Ramping up emission cuts by sharing risk and liability - Ingvild OmbudstvedtAugust 19, 2020
Ramping up emission cuts by sharing risk and liability - by Ingvild Ombudstvedt
The United Nations refers to climate change as “the defining issue of our time” and claims the impacts of climate change are “global in scope and unprecedented in scale”.1 In 2018, the Intergovernmental Panel on Climate Change (“IPCC”) published a special report on the impacts of global warming of 1,5C above pre-industrial levels, concluding that a significant reduction of greenhouse gas emissions,2 including carbon dioxide (“CO2”), is needed to abate climate change and global warming and further that CO2 capture and storage (“CCS”) is one of the many useful techniques to reduce such emissions.3 CCS is a set of technologies separating CO2 from the industrial exhaust gas, before the CO2 is transported away, injected and stored in geological formations, either onshore or offshore.4
As of December 2019, there were 51 CCS facilities around the world, 19 of which are in operation, while four were under construction and the remaining 28 in various stages of development.5 Several of these projects are in the United States although most of these are using the CO2 for enhanced oil recovery (“CO2-EOR”).6 The injected CO2 mixes with the petroleum, making it more mobile to extract, while increasing the pressure in the reservoir, resulting in more petroleum being pushed through the production wells. Portions of the CO2 will be trapped in the reservoir as part of the process and portions (while mixed with the petroleum) will follow the well stream and be “re-produced” with the petroleum. Often, the operator will separate and reinject the re-produced CO2 , resulting in a closed loop which ultimately leads to most of the CO2 used in the process being permanently stored.7 Unfortunately, many CO2-EOR projects utilizes natural CO2, meaning the CO2 is produced or extracted from underground CO2 reservoirs.8 For the CO2-EOR operations to have a positive environmental footprint, the CO2 needs to be replaced with anthropogenic CO2.9
To encourage deployment of more projects utilizing anthropogenic CO2, many countries have implemented financial and other incentives for CO2 storage. In Europe, the 27 member countries to the European Union (“the EU”),10 and the three countries tied to the EU through the European Economic Area Agreement,11 have included CCS and CO2-EOR in the EU Emission Trading Scheme (“EU ETS”).12 The EU ETS provides a cap and trade system, in which industries are subjected to a cap on emissions, 13 and if emitting below the cap, the excess allowances may be traded. 1415 If an emitter subject to the EU ETS regime is able to demonstrate storage pursuant to the EU CCS Directive,16 the amount stored will be counted as not emitted and the emitter may trade the allowances instead of surrendering them.171819 In the US, the tax credit regime 45Q provides a similar financial incentive.2021 Through 45Q, stakeholders storing CO2 as part of CCS operations may be eligible for a tax credit of up to 50 USD per ton,22 while similarly up to 35 USD per ton if stored through CO2-EOR operations.2324 In other words, the US has chosen a carrot, while the EU a stick, to incentivize and ramp up deployment.
In this blog post, I will look into why, despite existing financial incentives, the global increase in number of projects is too slow to meet the emission reduction targets set by IPCC.25. In particular, I will look into how an unresolved US issue related to long-term liability for the CO2 being stored affect risk sharing and predictability for a project, and thus impact the stakeholders’ ability to deploy more projects. Further, I will touch on whether addressing the lack of predictability through the regulatory framework is desirable from an environmental perspective. Throughout the analysis, observations on how these issues have been solved in the European Union are included for comparison. I have found that implementation of a model similar to the EU model for risk and liability, in which long-term liability is transferred from the operator to the national authorities after a pre-defined period and after offering up a financial contribution to cover future monitoring cost for a pre-defined period after transfer, may be beneficial to both stakeholders and climate change.
Financial incentives not enough?
Onshore in the United States,26 the two main legal instruments for geological storage of CO2 are the Clean Air Act,27 which governs the mandatory Greenhouse Gas Reporting Rules (“GHGRP”)28, and the Safe Drinking Water Act (“USDWA”),29 which governs the Underground Injection Control (“UIC”) Program.30 The purpose of the UIC Program is to protect the drinking water31 and prior to engaging in CO2 storage, a number of permits32 are needed, including a storage permit pursuant to the UIC Program.33 Further, as the property in which the activities take place for most part in the United States is privately owned, the operator needs a land-lease agreement with the owner of the property and underground pore space.34
To access the incentives in the regimes mentioned above, demonstration of safe, long-term storage is key, and quantification and verification of the amount of CO2 stored are crucial. To be able to demonstrate such safe, long-term storage, a number of activities are required, prior to commencing a project, during operation, and when plugging and abandoning the infrastructure. Prior to potentially receiving a storage permit, the operator needs to characterize the selected geological formation to make sure it is capable of retaining the CO2.35 Once granted a storage permit, the operator is subject to requirements to monitor the operations and report to the authorities,36 as well as initiate emergency and remedial response in case of movement of either formation or injection fluids with the potential to endanger underground sources of drinking water.37 In general, the storage permit defines both monitoring and reporting requirements, and required emergency response, on the basis of an operational plan proposed by the operator.38 The Environmental Protection Agency (“EPA”) approves the operational plans for monitoring, reporting and verification pursuant to the GHGRP.39
Often, regulatory frameworks related to CO2 storage projects are technology neutral and the operational requirements may be determined on a case by case basis, depending on whether the project is onshore or offshore, related to aCO2-EOR project or a regular CCS project, the geology of the pre-selected area, whether it is a depleted oil reservoir or a so-called “greenfield”,40 and many other factors. Thus, to demonstrate safe, long term storage and access the financial incentive stipulated either through 45Q or the EU ETS, the project must have the above-mentioned approved and permitted operational plan, based on operational criteria stipulated by the operator. The criteria of this plan must be satisfied during the operational phase. Sounds simple. Then, why is the number of projects so low? Is the financial incentive not enough?
Some Norwegian scientists have estimated that capturing, transporting and storing CO2 may cost an average of 93 USD per ton, depending on the type of technology and infrastructure being used.41 Meanwhile, the EPA has estimated a cost of 51.30 USD conducting the same activities.42 One possible explanation for this significant difference in estimated costs may be that EPA provided these numbers in relation to regulations applicable onshore and in shallow state waters, while the Norwegian scientists typically work on or research projects like Sleipner and Snøhvit, which both are operated offshore of Norway and are currently the only operational CCS projects in Europe.43
Offshore projects are in general more expensive than onshore projects, due to the required infrastructure. The fact that Sleipner and Snøhvit have succeeded despite high operational costs, depends on additional factors like a progressive and unique Norwegian CO2 tax imposed on offshore petroleum industry since 1991. The tax applies in addition the allowances pursuant to the EU ETS and results in a penalty of 700-800 NOK44 for emitting CO2.45 The concentration of CO2 in the natural gas produced at Sleipner and Snøhvit is too high to meet the specification of the European natural gas market, implying the need to strip CO2 from the natural gas produced before it may be sold.46 The alternative to storing the CO2 in a geological formation would be to emit it, exposing the operator to the CO2 tax as well as the allowances pursuant to EU ETS. There is still a gap between the 700-800 NOK penalty and the estimated 93 USD per ton stored. However, it needs to be emphasized that the estimated costs of 93 USD are not directly based on these projects and that for Sleipner and Snøhvit, the cost might be less.47
However, for Europe in general, the gap of about 64 USD between the financial incentive provided for in the EU ETS regime and the cost per ton captured, transported and stored seems to be a major part of the explanation for why there are so few projects. For the United States, on the other hand, the gap between the financial incentive and cost of capturing, transporting and storing the CO2 is minimal with approximately 1.30 USD. If not intimidated by the costs, might there be other aspects scaring stakeholders off, resulting in a modest number of operational projects?
There are several factors creating uncertainty and unpredictable conditions for the industry interested in and capable of operating CCS projects, some of which have been identified by industry, researchers and policymakers alike. One of these is long-term liability risks.4849
Liability may be defined as “a legal duty or obligation”.50 In relation to CCS, there are two types of liability identified as relevant: tortious liability and contractual liability. Tortious liability relates first and foremost to duties under a law or permit, while contractual liability relates to performance of one’s own promise.51 For this blog post, only tortious liability for CCS, and not CO2-EOR, will be considered, and particularly whether long-term liability for an injection site inhibits new projects, comparing the US and EU approaches. In this context, long-term liability refers to liability after the injection ceases.
When the operator is no longer injecting CO2 for storage and is planning to shut down operations, the UIC Program imposes on the operator an obligation to continue monitoring as specified in an post-injection site care (“PISC”) and closure plan for a default minimum period of 50 years, unless a different time period is approved by the ”the Regional Administrator, the State director or the Tribal director as the context requires, […]” (“the Director”).52 In this period, the operator is responsible for emergency and remedial response in case of irregularities or leakages.53 At the end of PISC, the operator must close the site. A part of the closure obligations is the requirement to plug the monitoring wells.54 The EPA has issued guidance on well plugging, PISC, and site closure to help operators establish sufficient criteria in their plans to meet EPA requirements and in order to transition through the CCS project’s final stages.55
In order to make sure the operator is able to cover its obligations throughout the life of the project, including PISC, there is a requirement to keep financial instruments sufficient to cover the cost of corrective action in case of e.g. leakage,56 injection well plugging,57 PISC,58 and emergency response.59 Such financial instruments must be maintained until the Director has approved the completion of the obligations pursuant to the PISC and closure plan, as well as the site closure.60
The model for long-term liability chosen in the United States, is similar to the one chosen in the European Union. In the European Union, after injection ceases and the storage site is closed, there is a post closure monitoring period61 in which the operator remains responsible for monitoring, reporting, surrendering of allowances, and corrective measures in case of significant irregularities or leakage.62 The obligations in this phase are stipulated by the post-closure plan, which is part of the permit and built around some technology neutral requirements stipulated in the CCS Directive itself.63 This post-closure monitoring period must be at least 20 years, unless demonstration of safe, long-term64 storage is satisfied earlier.65
Beyond the above-mentioned permit criteria for e.g. characterization, monitoring, and reporting etc., how to demonstrate such safe, long-term storage is not provided for in the CCS Directive (nor the U.S framework) and it is up to national authorities to implement criteria for this. The issue may be solved in the storage permit, through providing criteria on a case by case basis. To increase predictability, a set of international technical standards negotiated and published under the International Organization of Standardization (“ISO”) might be used to provide demonstration criteria, either directly in the storage permit or in the operational plan approved as part of the permit.66
In Europe, there is further an obligation to maintain a financial security throughout the project lifetime, which includes the post-closure period.67 Thus, both the United States and the European Union have some significant cost drivers after operations have ended, implying the total financial surplus of the project is much harder to estimate and accept for the operator
The European framework after the post-closure period significantly differs from what follows PISC and site closure in the United States. In the United States, the storage permit and the land-lease agreement with the private land owner are terminated, and the operator walks away. The regulatory framework is silent on what happens after the termination in case of e.g. a leakage at the site, and the operator may be subject to contractual liability to the private land owner to stop further leakages or cover the costs of such activities. If not, the operator may still be liable in accordance with principles of polluter pays and the conditions of the permit.68 This obligation may not even have a statute of limitation, implying major risk and uncertainty for the operator.
In the European Union, the operator is eligible to transfer the liability of the storage site to the national authorities at the end of the post-closure monitoring period, upon making a financial contribution to the authorities. The financial contribution must cover, at minimum, expected monitoring costs for a time period of 30 years.69 The CCS Directive does not regulate what means are recognized as a financial contribution. However, to aid the Member States implementing their own criteria for this, the European Commission has provided some non-binding guidelines.70 Based on these guidelines, Norway has developed specific criteria for this financial contribution, being money set aside for the purpose of covering said costs for the 30 years’ period.71
Ultimately, the transfer of liability provides predictability for the operator, making it easier to calculate risks and costs of the project, and thus make investment decisions and deploy projects. Subsequently, this might result in more projects being deployed, which will contribute to EU and national emission reduction targets and thus explain why the authorities are willing to resume the liability for the storage sites post-closure.72
In the United States, the regulatory uncertainty relating to long-term liability has previously been assessed, some options have been considered and with no federal regulation of this issue, the states of Wyoming, Montana and Kansas have moved forward and imposed their own requirements.73 An example of a possible solution is creation of a stewardship fund, in which the operator contributes financially throughout the lifetime of the project, leaving a sum of funding in place for covering potential future leakage after closure of the project.7475 Transfer of liability, somewhat similar to the European model has also been suggested,76 supported by for example Montana.77 Use of public funds, which would be the case if transferring the liability back to either the states or the US federal government, has been met with some criticism and skepticism78, as it may reduce some of the operator’s incentive to prevent future leakages and both the states of Wyoming and Kansas have rejected this model.79 A stewardship fund seems to have gained the most support.80
Considering CCS and other climate change mitigating technologies are desired by governments around the world, requiring governments to take part of the risk and costs is not unreasonable. Further, to be able to compete on a global market, US industrial stakeholders face major challenges if the risk, liability, and costs in the United States are greater than what industry encounter in other countries. Thus, as in Europe, transferring the liability from the operator to the national authorities after providing financial security for a completed seems more appropriate. Despite such a model implies some transfer of funds from the operator, it may be assumed the amount of such funds would be lower than stipulated for a stewardship fund covering the operator’s future liabilities. This could support fair competition for US industry, while supporting climate change abatement through CCS deployment. Also, the individual states should not be required to carry the financial burdens of long-term liability alone, given the emission reduction following CCS projects will benefit the Unites States as a whole.
Consequently, for the United States to ramp up deployment of more CCS projects and thus contribute to the global targets on emission reductions, the federal government should consider implementing regulations accepting transfer of liability from the operator to the federal government at a pre-defined point in time after site closure, and pursuant to certain criteria and upon making a financial contribution available, to share the long-term risks and liability with the operators.
7 ISO 27916:2019 Carbon Dioxide capture, transportation and geological storage – carbon dioxide storage using enhanced oil recovery (CO2-EOR), Annex A, p. 18
8 Underground, geologic formations containing natural CO2
12 ETS Directive Article 2(1), c.f. Annexes I and II. Full reference of the directive is Directive 2007/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (Text with EEA relevance)
13 ETS Directive Article 9, c.f. Article 9a
14 ETS Directive Article 10
16 Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 200/60/EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, 2008/1/EC and Regulation (EC) No 1310/2006 (Text with EEA relevance)
17 ETS Directive Article 12(3a)
19 The EU CO2 price per 10 April 2020 is 25,15 EUR per ton (28,66 USD at the exchange rate 12 March 2020, according to this website: https://www.dnb.no/bedrift/markets/valuta-renter/kalkulator/valutakalkulator.html). https://markets.businessinsider.com/commodities/co2-european-emission-allowances
20 “Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions Act” (“the FUTURE Act”), c.f. Section 45Q of the Internal Revenue Code (“IRC”) of 1986, (26 U.S.C, Subpart D, Section, 45Q)
21 Clean Air Task Force, The Role of 45Q Carbon Capture Incentives in Reducing Carbon Dioxide Emissions, Fact Sheet and Analysis. Available at: https://www.catf.us/wp-content/uploads/2017/12/CATF_FactSheet_45QCarbonCaptureIncentives.pdf
22 26 USC 45Q §(b)(1)(A)(i)(I)
23 26 USC 45Q §(b)(1)(A)(i)(II)
24 Letter from the Secretary of Energy, Rick Perry: https://www.energy.gov/sites/prod/files/2019/02/f59/Letter%20from%20Secretary%20Perry%20-%2045Q.pdf
25 World Coal Association, Carbon Capture and Storage – the Vital Role of CCS in an Effective COP21 Agreement, p. 2. 2015
26 Currently, there is no comprehensive regulatory framework for CO2 storage offshore in the US.
27 The Clean Air Act of 1963 (42 U.S.C. § 7401)
28 Relevant for CCS are subparts RR and UU
30 40 CFR §146
31 Smyth RC, Hovorka SD. 2017. Best management practices for offshore transportation and sub-seabed geologic storage of carbon dioxide. Sterling (VA): US Department of the Interior, Bureau of Ocean Energy Management. OCS Study. Page 16. The Environmental Protection Agency (“EPA”) has the regulatory responsibility for CCS and EOR through the Office of Air and Radiation and the Office of Water.
32 Area permit (40 CFR § 144.33), emergency permit (40 CFR § 144.34), and authorization pursuant to the UIC program (e.g. 40 CFR § 144.22),
33 See 40 CFR § 144.22 and ,
35 See e.g. 40 CFR Subpart H § 146.82 and §146.83, and Directive 20019/31/EC Article 4
36 See e.g. 40 CFR Subpart H § 146.90 and § 146.91, and Directive 2009/31/EC Articles 13 and 14
37 See e.g. 40 CFR Subpart H § 146.94, c.f. Subpart A § 146.1. In the EU, Directive 2009/31/EC Article 16 requires corrective measures in case of leakages or significant irregularities
38 See e.g. 40 CFR Subpart H § 146.82, § 146.84 and § 146.94, and Directive 2009/31/EC Article 9
39 40 CFR Part 98, Subpart RR
40 For CCS, a greenfield refers to a geological formation in which no petroleum production has previously been conducted.
42 Federal Register/Vol. 75, No. 237/Friday, December 10, 2010/Rules and Regulations. 40 CFR Parts 124, 144, 145, 146 and 147. [EPA-HQ-Ow-2008-0390 FRL-9232-7]. RIN 2040-AE98. Federal Requirements Under the Underground Injection Control (UIC) Program for Carbon Dioxide (CO2”) Geologic Sequestration (GS) Wells. Table IV-4. Example Total Annualized CCS Project Costs.
44 As per 9 May 2020, 800 NOK was worth approximately 79 USD.
47 The actual costs for capturing and storing CO2 at Sleipner and Snøhvit have not been available for this analysis.
48 See e.g. Davies, Lincoln et. al. Understanding barriers to commercial scale carbon capture and sequestration in the United States: An empirical assessment. Research Gate. 2013. Page 1 https://www.researchgate.net/publication/257126678_Understanding_barriers_to_commercial-scale_carbon_capture_and_sequestration_in_the_United_States_An_empirical_assessment
49 See e.g Smyth RC. 2017. Page 81
50 See Oxford Dictionary of Law (7th edition 2009) (s.v. “liability”)
51 De Figueiredo, Mark Anthony. The Liability of Carbon Dioxide Storage. 2007. Massachusetts Institute of Technology. Page 51
52 40 CFR Subpart HH § 146.81, c.f. Subpart A §146.3. The Administrator is defined as “the Administration of the [EPA], or an authorized representative”, Subpart A § 146.3, implying the Regional Administrator would be an EPA representative or authorized representative too.
53 40 CFR Subpart H § 146.94
54 40 CFR Subpart H § 146.93
55 EPA. Geologic Sequestration of Carbon Dioxide – Underground Injection Control (UIC) Program Class VI Well Plugging, Post-Injection Site Care, and Site Closure Guidance. Office of Water (4606M) EPA 816-R-16-006. 2016. Page ii
56 40 CFR Subpart H § 146.85(a)(2)(i)
57 40 CFR Subpart H § 146.85(a)(2)(ii)
58 40 CFR Subpart H § 146.85(a)(2)(iii)
59 40 CFR Subpart H § 146.85(a)(2)(iv)
60 40 CFR Subpart H § 146.85
61 In the EU/EEA, the plugging of the wells is required as part of the site closure prior to commencement of the post-closure monitoring period, see Directive 2009/31/EC 17(2)
62 Directive 2009/31/EC Article 18 c.f. 17
63 Directive 2009/31/EC Article 17, c.f. Article 9 and Annex II
64 The Directive uses “completely and permanent”. However, no geologist will sign off on anything being permanent, given the constant and slow movement of the earth’s plates and geologic formations. Therefore, one often talk of “safe, long-term” storage. IPCCS has done analysis of what period is needed to meet the criteria of permanence (See IPPC special report e.g. pages 66-67 and 373-378, available at https://www.ipcc.ch/site/assets/uploads/2018/03/srccs_chapter9-1.pdf) and there is really no fixed definition of permanence. There has been an assumption, however, that storage over 100 years may be considered permanent. Herzog, Howard et. al. An Issue of Permancence: Assessing the Effectiveness of Temporary Carbon Storage. Kluwer Academic Publishers. 2003. PP. 293-310, on p. 295. Available at https://sequestration.mit.edu/pdf/climatic_change.pdf
65 Directive 2009/31/EC Article 18
67 Directive 2009/31/EC Article 19
68 Ingelson, Allan et. al. Long-Term Liability for Carbon Capture and Storage in Depleted North American Oil and Gas Reservoirs – a Comparative analysis
69 Directive 2009/31/EC Article 18, c.f. 20
71 Norwegian Petroleum Regulations § 30 m, c.f. Norwegian CO2 Storage Regulations § §5-10, c.f., Detailed Regulations for Financial Security for CO2 Storage. Available (in Norwegian only) at: https://www.miljodirektoratet.no/globalassets/publikasjoner/m521/m521.pdf
73 Ingelson, Allan et. al. Long-Term Liability for Carbon Capture and Storage in Depleted North American Oil and Gas Reservoirs – a Comparative analysis
74 Report of the Interagency Task Force on Carbon Capture and Storage. 2010. Department of Energy and Environmental Protection Agency. Page 127
75 Al-Fattah, Saud M. et al. Carbon Capture and Storage: Technologies, Policies, Economics, and Implementation Strategies. KAPSARC. 2012. p. 270
76 Report of the Interagency Task Force on Carbon Capture and Storage. 2010. Department of Energy and Environmental Protection Agency. Page 127
77 Ingelson, Allan et. al. Long-Term Liability for Carbon Capture and Storage in Depleted North American Oil and Gas Reservoirs – a Comparative analysis
78Smyth, RC. 2017. Page 81
79 Ingelson, Allan et. al. Long-Term Liability for Carbon Capture and Storage in Depleted North American Oil and Gas Reservoirs – a Comparative analysis
80 Smyth, RC. 2017. Page 81