June 16, 2022

Environmental, Natural Resources, & Energy Law Blog

The CCS Lifeboat: Charting a New Course for Industrial Carbon Capture - Ryan Sweeney

I.                    Introduction

It’s late on the night of April 14th, 1912, and Frederick Fleet and Reginald Lee are the crew members on duty in the crow’s nest of the RMS Titanic.[1] They spot something directly in the ship’s path. Fleet rings the lookout bell three times and calls the ship’s bridge: “Iceberg right ahead!” The bridge officers give the order to turn hard to port, but there’s a delay; the ship’s steam-powered steering mechanism takes up to 30 seconds to turn the tiller. We all know the rest.

What was it like to be those sailors, seeing imminent danger ahead and watching their ship turn too late? Did they believe the publicity claiming their ship was unsinkable? Or were they wondering about the lifeboats?

This post will discuss the basic background and concepts of carbon capture and storage (“CCS”), the discord of the United States’ present industrial CCS course, and some possible alternatives. This post will then lay down three basic planks for the carbon capture lifeboat, recommendations for practical legislative and regulatory steps the federal government can take to steer away from the iceberg.

 

II.                  Primer on Carbon Capture & Storage

According to the Intergovernmental Panel on Climate Change (“IPCC”), humanity needs to keep planetary warming under 2.0 degrees Celsius to avoid the most cataclysmic effects of climate change.[2] To achieve this goal, the IPCC calculates we must reach net-zero emissions of carbon dioxide by approximately 2050.[3] This will require cutting approximately 800 gigatons (“Gt”)[4] of cumulative carbon dioxide (“CO2”) emissions between now and 2050, through some combination of (A) limiting future emissions and (B) removing existing carbon from the atmosphere.[5]

Industrial CCS techniques have potential to do both—to a degree. Industrial CCS refers to mechanical and chemical methods for capturing and storing carbon molecules at fixed industrial sites, either limiting future emissions at facilities[6] through “point-source capture” or removing existing carbon from the atmosphere through “direct air capture.”[7] Of the 800 Gt total mitigation target, the International Energy Agency estimates that industrial CCS should be responsible for sequestering a cumulative 120 to 160 Gt of CO2 by 2050, approximately 15 to 20 percent of the total.[8] To meet this target, by 2050 industrial CCS should be removing a net of 8 to 10 Gt of CO2 per year.[9] The current global industrial CCS capacity for removing carbon from the atmosphere is approximately 36.6 megatons (“Mt”) per year,[10] less than 0.5 percent of the 2050 annual goal.[11]

Industrial CCS includes two models for storing carbon. Captured CO2 can be used for commercial purposes (the “commercialization model”) or disposed as a waste product (the “public service model”).[12] Under the commercialization model,[13] carbon is treated as a commodity and largely stored in a process known as “enhanced oil recovery” or “EOR.”[14] In EOR, CO2 is injected underground to repressurize oil fields and extract petroleum that is otherwise trapped in an unproductive well.[15] Under the public service model, CO2 is treated as a waste product and injected underground for permanent storage, also known as “geological sequestration” (“GS”).[16]

 

III.                The Delusion & Dissonance of the Existing U.S. Carbon Capture Regime

The U.S. government has long recognized the potential for industrial CCS to assist in achieving our climate goals.[17] However, the government’s legal regime for this important pillar in the fight against climate change, which to date has largely focused on financial incentives, appears to be both delusional and self-defeating.

a.      Financial Incentives

The U.S. has chosen an industrial CCS strategy that is all carrot, no stick. Although individual U.S. states and regional coalitions have instituted carbon pricing systems like a carbon tax or cap-and-trade,[18] the federal government has resisted calls for these measures for decades.[19] Instead, the U.S. has attempted to incentivize industrial CCS through subsidies, specifically tax credits.

In 2008, Congress created the 45Q tax credits. Section 45Q of the Internal Revenue Code authorizes a tax credit of $20 per metric ton of GS carbon and $10 per metric ton of EOR carbon.[20] Specifically, this means any entity that injects CO2 underground without using it to extract oil is eligible to claim $20 per metric ton of CO2 injected, while any entity that injects CO2 underground for the purpose of extracting oil is eligible to claim $10 per metric ton of CO2 injected. Congress has repeatedly extended these incentives, increasing the tax credits to $50 per ton of GS CO2 and $35 per ton of EOR CO2. Congress also expanded eligibility for the credits.[21] Unfortunately, these incentives have thus far been unsuccessful at scaling industrial CCS or making a meaningful dent in the net-zero mitigation goal, especially when carbon emissions for the entire lifecycle of a project are considered.[22] To hit its expected target of 120 to 160 Gt of cumulative carbon sequestration by 2050, 15 to 20 percent of the total 800 Gt mitigation target, global industrial CCS will need to be two to four times larger than the current global oil industry.[23] At recent rates of growth, global industrial CCS is projected to permanently store only 4.5 to 8.5 percent of the total mitigation target by 2050, well below the necessary 15 to 20 percent.[24]

b.      Environmental Regulations

The federal government’s financial incentives appear to be at odds with its environmental regulations for injection wells. Pursuant to the Safe Drinking Water Act, the Environmental Protection Agency (“EPA”) is charged with protecting underground sources of drinking water (“USDW”) from pollution caused by drilling activities, which it does through the Underground Injection Control (“UIC”) program.[25] There are six classes of wells under the UIC program; EOR wells require a Class II permit, while GS wells require a Class VI permit.[26] The requirements for a Class VI permit are significantly more onerous than the requirements for a Class II permit. Specifically, a Class VI permit has additional planning, monitoring, reporting, and financial assurance requirements throughout the life of the project and for a default period of 50 years after project closure.[27] For comparison, hazardous waste facilities are only required to provide post-project monitoring and coverage for a period of 30 years.[28] The rationale for the additional requirements is that Class VI GS wells are expected to inject larger volumes of CO2 and have higher pressure and corresponding risk of USDW contamination than Class II wells, where the added pressure is relieved by extracting trapped petroleum.[29]

The additional burdens necessary to obtain Class VI permits have prevented completion of GS projects. The Wellington project, a demonstration facility in Kansas sponsored by the Department of Energy as a “test run” for the Class VI permitting process, provides a good example. The project sought a Class VI GS permit for permanent storage of 26,000 tons of CO2.[30] The project ran into roadblocks with the requirements for project planning, monitoring, reporting, and financial assurance, which forced administrators to convert the project to a Class II well.[31] The EPA’s financial assurance regulations require project administrators to demonstrate the financial ability to complete all project tasks.[32] For the Wellington project, the emergency remedial plan was by far the largest expense, estimated by the EPA to cost between $3.2 million and $62.8 million.[33] Although the EPA allows financial assurance to be proven via numerous methods, these methods are either only available to larger corporations (e.g., self-demonstration tests) or not offered in the marketplace.[34] Third-party insurers do not provide coverage to this market due to the significant uncertainty of the risk.[35] Furthermore, even if insurers did provide coverage, the premium costs would far outweigh the benefits. As the Wellington administrators noted, “The cost of using a bond, insurance, or trust fund can be expensive and approach 3% of the face value annually. For coverage of $70M, the cost can approach $2M annually.”[36] Two million dollars per year for a possible 12-year period of facility operation, followed by a 50-year post-closure period of coverage, would be a total of $124 million paid out over the entire life of the project. All of that to obtain a potential $1.3 million of tax credits.

Since creation of the Class VI permit in 2011, only two permits have been issued, both for an ethanol facility in Illinois.[37] Those permits took the EPA six years to approve.[38] States have authority under EPA regulations to seek primacy over Class VI permit applications, which could speed up the permitting process, but to date the demand for GS under the existing industrial CCS regime has not been sufficient to generate significant state demand for Class VI primacy.[39]

While the 45Q tax credits appear designed to incentivize GS projects over EOR projects, the environmental regulations of the UIC program belie the notion that the federal government has a harmonious plan to address climate change through industrial CCS. Given the urgency and scale of the climate issues we face, far more needs to be done—and far sooner—if we are to avoid the iceberg.

 

IV.                Competing Courses for Carbon Capture

There are several options the U.S. could pursue. One option would be to stay the course. The U.S. industrial CCS strategy sought to incentivize and scale GS by using EOR as a commercial springboard.[40] The federal government has doubled down on this strategy, pumping billions of dollars into new development projects in addition to the expanded tax incentives.[41] There are some indications that industry is responding to the new investment—the Global CCS Institute reported there were 27 industrial CCS projects operating around the world in 2021, with 108 more projects in development, 36 of them in the U.S.[42] However, this strategy relies on a flawed assumption about the commercial viability of carbon as a commodity, and often does not consider the emissions from a project’s entire carbon lifecycle.[43] Analyses of these factors show that there is no significant commercial market for carbon without government subsidy,[44] and that EOR has not made significant progress toward net carbon reductions.[45]

Some researchers and environmental commentators have proposed course corrections that would amount to a 180-degree turn. Some proposals would install a carbon tax and cap-and-trade system;[46] others would abandon the polluter pays principle (“PPP”) in liability and financial assurance requirements;[47] still others would remove all subsidies for industrial CCS and reallocate that funding for natural (i.e., biological and chemical) CCS initiatives.[48]

Yet completely abandoning industrial CCS appears short-sighted and incompatible with the current U.S. political system. World energy demand is expected to increase into the future,[49] and the fossil fuel industry and its carbon emissions are not going away any time soon.[50] Additionally, the carbon capture problem will require a monumental effort “similar in scale to wartime mobilization.”[51] As previously noted, by 2050 the global CCS industry will need to be two to four times larger than the current global oil industry,[52] and it is difficult to see this type of civilization-wide mobilization coming together without the help of private industry. It’s all hands on deck to address this problem.

A middle course for the near future could acknowledge the flaws of the EOR-commercialization model while simultaneously acknowledging the important role fossil fuel companies must play. Moving toward a public service model for industrial CCS can accomplish these objectives.

 

V.                  Recommendations for a New Course: A Public Service Model

Assuming the U.S. government will continue to favor subsidies over carbon pricing in the near future,[53] there are three specific legislative and regulatory steps that the government can take to move toward a middle course.

1.                  Remove the EPA’s financial assurance barriers for Class VI wells by passing legislation modeled on the Price-Anderson Nuclear Industries Indemnity Act. The Price-Anderson Act was able to adequately address similar problems to those facing industrial CSS by covering risk of nuclear incidents through a combination of an industry-pooled trust fund; capped liability for the operator responsible for an incident; and government indemnification of the remainder.[54]

 

2.                  Bring the duration of operator responsibility for post-injection site care in line with other hazardous wastes, from a 50-year default down to a 30-year default.

 

3.                  Phase out 45Q tax credits for EOR projects, and dramatically increase 45Q tax credits for GS projects.

Under these proposed changes, the industrial CCS regime would retain important portions of the PPP—each Class VI well operator would be required to pay into the pool, and any operator responsible for USDW contamination or other CO2-related incidents pays more—while still acknowledging that capture and storage of CO2 is a public service that should be subsidized accordingly. These changes can right the ship, providing stability while additional planks (e.g., biological and chemical CCS methods) and structural changes (e.g., installation of a carbon tax and cap-and-trade system) necessary to achieve our climate goals progress below the waterline.

 

VI.                Conclusion

The existing course charted by the U.S. government on industrial CCS is courting disaster. Industrial CCS technology has existed for almost a half-century, and the U.S. government has been investing in this technology for twenty years with the explicit goal of curbing carbon emissions. However, there has been little success at scaling the technology or making meaningful progress toward our climate goals, particularly because of the commercialization model. If we travel much further on this heading, it may be too late to turn the ship. The three proposed legislative and regulatory changes described in this post are concrete steps that can operate as the foundation for an industrial CCS lifeboat.

 


References

 *Ryan M. Sweeney, Esq. is an attorney in private practice in Arizona.

[1] Walter Lord, A Night to Remember, New York: St. Martin’s Griffin (1955).

[2] Special Report: Global Warming of 1.5°C, Summary for Policymakers, Intergovernmental Panel on Climate Change (2018) (available at https://www.ipcc.ch/site/assets/uploads/sites/2/2018/07/SR15_SPM_version_stand_alone_LR.pdf).

[3] Id. Other greenhouse gases aside from carbon dioxide play a role in warming, most notably methane. Addressing emissions and existing concentrations of these other greenhouse gases will require their own strategies, some of which may use carbon emissions strategies as a model.

[4] A gigaton is equivalent to one billion tons; a megaton is one million tons; a kiloton is one thousand tons.

[5] Niall Mac Dowell, et al., “The role of CO2 capture and utilization in mitigating climate change,” Nature Climate Change, Vol. 7 (April 2017).

[6] According to the U.S. Congressional Research Service, point-source emitters are generally found in five industrial sectors: chemical production, hydrogen production, fertilizer production, natural gas processing, and power generation. Carbon Capture and Sequestration (CCS) in the United States, Congressional Research Service (Oct. 18, 2021) R44902 (available at https://crsreports.congress.gov) (hereinafter “CRS Report, Oct. 2021”). The Global CCS Institute identifies other industrial emitters, including waste incineration, ethanol production, and iron, steel, and aluminum production. Global Status of CCS 2021, Global CCS Institute (2021) 16-17, 19 (hereinafter “Global CCS Institute 2021 Report”).

[7] Point-source capture uses containers at the source of the emissions, while direct air capture uses large fans to vacuum ambient air. “Point source carbon capture from industrial sources,” National Energy Technology Laboratory (available at https://www.netl.doe.gov/carbon-capture/industrial); Diana Olick, “These companies are sucking carbon out of the atmosphere—and investors are piling in,” CNBC (Jul. 29, 2021) (available at https://www.cnbc.com/2021/07/23/these-companies-are-sucking-carbon-from-the-atmosphere.html). Both methods then use membranes or chemical techniques to separate carbon for later transport and storage. “Point source carbon capture program,” National Energy Technology Laboratory (available at https://www.netl.doe.gov/coal/carbon-capture); Direct Air Capture of CO2 with Chemicals, American Physical Society (Jun. 1, 2011) (available at https://www.aps.org/policy/reports/assessments/upload/dac2011.pdf); Shigenori Fujikawa, et al., “A new strategy for membrane-based direct air capture,” Polymer Journal (2021) 53:111-19 (available at https://www.nature.com/articles/s41428-020-00429-z.pdf).

[8] Mac Dowell, et al., supra n. 5. The International Energy Agency is an autonomous intergovernmental agency specializing in analysis and policy recommendations for the global energy system.

[9] Id. The remainder is expected to come from increased efficiency, reductions in use, and natural CCS methods, including biological carbon removal (e.g., forestation and afforestation initiatives, soil initiatives, ocean fertilization) and chemical carbon removal (e.g., terrestrial enhanced mineral weathering, stimulating ocean alkalinity). Tracy Hester, “Legal Pathways to Negative Emissions Technologies and Direct Air Capture of Greenhouse Gases,” 48 Envtl. L. Rep. News & Analysis 10413 (May 2018).

[10] Ahmed Abdulla, et al., “Explaining successful and failed investments in U.S. carbon capture and storage using empirical and expert assessments,” Envtl. Res. Lett. 16:014036 (2020) at 3, fig. 1, and 9, fig. 5; Global CCS Institute 2021 Report, supra n. 6, at 14.

[11] See Justine Calma, “Visualizing the scale of the carbon removal problem,” The Verge: MSN.com (Apr. 7, 2022) (available at https://www.msn.com/en-us/weather/topstories/visualizing-the-scale-of-the-carbon-removal-problem/ar-AAVYFNZ), showing a good visual representation of the challenge for direct air capture technology.

[12] June Sekera & Andreas Lichtenberger, “Assessing Carbon Capture: Public Policy, Science, and Societal Need,” Biophysical Economics and Sustainability (Oct. 2020) 5:14.

[13] The commercialization model is often called “carbon capture, utilization, and storage,” or “CCUS.”

[14] Sekera & Lichtenberger, supra n. 12. CRS Report, Oct. 2021, supra n. 6.

[15] Id.; Peter Connors, et al., Review of Federal, State, and Regional Tax Strategies and Opportunities for CO2-EOR-Storage and the CCUS Value Chain, U.S. Department of Energy and U.S. Energy Association, Orrick, and FTI Consulting (Sept. 21, 2020).

[16] Sekera & Lichtenberger, supra n. 12; The Tax Credit for Carbon Sequestration (Section 45Q), Congressional Research Service, Vers. 2:IF11455 (June 8, 2021) (available at https://crsreports.congress.gov) (hereinafter “CRS Report, June 2021”).

[17] The Department of Energy has funded research and development into industrial CCS since 1997, and Congress has repeatedly authorized financial incentives for industrial CCS since 2008. CRS Report, Oct. 2021, supra n. 6, at “Summary”; see also discussion of tax incentives for industrial CCS, infra.

[18] State and Trends of Carbon Pricing 2021, The World Bank (May 2021).

[19] Teal Jordan White, “Clean Air Act Mayhem: EPA’s Tailoring Rule Stitches Greenhouse Gas Emissions Into the Wrong Regulatory Fitting,” 18 Tex. Wesleyan L. Rev. 407 (2011); Effects of a Carbon Tax on the Economy and the Environment, Congressional Budget Office (May 2013) (hereinafter “CBO Report, May 2013”); “Sens. Whitehouse and Schatz Introduce Carbon Fee Legislation,” Sen. Sheldon Whitehouse Press Release (Nov. 19, 2014) (available at https://www.whitehouse.senate.gov/news/release/sens-whitehouse-and-schatz-introduce-carbon-fee-legislation) (hereinafter “Whitehouse Press Release”); Adele Morris, “Why the federal government should shadow price carbon,” Brookings Institute (July 13, 2015); Peter Nelson, “Carbon Pricing versus Federal Regulations to Reduce US Emissions,” Resources for the Future (March 1, 2017).

[20] 26 U.S.C. § 45Q (current); Pub.L. 110-343 (enacted Oct. 3, 2008). Similar to the 45Q incentives, section 48A of the Internal Revenue Code authorizes tax credits between 15 and 30 percent of a coal-fired power plant’s qualified taxable investment if it captures and sequesters 65 percent of its carbon emissions. 26 U.S.C. § 48A.

[21] Pub.L. 115-123 (enacted Feb. 9, 2018); Pub.L. 116-260 (enacted Dec. 27, 2020). The prior statute put a claim cap on eligibility, permitting claims until 75 million tons of CO2 were captured and sequestered. The present law states facilities are eligible if they begin construction before January 1, 2026, and allows claims for a 12-year period once a facility is “placed in service.” The Internal Revenue Service issued regulations to address the gap between the “beginning of construction” deadline and the “placed in service” trigger for the 12-year claims period, including a requirement that facilities must engage in continuous construction to be eligible. 26 C.F.R. § 1.45Q-2(g). However, this continuity requirement permits numerous exceptions, including allowances for delays in obtaining permits and financing. I.R.S. Notice 2020-12: Beginning of Construction for the Credit for Carbon Sequestration Under Section 45Q (March 9, 2020). As explained in more detail below, obtaining permits and financing are common problems. Under this industrial CCS regime, a fossil fuel company seeking to engage in carbon additive-EOR can start construction on a facility in December 2025; toll the continuity requirement during the period it is waiting for EPA permitting or financing, possibly adding years before the continuity requirement resumes; take additional years to complete construction and place the facility into service; and then begin claiming tax credits for a 12-year period. CCS facilities “usually take seven to 10 years from concept study through feasibility, to design, construction, then operation.” Global CCS Institute 2021 Report, supra n. 6. Reflecting on the lackluster results of the industrial CCS regime to this point, it is not an unreasonable fear that fossil fuel companies may be collecting federal subsidies for net carbon additive activities into 2050 and beyond.

[22] Alex Dewar & Bas Sudmeijer, “The Business Case for Carbon Capture,” Boston Consulting Group (Sept. 24, 2019); Mac Dowell, et al., supra n. 5; Global CCS Institute 2021 Report, supra n. 6; Sekera & Lichtenberger, supra n. 12.

[23] Mac Dowell, et al., supra n. 5, at 244.

[24] Id. at 247.

[25] First cite to primary source, the statute, then can keep this secondary source cite. Federal Requirements Under the Underground Injection Control (UIC) Program for Carbon Dioxide (CO2) Geologic Sequestration (GS) Wells; Final Rule, Federal Register, Vol. 75, No. 237 (Dec. 10, 2010) (hereinafter “Class VI Final Rule”); Injection and Geologic Sequestration of Carbon Dioxide: Federal Role and Issues for Congress, Congressional Research Service (Jan. 24, 2020) (hereinafter “CRS Report, Jan. 2020”).

[26] Class VI Final Rule, supra n. 25; CRS Report, Jan. 2020, supra n. 25.

[27] Charles C. Steincamp, et al., “Regulation of Carbon Capture and Storage: An Analysis Through the Lens of the Wellington Project,” 51 Envtl. L. 4:1149 (2021); Class VI Final Rule, supra n. 25.

[28] Steincamp, et al., supra n. 27.

[29] Id.; CRS Report, Jan. 2020, supra n. 25.

[30] Steincamp, et al., supra n. 27. et al.

[31] Id.

[32] Id.; 40 C.F.R. § 146.85.

[33] Steincamp, et al., supra n. 27.

[34] Id.

[35] Id.

[36] Id.

[37] Connors, et al., supra n. 15; Anne Isdal Austin, et al., “State-Level Permitting Primary May Boost Carbon Capture and Storage,” JDSupra (Aug. 12, 2021); CRS Report, Oct. 2021, supra n. 6; Abdulla, et al., supra n. 10.

[38] Isdal Austin, et al., supra n. 37.

[39] Id.

[40] JJ Dooley, et al., “An Assessment of the Commercial Availability of Carbon Dioxide Capture and Storage Technologies as of June 2009,” U.S. Dep’t of Energy (June 2009); Wendy B. Jacobs, et al., “Proposed Roadmap for Overcoming Legal and Financial Obstacles to Carbon Capture and Sequestration,” Discussion Paper, Harvard Kennedy School of Government, Belfer Center for Science and International Affairs (March 2009).

[41] Justine Calma, “The infrastructure deal could create pipelines for captured CO2,” The Verge (Aug. 3, 2021).

[42] Global CCS Institute 2021 Report, supra n. 6.

[43] Sekera & Lichtenberger, supra n. 12.

[44] Id.

[45] Mac Dowell, et al., supra n. 5.

[46] See Jordan White, supra n. 19; CBO Report, May 2013, supra n. 19; Whitehouse Press Release, supra n. 19; Morris, supra n. 19.

[47] Paul Bailey, et al., “Can Governments Ensure Adherence to the Polluter Pays Principle in the Long-Term CCS Liability Context?” 12 Sustainable Dev. L. & Policy 46 (2012).

[48] Sekera & Lichtenberger, supra n. 12.

[49] Id.; Mac Dowell, et al., supra n. 5; Calma, supra n. 41.

[50] Anyone suggesting otherwise has ignored the winds of U.S. campaign finance law. Robert J. Brulle, “The climate lobby: a sectoral analysis of lobbying spending on climate change in the USA, 2000 to 2016,” Climatic Change, 149:289-303 (Jul. 19, 2018), showing that lobbying by corporate interests involved in production or use of fossil fuels outspent that of environmental organizations and the renewable energy industry by a ratio of approximately ten to one. See also Mac Dowell, et al., supra n. 5; Niall McCarthy, “Oil and Gas Giants Spend Millions Lobbying to Block Climate Change Policies,” Forbes.com (Mar. 25, 2019) (available at https://www.forbes.com/sites/niallmccarthy/2019/03/25/oil-and-gas-giants-spend-millions-lobbying-to-block-climate-change-policies-infographic/).

[51] Mac Dowell, et al., supra n. 5.

[52] Id.

[53] See Connors, et al., supra n. 15: “Absent a national carbon tax, capturing CO2 provides little financial incentive for entities to invest in costly CCUS technologies to capture CO2.”

[54] “The Price-Anderson Act, Background Information,” Center for Nuclear Science and Technology Information (Nov. 2005) (available at https://ans.org/pi/ps/docs/ps54-bi.pdf).