Carbon Capture and Storage Policy and Regulation Development – a Case for Learning by Doing?

1. The Issue of Leakage Scottish Power Academic Alliance Carbon Capture and Storage Policy and Regulation Development – a Case for Learning by Doing? Authors: Mr. Zen Makuch, Ms. Slavina Z. Georgieva, Mr. Behdeen Oraee-Mirzamani Centre for Environmental Policy, Imperial College London Legal and regulatory context of CCS With a growing concern about the consequences of global climate change and an escalating need for the diversification and enhanced security of energy supply, the EU has taken on ambitious targets for the promotion of renewable energy and low-carbon technology. In this context, Carbon Capture and Storage (CCS) is seen as a cost-efficient technology that has the possibility to be deployed and up-scaled in EU Member States in the near future. The EU has already granted a total of €1 billion to six CCS projects across Europe, however, despite this investment, there still remain significant regulatory barriers in the way of full-scale deployment of CCS. As of yet, no comprehensive international regulatory regime for CCS exists and legislation is purveyed via a patchwork of international (OSPAR and London Dumping Conventions) and European laws – the CCS, Emissions Trading and Environmental Liability Directives (See Figure 1). The UK is due to transpose the main (CCS) Directive on the 25th of June 2011 and as such faces the challenge of incorporating existing legislation in a way that is appropriate to the financial and regulatory environment of the United Kingdom. In order to achieve that, policymakers ought to consider some of the issues that stem from an overly strict interpretation of the CCS Directive in particular, and other carbon capture-related legislation in general. Of particular note should be the fact that the EU CCS Directive’s underlying regulatory approach places a high technical and financial risk burden on industry participation in CCS, featuring potentially uncapped and uncertain long term liability regulatory burdens. Specifically, there exists an obvious case of a “double-counting” event - capture operators are legally required to buy emissions credits in the event of a leak, however, storage operators are also bound to cover liability of the same leakage event. Thus, under the current EU directives, there arises a double penalty for the CCS sector. European legislative framework The CCS Directive places a significant cost burden on operators of CO2 storage sites, in part because there is no cap on the time or amount of damages they are liable for should a leak occur. Additionally, under the ETS Directive capture sites are also penalised by being obligated to relinquish or pay for Emissions Trading Credits of the amount leaked. CCS projects can be argued to represent a public good/service, given that their primary objective is to deliver a public interest function aimed at satisfying climate change mitigation and related emissions reduction. The authors have queried the issue of whether state aids restrictions on financial incentives for CCS apply, given that state aids rules do not apply to the delivery of public interest legislation by Member States. We posit that, given the significant chance that CCS may be a cost vs. benefit neutral activity and the public interest thus served, state aids rules/competition law should not apply. Overcoming regulatory shortcomings Having in mind the financial and regulatory barriers that face CCS development as well as the examples provided from other states and industries, we can draw conclusions as to the way that the UK can use flexible and co-operative policy models to incentivise CCS development. What materializes, first and foremost, is the need for some form of risk-sharing agreement between government and the CCS industry. In order for carbon capture technology to have a future in the UK there must be some form of ceiling to liability, be it in terms of time or amount of damages up to which a storage site operator is responsible for. That could take the form of a public/private liability fund which would combine government oversight with and private finance. Such a fund would bolster confidence in regards to the risk profiles of CCS activities and spark the interest of private insurance firms thus laying the foundation for an insurance market for CCS. Even if no decision is taken at this moment regarding long-term liability for storage site operators for full-scale CCS operations, then at least, a government/public indemnification scheme ought to be set up during the demonstration phase in order to ensure that there is investment from private sector stakeholders and that CCS technology is not stunted during the early stages of its development. Additionally, during the transposition of the CCS Directive, policymakers ought to consider some form of compensatory mechanism that exempts CCS operators (at least in the demonstration phase) from the duty to purchase allowances under the Emissions Trading Directive in relation to leakage. This obligation serves little purpose in terms of remediation policy as the Environmental Liability Directive and the CCS Directive provide competent authorities with ample means of punishing and remediating leak-based damage including climate-related damage. Figure 1 Conclusions CCS technology is developing in a highly competitive energy sector under an overly guarded regulation framework which is restrictive to CCS competition. In order to remedy some of these policy shortcomings, the UK government is advised to work with industry in providing clear regulatory solutions for a predictable investment framework for CCS when transposing the EU CCS Directive. A flexible regulatory approach could allow for the development of a regulatory framework for CCS in a manner that is integrated with the process of technological evolution and competitive leadership. Furthermore, it would take advantage of pre-existing good relationships between policymakers and industry which could lead to enhanced precision of monitoring measures and allow for a more inclusive approach to risk management measures. Lessons from other jurisdictions and industries There are a lot of lessons to be gleaned from states such as Norway, the USA, Canada and Australia which are pioneering innovative and flexible funding mechanisms and liability provisions for CCS projects. In the US for example, select states such as Texas and Illinois have waived long-term liabilities for storage site operators; this is in addition to federal-level initiatives in forming a comprehensive permitting system for CO2 storage sites. In Canada, the government is expected to take on liability for the captured CO2 from the Weyburn CCS project (now operating for 10 years). Similarly, in Australia, a time limit is set on litigation against CCS storage site operators (20 years following project closure) and the federal government has assumed long-term liability for leakage. Closer to the EU, in Norway the Sleipner project has benefited significantly from a carbon emission tax of €40 t/CO2. Furthermore, there is experience to be benefited from not only from other jurisdictions, but from global industries such as nuclear, oil and gas and landfill, which hold important similarities to CCS yet often differ in a significant point – there is an established risk-management policy for all these industries often including some form of ceiling for liability for operators and a government/private insurance mechanism that covers losses beyond a certain threshold. See Table 1 below. Table 1 Future areas of research In order to achieve successful co-operative and risk-sharing policy models for CCS projects, further inroads must be made into understanding the technical aspects of carbon capture and storage technology. Policymakers in particular would greatly benefit from continuing research into the precise carbon and energy balances involved in power plants with added CCS technology, as well as a greater understanding of the risk profile that such installations would entail. Therefore, some of the future avenues of this research would be to employ methodologies , such as Life Cycle Analysis and Risk Assessment in the evaluation of suitable regulatory and legal frameworks for CCS demonstration and roll-out.