5.2 Qualifications

This report:

  • states the law current as at 31 March 2009;
  • should not be relied upon as a substitute for specific legal advice;
  • has links and references throughout that were current as at 31 March 2009; and
  • represents the views of Baker & McKenzie only and not of any person or agency that may have contributed to or reviewed any aspect of the report.

5.2.1 Background

Recognising the adverse environmental effects of greenhouse gases (GHG) in the atmosphere, many governments (both at a State and sub-State level) are taking steps to begin reducing such emissions. Some are taking action in satisfaction of international treaty obligations (such as under the Kyoto Protocol) and some are acting in discharge of domestic goals or in response to domestic legal or political pressures.

In the developed world in particular, many States are putting a price on carbon, either via cap and trade schemes or taxes. These measures are designed to reduce reliance on high GHG emitting fuel sources and to promote both energy efficiency and the development of low emission energy sources.

This discussion is structured into three main sections.

  • First, policies and legislation which aim to impose a cost on carbon and which could therefore have the effect of improving the viability of CCS as a GHG emission mitigation tool.
  • Second, policies which aim to provide incentives for the development of CCS and the gaps and barriers in these policies.
  • Third, policies and legislation regulating key stages of the CCS project cycle. The CCS project cycle can be divided into a number of stages.

Figure 5-1 The CCS project cycle

A number of the legal and policy challenges posed by CCS are common to more than one stage in the project cycle. This project cycle-centred approach has been adopted here because it provides the best analytical structure within which to compare regulatory approaches across the jurisdictions surveyed for this report. These jurisdictions include: Australia, Brazil, Canada, The People’s Republic of China, The European Union, India, Indonesia, Japan, Mexico, New Zealand, Norway, Papua New Guinea, Russia, South Africa, South Korea, The United Arab Emirates and The United States of America. Comments are also made on international legal developments and barriers.

5.2.2 Valuing carbon use

Absent a cost on carbon, it is very unlikely that many economies could reduce their GHG emissions to levels which it is now widely accepted must be achieved by 2050. Policies imposing a cost on GHG emissions play an important role in making CCS and other emission reduction responses economically viable.

Mandatory cap and trade and carbon taxation schemes are both underpinned by legal sanctions. By introducing policies imposing a cost on carbon (in combination with other measures), governments can utilise their policy-making power to correct markets which have not internalised the cost of carbon or have only done so in a limited or superficial manner.

Cap and trade schemes impose a carbon cost on GHG emissions and in so doing may help bring down the comparative cost of CCS and other emission reduction responses by making high emitting activities more expensive and diverting capital into new technologies designed to reduce or eliminate those carbon costs.

Mandatory emissions trading schemes (ETS) introduced to date include the following:

  • supranational – such as the European Union Emissions Trading Scheme (EU ETS);
  • national – such as national emissions trading schemes in New Zealand and Norway;
  • sub-national (multi-state) – such as the Regional Greenhouse Gas Initiative (RGGI) in ten Northeastern and Mid-Atlantic States of the USA; and
  • sub-national (single state) – such as the Provincial scheme in Alberta, Canada and the Greenhouse Gas Abatement Scheme in the Australian Capital Territory and New South Wales, Australia.

In addition, mandatory national-level cap and trade schemes are currently under development in a number of jurisdictions. In the USA, the American Clean Energy and Security Act (ACES Act) was passed by the House of Representatives on 26 June 2009 and, at the time of writing, similar legislation was under development in the USA Senate. In Australia, the Federal Government is developing a national emissions trading scheme, the Carbon Pollution Reduction Scheme (the proposed CPRS). Legislation implementing the scheme, the Carbon Pollution Reduction Scheme Bill 2009 (Cth) (CPRS Bill) is likely to be reintroduced in the Federal Senate later in 2009. South Korea is also considering developing a national mandatory cap and trade scheme.

However, the mere existence of a cap and trade scheme may not, of itself, be sufficient to promote CCS projects in the very near term. For example, although the EU has a sophisticated and well established cap and trade scheme there has not yet been extensive CCS deployment in Europe. Financial incentives or mandatory (non-tradeable) emission limits may also be needed to help promote deployment of CCS as its cost can vary dramatically depending on the project type and methodologies used.

Case study: The EU ETS

The EU ETS is the largest multi-country, multi-sector GHG ETS in the world. It was introduced in 2003 through the European Community (EC) Directive 2003/87/EC (EU ETS Directive), as amended by EC Directive 2009/29/EC (Revised ETS Directive).

The EU ETS covers energy-intensive installations in energy and industrial sectors, such as electricity generation, iron and steel manufacturing and minerals processing. It is divided into three distinct phases:

  • Phase I - commenced on 1 January 2005 and ran to the end of 2007;
  • Phase II - 2008 to 2012 inclusive; and
  • Phase III - 2013 to 2020 inclusive.

During each Phase, operators of installations within the scope of the EU ETS must account for their actual emissions on a yearly basis through the surrender of an equivalent number of ”allowances” (European Union

Allowances - EUAs). For Phases I and II, each Member State was required to submit a National Allocation Plan, setting an overall emissions ”cap” for the sectors covered. This cap is converted into a set number of EUAs, which are distributed in accordance with the National Allocation Plan to individual installations falling within the scope of the EU ETS. For Phase III, the use of Member State National Allocation Plans will be replaced by a single EU-wide cap, distributed according to harmonised rules.

After allocation, EU ETS installations must monitor and report their emissions. They may choose to implement abatement technologies and, by so doing, free up EUAs to sell on the carbon market. Alternatively, they may purchase EUAs to cover any excess emissions (ie, emissions that cannot be covered using their initial allocation). The scheme cap covers around 46 percent of CO2 emissions and 40 percent of GHG emissions. The overall number of EUAs allocated will decrease over time and it is expected that this will result in a corresponding reduction in European carbon emissions. The emissions reduction target for sectors covered by the EU ETS is 21 percent below 2005 levels by 2020.

A combination of incentives and penalties are likely to make it easier to facilitate CCS projects. The role of Norway’s complementary carbon tax and its own emissions trading scheme (NETS) in making commercial-scale carbon storage economically viable for the Sleipner Project provides an example of how such policies can, when targeted and well-developed, directly affect the viability of CCS. The price that will make CCS cost-competitive will vary as the cost of capture varies from plant to plant.

A combination of penalties and incentives are likely to make it easier to facilitate CCS projects

Case study: Norway’s carbon tax and the Sleipner Project

The Sleipner Project, which involves the capture of CO2 from natural gas and injection into a saline formation 1,000 metres below the sea bed, is operated by Statoil, the Norwegian oil and gas company. In the last 13 years over 11 million tonnes of CO2 has been injected at the platform. Statoil’s decision to test CCS appears to have been made because of the interplay between natural gas standards and the Norwegian carbon tax. The natural gas extracted from the site needs to be ”filtered” to reduce the CO2 content in the raw extraction stream. Without such refinement its CO2 content would be around four times higher than the European commercial export target (EuroActiv.com, 2007).

Since Statoil was already capturing CO2 at the offshore platform, it was faced with the decision whether to release or store it. This decision was influenced by the contemporary level of carbon tax versus the cost of injection. At the time that the storage decision was made, the high Norwegian CO2 tax prompted Statoil to pursue storage as a commercially attractive option (Heiskanen, 2006). Although the injection facility is estimated to have cost $80 million to construct and approximately $5 million per year to operate (Walter, 2008), every year Statoil has avoided paying tax on an estimated 1 million tonnes of injected CO2, which currently costs around $30 per metric ton. No official figures appear to be publicly available, but Olav Kaarstad, special advisor to StatoilHydro, has agreed that carbon storage has proved cost effective for Statoil.

The effectiveness of these policies can be maximised by ensuring that their development is as free from rent-seeking as is politically feasible. Governments and regulators should also ensure that the most cost effective means of facilitating CCS projects is explicitly embedded in such policy regimes. In this sense, the experiences of Australian, Canadian and USA jurisdictions and the EU are particularly relevant as these could be utilised in other jurisdictions considering implementing policies in this area.

In the absence of economically efficient pricing of GHG emissions set by governments, CCS could potentially remain more costly than other GHG emission reduction schemes in the short to medium-term. A range of policy measures will be required to prompt the design, permitting and construction of CCS projects until a sufficiently high price is placed on GHG emissions.

A range of policy measures will be required to prompt the design, permitting and construction of CCS projects until a sufficiently high price is placed on GHG emissions

5.2.3 The challenges and risks of CCS

The G8 objective of launching 20 large-scale CCS projects globally by 2010, for broad deployment by 2020, is very ambitious.

Harnessing and deploying the resources required, overcoming the opposition which will emerge (locally and ideologically) and establishing the legal frameworks needed to attract and retain private sector investors will require the immediate expenditure of vast political and financial resources across multiple jurisdictions. It will also necessitate a better and more coordinated public explanation of the long-term environmental benefits and risk management strategies which will be employed along the CCS project cycle.

A sufficient number of geologically adequate storage sites need to be identified and secured to facilitate CCS projects. Not all States wanting to store captured CO2 (or emitters operating within those States) will have such sites or, even if they do, they may not have immediate access to them or legal rights over them.

Securing sites, compensating land owners and/or negotiating rights of access to sites across State borders will be time consuming even with CCS specific laws in place. Transporting the gas by pipelines over long distances will throw up similar issues (as well as additional issues such as potential prohibitions under International Treaties affecting the transport and storage of certain wastes).

Securing sites, compensating land owners and/or negotiating rights of access to sites across State borders will be time consuming, even with CCS specific laws in place

There are a number of international conventions that regulate pollution of the marine and land-based environment and the treatment or disposal / dumping of waste, hazardous waste and harmful substances. If a CO2 product falls within one of these definitions, dealing with the CO2 as part of the CCS project cycle may be prohibited, or attract strict regulatory requirements for environmental impact assessment and project management.

Even if the emission reductions technically capable of being achieved by CCS are widely understood by the public (which at present is not the case), the issue of long-term leakage potential and the unknown consequences of that (real or imagined) are likely to delay approvals and may well result in litigation or other time consuming legal challenges.

There is also likely to be very considerable opposition to locating storage sites under lands already given over to productive uses or which are otherwise already environmentally sensitive - this opposition may also be agitated by environmental groups for a variety of reasons.

While the costs of developing CCS projects have been well documented, the long-term costs associated with managing risks associated with leakage liability are less well known. Legal frameworks that apportion liability for leakage from storage sites between project developers, site owners and host country governments vary between States and are likely to change as governments test the appetite for the private sector to accept longer-term risks.

Where CCS specific legal frameworks do exist, in most cases liability for leakage passes to a host country government after a period of between 10-30 years. However, in the interim, the entity with responsibility for the storage site may need to find insurance to cover the potential costs associated with leakage (as may governments if and when they take on the liability risk). Those costs are not only for direct physical harm caused by an escape of CO2, but also for the indirect costs of CO2 leakage to the atmosphere, which may equate to the cost of carbon at the date of escape.

Overcoming the challenges of selecting and securing appropriate sites (including storage), dealing with leakage liability and obtaining the necessary government approvals for CCS projects are just three of the threshold issues that need to be addressed in the project planning phase. Equally important is the ability to secure project funding which will cover not only the infrastructure costs of capture, transportation, injection and storage, but also the long-term costs associated with ensuring permanent storage.

It is critical that policy frameworks which provide similar incentives are developed for CCS to enable it to stay within competitive reach of other new technologies

Funding in both the public and private arena is limited for low or zero-emission technologies. Incentives and subsidies for some of these technologies, in particular renewable energy, are rapidly bringing down their costs and making them more attractive as a commercial investment. These technologies are often less controversial from an environmental and social point of view, being seen to be cleaner, more sustainable and less experimental than CCS. It is critical that policy frameworks which provide similar incentives are developed for CCS to enable it to stay within competitive reach of other new technologies.

5.2.4 Policies supporting CCS

A variety of funding and support measures have been employed by governments and other agencies which have, and are, contributing to developments in CCS, especially at the ”pilot” or “demonstration” stage. These research funding and related measures generally assist in facilitating what is still a relatively new technology and one which is still not widely applied at a commercial scale. Some key funding schemes currently operating or being proposed include:

  • A$1 billion (US$ 860 million) over 10 years from 2006 through the Australian Coal Association’s COAL21 Fund;
  • A$2 billion (US$1.62 billion) under the Australian Government’s CCS Flagships Program that is expected to leverage an additional A$4 billion (US$3.24 billion) from State governments and industry over next nine years;
  • C$650 million (US$562 million) under the Canadian Government’s
  • Action Plan (Canada’s economic stimulus plan). Furthermore, C$2 billion ($US 1.73 billion) has been committed by the Alberta Government;
  • €1.05 billion (US$1.5 billion) from the European Economic Recovery Plan (EERP) and up to 300 million EUAs from the new entrants’ reserve (NER) will be made available until 31 December 2015. At an approximate value of $US20.00 per unit as at September 2009 approximately $US6 billion may be available;
  • Approximately US$1 billion in CCS activities by the Japanese government; and
  • US$2.4 billion from the USA Governments American Recovery and Reinvestment Act (ARRA) (economic stimulus funding).

At present there appears to be approximately $17 - $20 billion currently available to support the development of CCS projects.

Without detracting from the important role that the funding of demonstration activities play, one concern is that because of the significant costs and timescales involved in establishing full cycle projects, there is already competition between the different demonstration and commercial pilot projects for funding – in particular for co-financing from the private sector. At present, private sector engagement is led by those companies that have a direct interest in utilising the resulting technologies (eg, major global coal mining and energy companies) and which are likely to have their GHG emissions regulated. The number of those companies and their resources are finite and contributions to multiple projects rather than concentrating efforts on one or two could mean that none of the projects are adequately funded.

At present, private sector engagement is led by those companies that have a direct interest in utilising the resulting technologies, and which are likely to have their GHG emissions regulated

As well as directly funding a number of demonstration-scale CCS projects, governments in the jurisdictions surveyed have made use of three main forms of domestic policy incentive to encourage the development of CCS.

  • First, high-level CCS or energy management policies which can provide whole-of-government frameworks for initiatives to develop CCS, such as the USA Government’s goal of reducing USA GHG emissions by 83 percent by 2050.
  • Second, direct government funding and research support for CCS through cooperative research centres such as Australia’s Cooperative Research Centre for Greenhouse Gas Technologies (CO2CRC), South Africa’s National Centre for Carbon Capture and Storage and the Masdar Institute of Science and Technology in the United Arab Emirates (UAE).
  • Third, government-business collaboration on demonstration projects such as the FutureGen project in Illinois in the USA or the Sleipner Project in Norway.
Case study: FutureGen

In 2003, the US DOE announced a US$1 billion investment in a project known as FutureGen, a government-business joint venture to develop a 275 MW clean coal power plant to produce electricity and hydrogen using CCS technology (FG1). In 2006, the US DOE determined that providing financial assistance for the construction and operation of FG1 would constitute a major Federal action that could significantly affect the quality of the natural and human environment and accordingly prepared an Environmental Impact Study (EIS) for the project in compliance with USA National Environmental Policy Act (NEPA) (FG1 EIS, 2007). After a rigorous nation-wide selection process, the final four sites under consideration to host FG1 were located in Illinois and Texas.

The US DOE decided to restructure the program in late 2007 after the FutureGen Alliance (a consortium of private companies that form half of the government-business joint venture) chose a site in Illinois over a site in Texas to locate the project. The restructured FutureGen Project (FG2) would fund implementation of CCS components at several Integrated Gasification Combined Cycle (IGCC) plants planned to be operational by 2015.

In conjunction with FG2, the agency issued a funding opportunity announcement in autumn 2008 soliciting applications for a commercial scale IGCC power plant or other coal-based power generation technology that can capture and store in a saline formation of at least 1 million metric tons of CO2 per year for three to five years. The USA government announced on 12 June 2009 its commitment to the project, with a contribution of US$1.073 billion, US$1 billion of which will come from USA stimulus package funds.

These policy measures have helped facilitate coordination between governments, academia and market participants to achieve concentrations of financial and bureaucratic resources, academic and business knowledge. They have also helped accelerate the commercialisation of CCS by enabling project proponents to access funding which may not otherwise be available on a commercial basis. Measures like this may also provide project participants with high-level political and policy support for their projects and technologies.

In isolation, however, these measures will be counter-productive where R&D projects become too academically biased or not sufficiently focused on reducing the commercial risks and costs of CCS and where a proliferation of competing and overlapping R&D centres and projects occurs. Projects reliant on government funding can also suffer from often protracted delays in approval and funding clearance processes, which in some cases may be significantly longer than typical commercial approval timescales.

To achieve the G8’s goal within its stated timeframe means that there should be a real coordination (and possibly pooling) of the resources of key international research agencies such as the IEA’s Greenhouse Gas R&D Program (IEA GHG), the CSLF and the Asia-Pacific Partnership on Clean Development and Climate (APP). Multilateral funding agencies such as the World Bank and Asian Development Bank have not yet fully engaged in funding CCS projects in any comprehensive way but are considering whether to finance such projects. They should be persuaded to act in concert with those coordinating the global drive to commercialise CCS rather than acting in isolation.

To achieve the G8’s goal within its stated timeframe means that there should be a real coordination (and possibly pooling) of the resources of key international research agencies

5.2.5 The timeframe challenge

Contrasted with the stated aim of the G8, industry views the timeframe involved in the CCS project cycle to be in the order of:

  • 10 years to design, permit, and build a fossil-fuel power plant and other large industrial facilities such as steel mills and cement factories;
  • 20-30 years of operation and injection of CO2 before plant closure is considered; and
  • 20-100 years or more to monitor a CCS site post-injection.

As a result there is a need to:

  • manage environmental liabilities arising from injected CO2, which could persist for many hundreds, if not thousands, of years;
  • regulate site selection, monitoring and verification in ways which ensure that regulatory requirements are appropriate to technology type, geology and topography yet are sufficiently comprehensive to provide certainty;
  • ensure that property interests in potential and actual storage formations and injected materials are clearly defined;
  • encourage growth in public confidence in, and acceptance of, CCS and ensure adequate (but realistic) stakeholder consultation in the development of CCS projects; and
  • manage aspects of CCS projects which could cross jurisdictional borders, not only including environmental liabilities but also transport and ownership of storage formations and injected materials.

Given the lead time to design, permit and build CCS facilities, CCS project proponents need robust policies around these key issues to be in place by 2010 if the G8 objective is to be met. Furthermore, addressing these challenges will be crucial to the efforts of stimulating the global deployment of CCS beyond 2020.