Exploring new policy tools to deliver geologic carbon storage

Although carbon capture and storage (CCS) is recognised by IPCC, IEA and other scenarios as playing a vital role in the pathway to net zero, market-based policy approaches have to date struggled to incentivize parties across the full CCS chain, resulting in global deployment rates that fall woefully short of the kinds of levels envisaged in the scenarios.

Two recently published papers, led by Carbon Counts and presented at the recent GHGT16 conference in Lyon, consider previous efforts to develop crediting and certificate systems to support geological CO2 storage. They also explore an emerging set of proposals aimed at scaling up and addressing some of the past challenges faced by the technology.

Carbon Storage Units and Carbon Storage Obligations

Policies aimed at incentivizing the capture and geological storage of CO2 have so far tended to reward the resultant avoided CO2 emissions (or CO2 removals) achieved by operators at the point of capture. There is an implicit assumption that the storage sites and connecting infrastructure will be developed from the capture incentive (e.g. avoiding the costs of emitting under a ETS or carbon tax). Other mechanisms tend to treat the entire CCS chain as a single entity to be supplied with emission reduction or removal credits.

A patchwork of different goals, interests and incentives can create cross-chain risks, which impact negatively upon investment decisions. Geological storage site operators are reliant on payments for the offtake of CO2 from capture operators, whereas the decisions of capture operators are governed by carbon prices, fuel prices and various other factors. As a result, there has been only limited financial incentives to develop the networks and storage sites needed to deliver a multiple gigaton-per year CCS industry.

Proposals to address such risks have been made, including carbon contracts for differences or the use of carbon storage obligations on emitters or the producers/suppliers of fossil carbon (i.e. oil and gas companies).

One model attracting growing attention sees storage site operators being credited with carbon storage units (CSUs) that can be sold to and counted by fossil fuel producers against specific targets that are separate from those of CO2 capture operators – that is, for the purpose of offsetting the carbon embodied in the fossil fuels they produce. Parallel incentives can therefore be established that encourage the relevant actors to implement permanent CO2 storage alongside the carbon price incentives (e.g. from ETSs and carbon taxes) that encourage actors to capture and supply CO2.

The paper outlines the basis of such a system and the various approaches to its introduction, and is available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4285264

CCS under Article 6 of the Paris Agreement

The Paris Agreement introduced two key elements that offer the potential for developing a new model to help scale up geological CO2 storage. Article 6 lays the foundation for international carbon markets by allowing Parties to cooperate to achieve their climate targets, including through the Article 6.4. mechanism which will operate similar to the CDM under Kyoto. The Paris Agreement also embeds the concept of ‘net zero’ by calling for a balance between anthropogenic emissions of GHGs and removals of GHGs by sinks to be reached in the latter part of this century. This is important, because it means that Parties tacitly recognise that delivering on the goals of the Agreement relies not only on deep cuts in emissions, but also on the offsetting of residual, hard-to-abate, emission sources through ramping up the removal of carbon from the active climate system and storing it in enhanced terrestrial sinks and reservoirs.

Article 6 potentially offers a variety of routes to incentivize CCS, including through the trading of units based on the avoided emissions resulting from technological capture of CO2 as well also other more novel means of cooperation that focus more specifically on the storage component - including through the use of carbon storage obligations on fossil fuel producing companies and/or countries, with trading of CSUs. The focus on such a “CCS club” offers some potential benefits in terms of gaining international consensus, as seen in the use of similar agreements reached between relatively limited numbers of parties.

Our paper describes three potential models for cooperation under Article 6 and provides a comparative evaluation against the key criteria of effectiveness, environmental integrity, commercial and financial viability, progression and policy performance. The analysis indicates that models based on incrementally increasing storage quotas applied to groups of companies or countries with an interest in CCS, with trading of CSUs, could offer an important alternative but complementary approach to establish markets incentivizing storage activities alongside and complementary to more traditional carbon pricing policies.

Read the full paper at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4282891