Controlling liability risks is vital for uptake of carbon capture
Complex regulatory, operational and financial challenges must be addressed before CCUS can be developed at scale – not least how to help investors manage long-term storage liability risks.
Policymakers are introducing high-impact incentive packages and liability-capping schemes in a bid to trigger widespread deployment of carbon capture, utilisation and storage (CCUS).
Despite the general recognition that CCUS can play a significant role in achieving Net Zero, various complex regulatory, operational and financial issues have so far acted as barriers to adoption.
First, the technology itself – which has been in development for decades – is often complex and expensive. This is particularly true for methods that require considerable investment in infrastructure, such as extracting carbon from the air or transporting it over long distances to be stored.
The challenges of creating robust CCUS supply chains
Then there are challenging market dynamics to tackle. For example, in jurisdictions where the entire CCUS value chain is not vertically integrated (such as the UK), providers of transport and storage services will need confidence that there are sufficient carbon emitters, (or some other way to mitigate under-utilisation) to make investments worthwhile.
The development of carbon-capture clusters, where storage opportunities are located close to industrial facilities, can drive the take-up of CCUS.
Conversely, emitters want to be certain that transport and storage infrastructure will be in place before they commit to the capital investments needed to retrofit their plants with carbon-capture technology.
The development of carbon-capture clusters, where there are concentrations of industry and nearby storage opportunities, can drive the take-up of CCUS by helping to mitigate these risks and keep costs lower.
Regulatory support required to drive development
Moreover, CCUS requires considerable regulatory support, namely land-use permissions, streamlined permitting procedures and risk-mitigation measures, especially in relation to long-term liabilities for the security of carbon storage facilities.
Gaining government approval for sequestration permits, rights of way for pipelines and land-use permissions is another potential hurdle.
In the U.S., only two states – North Dakota and Wyoming – currently have primacy for Class VI wells, meaning they have been authorised to permit CCUS projects. The Environmental Protection Agency is responsible for permission in other states.
However, governments are counterbalancing these challenges by offering incentives to encourage more private investment, typically in the form of tax breaks, subsidies and other guarantees.
In Australia, for example, CCUS projects that meet prescribed requirements can qualify for carbon credits. In the U.S., the newly passed Inflation Reduction Act provides significant financial support for CCUS projects, for example, by extending and increasing the value of the current Section 45Q tax credit to any project that begins construction in the next 10 years.
In the U.S., the newly passed Inflation Reduction Act provides significant financial support for CCUS projects.
In the UK, a suite of measures is being developed including grant funding for capital costs, a regulated income/asset regime for carbon transport and storage networks, and various other subsidy models for emitters.
Who is responsible for carbon stored in ground?
Perhaps one of the most significant issues to be addressed is that of long-term responsibility for carbon stored in the ground. If investors are potentially liable for any leaks – even many decades after a carbon well has been plugged, as is currently the case in places like California – it could deter investment.
Under the Australian federal regime, liability cannot pass to the state until a minimum of 15 years after injection activities have ceased, but in practice this could be longer.
In North Dakota, lawmakers are considering a proposal for liability to be transferred to the state 10 years after a well has been plugged, with the company responsible for the project obliged to pay into a sinking fund during the sequestration process.
Meanwhile, in the UK, operators of transport and storage facilities in the North Sea will be responsible for CO2 storage until the relevant authority has agreed their licence can be terminated, which could be decades after the site has closed.
Could insurance be the answer?
More broadly, the CCUS industry is working with insurers to develop solutions to liability issues. This could enable firms to indemnify themselves against long-term leakage risks or technical problems as projects are being set up. However, some level of government guarantees may be needed to encourage more insurers to enter the market, and/or to address gaps in the products available.
Despite recent efforts to offer practical incentives in a bid to overcome the barriers to widespread adoption of CCUS, the need for even more targeted support for investors and coherent regulatory frameworks remains critically important if the technology is to fulfil its potential.