainty and the outcome of Copenhagen, confidence in the strength of the carbon market is eroding. Regional Greenhouse Gas Initiative (RGGI) permits auctioned in the RGGI March 10 quarterly auction sold at an average of $2.07 per tonne which, while up $0.02 from the record low in December 2009, is still ten times cheaper than in Europe. The low price has been attributed also to an oversupply of carbon allowances and reduced energy demand caused by the recession. Even the EU, with a compliance-based market, is struggling with reduced demand and an oversupply of carbon allowances. Industry insiders suggest that it is the U.S. and Australia's failure to commit to real reductions that has given the EU little incentive to tighten up emissions caps - an action that would increase the demand for offsets. With a soft and volatile carbon market and the absence of definitive climate change legislation, many investors in North America must rely on fiscal incentives, policy pronouncements, and provincial and state initiatives to guide investment.
The legislative void at the federal level has been filled to some extent by the more than twenty U.S. states and seven Canadian provinces that are either implementing or proposing climate change strategies locally, or are participating in or observing a regional trading system. In Canada, Alberta has implemented cap-and-trade, British Columbia and Quebec have implemented carbon taxes, and British Columbia, Manitoba, Ontario, and Quebec are committed to or are taking steps towards implementing cap-and-trade. As discussed in our December 2009 ETCC Update, British Columbia, Manitoba, Quebec, and Ontario are also parties to the Western Climate Initiative (WCI), a regional GHG cap-and-trade regime the first phase of which is to take effect in 2012. The WCI is expected to be four times bigger than the current RGGI, which is the only operational regional trading system in North America. Recent reports have indicated that members of the RGGI and WCI are in discussions regarding the feasibility of linking their regimes.
While regional initiatives may fill a gap, comprehensive federal legislation is still an important goal. In fact, two commonly identified structural impediments to CCS include the lack of a national strategy to control CO2 emissions and the need for coordinated efforts among federal and state or provincial governments. For one thing, the scope of implementation matters for pricing strategies like cap-and-trade or carbon taxes. In the case of cap-and-trade, especially, meaningful economy-wide compliance-based emissions caps and appropriate standards for what qualifies as abatement are required for an efficiently operating market. Whether the federal legislature adopts a carbon tax, cap-and-trade, cap-and-dividend, or a combination thereof will impact the pricing of carbon and will determine which kind of market-based incentives are available. Depending on the details of proposed federal legislation, its implementation may require the harmonization of existing rules across the provinces. Such harmonization may be resisted by provinces with local legislation, like Alberta, which may conflict with or may not be as stringent as proposed federal legislation. Nonetheless, the hope is that any harmonization associated with the introduction of federal legislation will provide administrative and legislative certainty to industry, which does not exist in today's regulatory patchwork.
Part II: Identified Regulatory Gaps
The other impediment to CCS that has been identified is the existence of significant regulatory gaps - CCS having consistently been identified as a technology where regulation is needed. The IEA, the Alberta Carbon Capture and Storage Development Council, and the U.S.-Canada Clean Energy Dialogue Action Plan, to name only a few, have identified the regulatory gap as an issue or offered guidance on how regulations should be designed. Additionally, in February 2010, President Obama released a Presidential Memorandum establishing an Interagency Task Force on Carbon Capture and Storage with the mandate of overcoming legal and other barriers to the widespread cost-effective deployment of CCS within 10 years. Despite this call for regulation, only a handful of jurisdictions are developing or have adopted CCS-specific regulations (notably Australia, several U.S. states and certain international treaties). In others, such as the EU and the U.S., guidelines of CCS regulation have been adopted or proposed, but no actual regulations have been implemented. It was expected that Alberta, which has five major CCS projects in the pipeline which are to be developed over the next several years and $2 billion committed to these projects, would release regulations on CCS last year. According to recent reports, however, the Government of Alberta will not confirm whether a bill is being prepared.
The bulk of regulatory work for low carbon technologies will have to occur at a local level. The federal government can set emissions pricing or targets, regulate those activities (including transportation) that occur on federal lands, inter-provincially or internationally, and establish minimum technical or performance standards. Provinces have the authority to regulate health and safety, sitting, permitting, property laws, and emissions legislation and will likely need to do the bulk of work relating to injection, monitoring, and verification. For the capture, transportation, and injection well components of CCS, existing regulations (such as regulations for acid gas and EOR) provide a natural framework on which regulation could be based. Storage, however, is a unique process in the sense that it is expected to be perpetual and every site is different. It has been recommended that specific regulations relating to property rights and liability at the storage site (both during injection and post-closure) be developed that attend to the long-term nature of the process and that are flexible enough to address site-specific characteristics, emerging technologies and new information.
Property rights should be formalized with respect to the storage site (i.e. subsurface and pore space property rights and liabilities) and the mechanisms by which the rights to CO2 are transferred throughout the supply chain. With respect to the ownership of CO2, it is necessary to determine whether the owner of the source of CO2 retains ownership, or whether it is transferred as a result of capture, transportation, and/or sequestration by the operator. With respect to rights to the storage site, it is necessary to contemplate the possible impacts of a CCS license on land title (especially that of First Nations), access rights, mineral rights and pore space ownership. Much of this will turn on whether CO2 becomes tied to the property into which it was injected or whether it retains a separate legal identity. For instance, where ownership of surface rights is divorced from the subsurface rights, third parties may be granted access rights to the lands or rights for mineral or petroleum licensing over the same property.
Potential liabilities at the storage site include harm to local environment or human health caused by leakage or common law liabilities, such as nuisance, negligence, or trespass. When operators are liable, they carry the risk of compensatory damages. Consequently, where regulation is uncertain, participants may be exposed to unlimited risk. This exposure is exacerbated by uncertainties such as the reliability of capture, the effectiveness of monitoring methodology and remediation techniques and physical site specific risks, including subsurface fractures, tectonics, well integrity and non-geologic operational risks. Regulators should assign clear responsibility for leaks or excursion outside of the area subject to a CCS license, expressly setting out liabilities and penalties and their scope (especially in respect of remediation) and requiring appropriate operational and corrective measures. One of the most important ways to manage long-term liabilities associated with CCS is through careful site selection. Stringent siting regulations can ensure that injection wells are not sited in areas that could potentially damage public and private property, such as population centres, areas in communication with subsurface resources, including water sources or minerals, or sensitive habitats. Additionally, regulators should review the design of the injection well, the quantities of CO2 that can be injected, and reservoir pressure limits.
One of the most the crucial issues for CCS projects is the assignment of long-term responsibility for sites, including post-closure. In many jurisdictions, the operator must post financial assurance and assume responsibility for monitoring and verification for a certain length of time, at which point the responsibility for sites will transfer to the public sector. It is therefore necessary for regulators to assign responsibility for long-term financing and management of the site, to determine when the public sector should assume responsibility for post-closure liabilities and remediation and to select the regulatory agency responsible for long-term stewardship of CCS sites.
CCS has gained momentum as a promising technology to facilitate GHG emissions reductions. Two commonly identified impediments to the widespread deployment of CCS include the cost of implementing CCS and a lack of regulation addressing unique CO2 storage issues. While CCS has enjoyed various financial incentives and political support, it is equally necessary to develop a comprehensive legislative framework to give potential investors regulatory certainty and stable market-based incentives. Comprehensive and broadly implemented legislation that puts a price on carbon would encourage investment in carbon abatement technologies and help offset the current cost disadvantage of CCS. The second major type of impediment - an unclear regulatory environment - creates a risk of unpredictable and un-measurable liability that impedes investment. Well-designed regulations would mitigate this risk by clearly identifying the ownership of CO2, the scope of associated potential liability and remediation obligations, and the long-term liability for CCS.
1 Unless otherwise noted, monetary amounts in this article are stated in U.S. dollars.