Carbon Capture and Storage in the EU, UK and US

Given the increasing focus on the reduction of carbon emissions the promotion of new technology and processes is gaining momentum. Against the backdrop of numerous legal, policy and economic instruments relating to reductions in CO2 emissions in the US, UK and EU we review the present status of carbon capture and storage (sometimes termed sequestration) (“CCS”) in these areas.

The London Convention 1972, which relates to prevention of marine pollution, was amended in November 2006 to facilitate CCS. A key issue for off-shore CCS however remains the need for ratification of similar changes to the 1992 OSPAR Convention, which is the treaty guiding international cooperation on the protection of the marine environment of the North-East Atlantic.

In addition to the many practical, technological and geological challenges, legal and regulatory issues also need to be overcome, not least in ensuring sufficient confidence in the price of carbon post 2012, clarification of the legal framework for CO2 transportation, and a fuller understanding of the impact of existing planning, energy, waste and environmental regulations on implementation of CCS.

Providing regulatory clarity is therefore one of the principal short term objectives for policy makers, and in the medium term is also likely to require the implementation of an international regime that deals effectively with the potential liabilities of CO2 storage. There is a general consensus that in the long term those risks would need to be borne by governments.

EU

Following consultation on the regulation and the incentivisation of CO2 capture earlier this year, the European Parliament’s Committee on Industry, Research and Energy whilst very clearly emphasising the importance of fossil fuels in ensuring the EU’s security of energy supply, invited the Commission to progress a proposal for legislation on CCS. This Committee identified the need for clear political guidelines for the promotion of research into CCS technology, and the eradication of market barriers and economic instruments to avoid favouring other sectors, such as inclusion of CCS in the emissions trading Scheme (the “EU ETS”). A critical issue for those looking to invest in CCS, as for other renewable technologies, remains the uncertainty over the price of carbon post 2012.

On 24 October 2007 the European Parliament adopted a resolution and called on the Commission to submit a proposal for CCS legislation so as to create a basis for investment security in connection with CCS projects. On 22 November 2007, the Commission presented a European Strategic Energy Technology Plan (SET - Plan). The goal of the SET-Plan is to “accelerate the development and implementation of low carbon technologies”, including CCS. We understand that a draft Directive has been prepared and is anticipated early next year.

The aim is to have around 10 to 12 demonstration plants by 2015, with proven economic viability by 2020. Until economic viability is proven, new coal fired plant may be required to be “CCS ready” (i.e. able to be retrofitted”). Once economic viability is proven, it is expected that all new coal fired plant would be required to incorporate CCS technology.

UK

CCS was included in the UK Government’s 2005 Carbon Abatement Technologies Strategy and in the 2006 Energy Review. In February 2007 the UK Government announced that £35 million had been allocated for the small scale demonstration of carbon abatement technologies (CAT), including CCS. On 19 November 2007, 5 days after the first reading of the Climate Change Bill in the House of Lords, the Prime Minister launched a competition for the full-scale demonstration of CCS by virtue of a single post-combustion coal-fired project. The Information Memorandum and related documents can be found at here. The pre-qualifying period will finish in March 2008. It is anticipated that the preferred bidder will be announced in May or June 2009.

Subject to affordability and state aid clearance, UK Government is willing to fund up to ALL of the additional costs of incorporating CCS technology, i.e. the costs other than those of the power plant itself. The UK Government’s focus on “post combustion” has been criticised by some as foreclosing a potentially significant aspect of CCS R&D.

US

There are a number of developments progressing at different stages at state and federal level. In 2003 a network of public private partnerships was established to characterise, validate and deploy carbon sequestration initiatives over 3 phases. The second phase of validation is under way, ending in 2009. On 9 October 2007 the US Department of Energy (“DOE”) announced the award of 3 large-scale carbon sequestration projects triggering the start of the deployment phase. DOE plans to invest $197 million in the projects over 10 years (subject to annual appropriations from Congress). Most recently the Climate Security Bill, introduced into Congress on 18 October 2007, promotes CCS and if successful would establish 3 to 5 CCS coal-fired demonstration plants and create an agency to determine a regulatory framework for CCS.

Combined strategies

The increase in support for research and development of CCS is not a co-incidence. The 2007 EU - US Summit Statement on Energy Security, Efficiency and Climate Change, published in April 2007, identified the advancement of the commercial deployment of clean coal and CCS technologies as one of the priorities for a transatlantic partnership on clean energy and climate change.

The Statement identifies that the EU will:

• establish a mechanism to encourage the construction of a network of up to 12 demonstration plants by 2015;
• invest up to €400m towards sustainable fossil fuel related projects; and
• consider extending the EU ETS to include carbon capture.

The Statement says that the US will:

• build the first integrated sequestration and hydrogen production research power plant “FutureGen”;
• provide support of approximately $200m for CCS; and
• develop a regulatory framework.

Future regulation

CCS is already an area of great interest for the investment community. To secure large scale investment, clarity and certainty in the regulatory regime is key, together with a full understanding of the commercial, legal and regulatory treatment of CCS. It will be interesting to see how the EU and US approach this and whether they will take significantly different approaches. Of particular interest to stakeholders is whether CCS will be a requirement for future fossil fuel generating plant only or whether retrofitting CCS could subsequently be extended to existing plant.