Where countries have set very ambitious climate goals without presenting appropriate policy plans on how to achieve them (i.e. PA), CCS might prove essential. CCS refers to a collection of technologies that enables the capture and liquefaction of CO2 emissions from industrial and fuel combustion plants either before the combustion or after. The liquid CO2 is subsequently transported by train, pipeline, ship or other transportation means and injected deep below ground into the microscopic pore spaces of underground geology sites. The last stage, which is likely to last thousands of years, is concerned with the environmental requirement of ensuring and monitoring the long-term storage of CO2 in the site to detect and prevent its leakage into the atmosphere.
While CCS is not the answer to address all of the challenges of climate change, science emphasises its pivotal role in enabling countries to mitigate it. The 5th Intergovernmental Panel on Climate Change Assessment illustrates how, among 147 scenarios examined, only 3/6 have a possibility greater than 66 per cent at maintaining CO2 at or below the amount required to keep the temperature below 2 degrees without the adoption of CCS. The latest report of the Committee on Climate Change, the body advising the UK Parliament on Carbon Budgets to achieve the goals set out by the Climate Change Act 2008, depicts CCS as being “key for meeting future carbon targets”. This because, achieving a net decarbonisation of modern economies by 2050 without CCS, as envisaged by the International Energy Agency , is simply unrealistic. In terms of transportation such as aviation and shipping, for example, humanity is still strongly dependent on fossil fuel consumption. To fully de-carbonise the economy, as many as 100 operative CCS projects should be in place by 2020 and over 3000 projects by 2050. Today, the portfolio of large-scale projects has only expanded from eight in 2010 to fifteen and with twenty-two CCS commercial projects expected to be operational by 2020. None of these, however, are located in the EU notwithstanding the latter has position itself as “leading” the battle against climate change. Among the existent CCS plants, three (two in Norway and one in Algeria) operate on natural gas while the fourth is located in Canada and involves the capturing of CO2 from a synfuels plant and injection in the Weyburn-Midale oil field (Saskatchewan) to enhance oil recovery. The main purpose of this project is to demonstrate the safe and monitored long-term containment of CO2. Thus, the component technologies of CCS per se are satisfactorily mature as CO2 capture is already commercially deployed in other industries such as gas and ethanol production. Similarly, there is sufficient experience in relation to the other two steps of CCS technologies (CO2 transport and storage). The combination of the three stages of this technology, however, is still at a pre-commercial stage, especially in relation to long-term containment of injected CO2. As emphasised above, in order for CCS to make a meaningful contribution to combating climate change, its commercial scale demonstration must take place, which, in turn, requires dedicated policy intervention, including, appropriate legal and regulatory framework. Contrastingly to science, which grew in the appreciation of CCS technologies with time, political support fluctuated and weakened since the early 2000s. Only recently, CCS was reintroduced as a topic of discussion on the policy makers’ agenda. For example, Norway requested a permit application for injecting and storing carbon dioxide in the North Sea and the European Commission acknowledged the role of CO2 removal to achieve the objectives of the PA.
iii. Reasons for Lack of Development
CCS, as a “technological fix” , has enjoyed extensive political endorsement, publicity and critiques. Some consider it as “the only promising option to reduce global warming impact from large fossil fuel usage” and as being able to contribute to one fifth of the efforts necessary to reduce energy-related CO2 emissions by 2050, as envisaged by the IEA. Others believe CCS to be a “false hope” and an “expensive distraction. This essay essentially adopts a middle ground, which Arranz describes as a reluctant framing rather than enthusiastic. It recognises the unavoidability of CCS as a partial and temporary solution in a climate of prevailing urgency to remove fossil fuels from an energy mix composed of other variable sources like renewable energies, which should nonetheless retain priority in terms of development and incentivisation. Importantly, there are four main elements that have contributed to CCS’s developmental failure.
First, the philosophical foundation behind CCS employment is controversial per se. The raison d’etre of this technology is to enable continued use of fossil fuels in a carbon emission constrained world. While CCS might prove beneficial to carbon intensive economies, it could provide further incentives to rely on fossil fuels, especially in developing countries, and result in a carbon lock-in, which occurs when the energy systems obstruct public and private efforts to introduce alternative energy technologies. Economic advantages associated with CCS include, on the one hand, the enhancement of energy security as it would enable countries like Korea and Japan, which are not rich of natural resources, to diversify their energy mix by allowing them to continue to utilise stable and cheap fossil fuelled energy generation compared to renewable energies. On the other hand, CCS also promotes energy prosperity by allowing developing countries to exploit their coal and oil reserves to achieve economic growth without further worsening the concentration of GHGs in the atmosphere. Thus, a particular emphasis should also be placed on the social utility of CCS as a fundamental tool in global emissions reduction strategies, especially in emerging economies, where dependence and demand for fossil fuels remain very high (e.g. India and Brazil). Thus, CCS is supported by the idea of self-defence illustrated by Gardiner. Countries are optimistic and seek to adopt CCS because it enables them to mitigate climate change whilst maintaining a predominant fossil fuel consumption until 2050 with similar infrastructure and avoid the social, economic and ecological transformation inherent to its abandonment. It allows them to “buy time”. The desirability of CCS adoption, therefore, largely depends on the preliminary assumption made. Clearly, if one country adopts a mitigation strategy that includes the continued use of fossil fuels, then, by implication, climate goals cannot be achieved without CCS.
Secondly, this technology presents extensive environmental risks. The CO2 stored could leak and be released back in the atmosphere. That would undermine the goal of climate change mitigation, have potential fatal effects on human life, and damage the surrounding flora and fauna. This has been considered the most significant risk associated with CCS. Model studies demonstrate that the majority of geological formations present leakage rates below 1% over 1000 years but above 0% – meaning that there is a risk that the CO2 will escape eventually. These risks, however, are inferior to those associated with nuclear power plant explosions, for example, as demonstrated in past to more recent incidents like Chernobyl (1986), where several individuals died during the plant explosion and subsequently as a result of the radiations. These dangers did not stop this industry from developing on a commercial scale. Rather, in the late 70s, some countries, like France, even assisted the nuclear industry’s development directly by granting interest loans. This comparison suggests a divergence between the approach adopted to promote nuclear energy and the reluctance relating to the development of CCS, which seems to go well beyond the necessity to protect the health and environment.
Third, while one way to reduce emissions is by increasing energy efficiency, CCS, differently from nuclear, is not an energy generating technology. Rather, it is directly controversial to such goal as it uses between 10 and 40% more of the energy produced by a power station. This is called “energy penalty”. Efficiency losses increase resource use and amount of CO2 stored – hence amplified environmental damages and emissions. Inter alia, this is one of the reasons why CCS is not a fully functional option yet.
The final and most significant factor affecting CCS development, in this author’s opinion, is the capital intensity of CCS infrastructure. Greenpeace criticises this technology because it would not save the climate in the long term for being too costly, dangerous and yet to be deployed on a large-scale. Boretti also considers the slow and costly demonstration of CCS very problematic if such technology is to be considered as “bridging” for countries to switch from a carbon economy to a renewable-based energy system. Realistically, however, these obstacles are not insurmountable and are not new to the students of technological change. As already mentioned, other industries, such as natural gas and nuclear, faced similar challenges such as capital intensity and uncertainty about the technology’s performance. Those, contrastingly, benefitted from extensive government support and incentives for private industries to invest in commercial scale projects. Thus, the reason why this technology is still at its infancy, especially in the EU, could be attributed to a lack of funding and investment triggered by the absence of incentives for the private sector coupled with an uncertain legal framework governing the operation of CCS. This essay argues that a strong degree of incentivisation is necessary for a regulatory framework to succeed in ensuring the evolving success of an emerging technology like CCS. The development of new and transformational underground technologies, like CCS, requires ample financing by the private sector and the government, convergence of science and technology, and solid public awareness. These three factors are inextricably linked. It is hard to secure financing if the technology is not proven. Similarly, financing might also be hindered by laws and public policy that fail to encourage new initiatives to address concerns relating to the environment and industry practices. Arguably, political will rather than expertise seem to be the shortfall in this context, and consequently, an inability to introduce a financially sound plan to render CCS more economically attractive. The question, therefore, is: how would the appropriate regulatory framework look like?
3. INCENTIVISING THE DEVELOPMENT OF A NEW TECHNOLOGY: PECULIARITIES INHERENT TO CCS REGULATION
The previous section provides an account of why CCS is an essential component to the effective achievement of climate goals and as a mitigation strategy. Nevertheless, notwithstanding this technology’s fundamental character, it has failed to develop in the EU. Before analysing the key legal measures that have led to such failure, this section seeks to identify the challenging elements relating specifically to the incentivisation of CCS from a regulatory standpoint and devise a solution for each.
This thesis starts from the presumption that the incentivisation of CCS is crucial for its development. While technical and engineering challenges vis-à-vis the integration of capture, transport and storage into a full-chain project remain present, the most critical barrier to CCS commercial demonstration and deployment is the absence of a system of comprehensive policy and legal measures, including financial measures encouraging further development, from governments. As Bell explains, such appropriate legal framework is a natural precondition to ensure sufficient incentivisation, the technology’s successful economic performance, risk management and social acceptability. Albeit questions of property ownership for storage sites can be clearly addressed by any regulatory framework, the technological, technical and economic uncertainties associated with large-scale deployment of CCS can only mitigated by regulation rather than eliminated. McHarg explains that these are considered “institutional risks”. Any regulation adopted in relation to CCS is likely to fail to meet its objectives. These risks usually materialise from either regulatory error per se, such as making premature commitments that impound on the credibility of the legal measure; or from regulatory inaction, such as failing to provide investors with sufficient legal certainty to promote investments or to re-assure the public vis-à-vis the introduction of a new technology. This essay focuses on the latter instance, which is referred to as “incentive framework” and exists in the EU, but, as it will be demonstrated in the Section 4, is largely ineffective.
This thesis supports the argument that an appropriate incentive framework must be both balanced in dividing obligations and liabilities for the public and private sectors equitably, and offer legally certainty. Difficulties in drafting the appropriate incentive regulatory framework arise in three main contexts: degree of government intervention, public policy goals and liability regimes. This essay considers them against the background of incentivisation and the necessity thereof. Additionally, it particularly focuses on the first and last elements, leaving public policy goals aside. This because this thesis seeks to conduct its analysis on the ability of the regulatory framework to ensure the provision of incentives for private stakeholders to invest in CCS development. It acknowledges both public policy goals and risks, but also clarifies that these have lesser direct impact on investors than the liability structure and financial incentives. Rather, they shape the way policy is formulated.
First, it is important to consider the market potential of CCS. The latter strictly depends on whether it provides commercial advantages compared to alternative CO2 reduction strategies. A technology is economically viable if it has a positive co-benefit ratio. The retrofit infrastructure integral to the CCS technology, especially in relation to capture equipment, however, is economically unattractive because it increases the cost of electricity generation (hence, decreases the efficiency of the plant); requires additional and upfront capital investment, which increases uncertainty ; and long lead and asset times. Large capital expenditure is generally translated into longer times for a project to become commercially viable. These are both investment and economic risks. If there is no demand for the product or the costs are greater than expected, the investor could lose capital and be exposed to the risks of market power. Both McHarg and Meadowcroft et al. explain that commercial viability can only be achieved through extensive government policy in this context. The gap between the costs associated with CO2 capture by CCS and the incentive for operators for doing so must be minimal, if non-existent, to render CCS attractive. This could be achieved by inducing technological advances to lower CCS costs and introducing stricter climate policies. If these risks are not addressed effectively, they could raise the cost of capital to the detriment of consumers or deter investment altogether. Meadowcroft et al. identify two inclusive elements that come into play when addressing economic risks in this context. First, a tool which is widely recognised for promoting cost-effective climate mitigation responses is the imposition of a price on carbon emissions or a carbon tax . These are prices applied to an amount of carbon pollution to encourage fossil fuel consumers to reduce the amount of GHG they emit in the atmosphere. Carbon pricing could be the principal driver to reduce emissions through CCS deployment, so long as CCS is considered more cost-effective than other mitigation options (hence depending on its market potential) and CCS technologies are technically feasible. Nevertheless, this method should be accompanied by other policies that induce innovation, lower market barriers and reduce technology costs. This because, as explained by Jaffe, a single policy measure cannot comprehensively address both barriers to innovation and emission reductions. For this reason, and secondly, government intervention is recognised to be effective in encouraging the development of low carbon emission technologies especially because, when these are yet to be applied on a commercial scale, private actors may be sceptical towards investing in them. Governments, are more likely to be neutral due to the size and scale of their usual operations. Since the cost of CO2 capture infrastructure, which represents the biggest economic challenge in the CCS chain cost must be lowered, emphasis must be placed on funding CCS projects that can demonstrate the functioning of the technology at a commercial scale and initiate the first phase of learning-by-doing. This should eventually lead to a significant decline in the cost of CCS infrastructure.
Second, due to the potential impact that CCS could have on the environment and human health, especially in the context of CO2 leakage, CCS projects are particularly vulnerable to public denigration and political opposition, which raise the same criticisms set out in Section 2. McHarg explains that these are public policy risks. In light of the large revenues of the fossil fuel industry and public enthusiasm for renewable energy and efficiency, there is a major debate about subsidising CCS in the EU. Environmental groups are sceptical about the use of public funds to promote the advancement of fossil fuel technologies. However, unless CCS is supported by a regulatory incentive or is rendered mandatory, it will hardly be considered commercially advantageous and will thus not be developed. Subsequently, a failure to deploy CCS on a large scale could result in the exclusion of unabated fossil fuels from the energy mix, thereby creating an economic risk also for the public per se both in terms of energy security, because, to achieve de-carbonisation, fossil fuels, which are a stable and relatively cheap form of energy, would not longer be utilised to satisfy the public’s energy demand; and of supply and energy costs. For this reason, a regulatory framework must be clear in reassuring the public that their interests will be protected and provide for certainty for stakeholders to enable them to invest. Hence, investment certitude must be carefully balanced with an assurance that public policy objectives such as climate change mitigation, environmental protection and developments in the renewable spectrum are not compromised.
Third, liabilities associated with the usage of CCS technologies, especially in relation to storage, are considered a major obstacle to investment in CCS. Generally, CCS carries three risks : (a) climate change risks arising from large scale leakages, which are could increase over time; (b) environmental, health and safety risks associated with the construction and operation of CCS technologies; and (c) environmental, health and safety risks that materialise from leakage, which are quite serious per se. Liability for leakage, which is the main focus of this section, originates from the CO2 and ownership thereof. If the CO2 belongs to the operator or the investor in the CCS infrastructure itself, depending on the contractual arrangements entered into, the latter is also liable for the risks inherent to injecting and storing CO2. The IPCC indicates that the risk of CO2 leakage in meticulously selected storage sites will remain below 1%, meaning that it is “likely” in the first thousand of years. Nevertheless, when such storage site is competently managed, the risk of leakage lowers to less than 0.1% in one million of years. Ergo, it decreases over time. This because, although CCS is a relatively new technology, it imitates the trapping mechanisms that already retain large volumes of oil and gas underground in stable geological formations. Once the CO2 is injected, it is permanently sequestrated and will hardly leak or be extractable, rendering the likelihood of leakage accidents very unlikely. Thus, as Clarke explains, the storage of CO2 is neither dangerous nor novel. Rather, the risks inherent to it depend on human action and are excessively feared. Additionally, the general assumption is that, in light of the amplified risks posed by climate change and the usefulness of this mitigation tool, disputes relating to CCS liability should not be protracted any more than what is strictly necessary.
This thesis considers that an appropriate liability framework should strike the balance between ensuring that CCS can be developed by not imposing prohibitive burdens on operators; provide certainty in relation to long-term liability; and ensuring adequate risk management and environmental protection to safeguard public confidence in CCS. In doing so, it should adopt a permissive approach in ensuring the minimisation of leakage risks as far as possible by the stakeholders who are more capable to do so and focuses on the long term, which is more problematic than short-term liability. It is where the “typical” interplay between states (public) and operators (private) comes into play. The issue is one of allocation of liability for CCS, especially in the long-term storage of CO2 after CCS operations have terminated. Governments want to promote CCS development to render it attractive to investors (or their operators) while maintaining environmental integrity, minimising the public burden and securing public confidence. Investors, on the other hand, want to keep the costs and risks low and predictable, especially because there are several elements that render liability in terms of CCS operation peculiar and magnified. These include, inter alia, the prohibitively expensive costs of large-scale CCS plants, the scientific uncertainty relating to the performance of the technology, the remoteness and inaccessibility of the storage sites (which render both monitoring and remediation very difficult) and the long time scale predicted for CO2 containment. This essay argues that the entity responsible for the long-term storage liability is the government. Such policy choice would strike an effective balance between the necessity to protect the environment and public policy goals, and the need to incentivise the investment in this emerging technology. Commentators have suggested that long-term liability should be borne by CCS operators, which are more capable of avoiding (leakage) accidents at a lower cost because they have full access to the site and the experience to do so. This liability model would be strongly detrimental to the development of CCS technology. First, as indicated above, the risk of leakage decreases in a well-managed storage facility and, over time, as the CO2 stabilizes in the geological formation. Importantly, because the CO2 remains stored for a very long time, it would be unrealistic for the operators to take on open-ended liabilities. Commercial entities do not survive undefinitively and even the most successful companies’ lifespan does not, usually, stretch beyond 50 years. In light of their “deeper pockets” , the most capable entities to bear liability are governments because of their longevity, their ability to raise capital easily and their extensive financial resources. Second, it would heavily disincentivise investors, which are already committing to fund a highly capital intensive technology and, if also operating the CCS plant, could be exposed to additional costs, which do not necessarily arise from any technical or operational defects but from, for example, a scientific failure to select the most appropriate geological formation, which results in CO2 leakage accidents. Third, the liability framework should also reflect the social utility of the technology, which, ultimately, constitutes a public good because it reduces the emissions in the atmosphere and acts to prevent dangerous climate change. In doing so, it also allows States to fulfil their commitments under international climate treaties such as the PA and thus benefit from the performance of CCS technologies. For this reasons, the development of CCS cannot be left entirely to the private sector. If the latter funds the majority of construction costs of CCS, then a balanced legal liability regime, where the public sector assumes a large part of the liability for long-term storage, could be vital to ensure its balance. A liability framework that imposes onerous and limited obligations of conduct on the operators, but where the State also plays a large role in assuming the risk, would reassure the public that certain standards are being followed nonetheless, both in terms of environmental protection, and in relation to storage procedures. The relevant question that this thesis seeks to answer is whether the legislative tools put in place by the EU do satisfy these requirements to be considered an appropriate incentive framework. Section 4 analyses these legislative tools against the elements identified in this Section.
4. ASSESSMENT OF DIRECTIVE 2009/31/EC: A LEGISLATIVE FAILURE?
In 2008, the EC published the Climate and Energy Package, which contained a series of documents showing increasing attention to CCS after being persuaded by a working group’s final report in 2006, which stressed the necessity to develop both policies and regulatory frameworks for CCS. Among these, there was Directive 2009/31/EC or the Directive on the geological storage of CO2 , which, as indicated by the EC, “establishes the legal framework for the environmentally safe geological storage of CO2 to contribute to the fight of climate change. Hence, it makes CCS possible. It could be considered one of the most complete, detailed and ambitious regulatory frameworks for CCS in the world. The relevant question to this analysis is whether this framework is sufficiently consistent and balanced to stimulate large-scale deployment of CCS against the elements identified in the second Section.
i. Object, Purpose and Scope of the CCSD
The CCSD was adopted very rapidly as the EC worked at an “incredible speed” and the Parliament voted on it very quickly. Thanks to Chris Davies, who worked as rapporteur on the CCSD, the latter is characterised by a comprehensive system of regimes focused on the regulation of geological storage of CO2, the removal of unintended barriers in existing legislation to CCS and the introduction of financial incentives for the development of CCS. The CCSD is compatible with the principles of subsidiarity and proportionality established by Art 5 of the Treaty on European Union. Because this legal measure is, in fact, a Directive, it represents an instrument of minimum harmonization in which legal uncertainties will be inevitable due to the differences in the national implementation choices of Member States. This framework is the exact reflection of the mix of complexities, uncertainties and rapid development of the technological and scientific aspects of CCS. It is nonetheless a controversial piece of law. Recital 4, for example, describes CCS as a “bridging technology” which “should not serve as an incentive to increase the share of fossil fuel power plants”. In reality, however, as strongly emphasised in this thesis, the costs inherent to large-scale deployment of CCS are very, if not prohibitively, high. Accordingly, the EC overlooked the risk of moral hazard that could arise once the technology is fully implemented and functional, whereby there would be no incentive to develop anything else and result in a carbon lock-in, or rather, a continuous predominant reliance on fossil fuels. Arguably, such drafting choice was made to compromise between the suspicion that, as climate change mitigation technology, CCS would not work on its own and the fear that it would undermine safer, cheaper, cleaner and safer constituents (i.e. renewables).
Overall, this piece of legislation provides a general legal framework comprising a number of operational, closure and post-closure obligations such as the requirements to satisfy for site selection, obtainment of storage and exploration permits, monitoring and management of CO2 storage sites. The CCSD mainly focuses on the geological storage of CO2 and amends a variety of existing legislation which represented a barrier to CCS because it was drafted without specific consideration to the regulations of capture of CO2. The amended regulations include the Water Framework Directive, the Regulation on the Supervision and Control of Shipments of Waste (implementing the Basel Convention in European Law), Waste Framework Directive, Integrated Pollution Prevention and Control (IPPC) Directive and Environmental Impact Assessment Directive. Additionally, four guidance documents were published by the EC to support the implementation of the CCSD in Risk Management; Characterisation of the Storage Complex, CO2 Stream Composition, Monitoring and Corrective Measures ; Financial Security and Financial Mechanism ; and Criteria for Transfer of Responsibility. These are only considered soft law rather than binding documents.
iv. The current situation in the EU: failure beyond legislation?
Among 28 member states, the majority has transposed the CCSD. Among those, two decided not to allow storage in their territory (Austria and Germany). The Energy Roadmap outlined by the EU in 2011 explores the different routes toward decarbonisation of the energy system in the EU. Among the several scenarios to achieve an 80% reduction of GHG emissions by 2050 compared to 1990 levels, CCS appears to have a fundamental role in this transition. Currently, however, in the EU, CCS is semi-dormant, thus reflecting the critique made by Greenpeace that it could not deliver in time to avoid dangerous climate change. A decade ago, the EU had predicted that CCS should have been deployed with new fossil fuel plants by 2020. Today, CCS is still very expensive and its performance at a commercial scale remains highly uncertain. The progress rate with large-scale CCS in Europe is much slower than expected. Preliminary estimates indicated that 7 million tonnes of CO2 could be stored by 2020 and up to 160 million tonnes by 2030; and that the CO2 emissions avoided in 2030 could account for some 15% of the reductions required in the EU. However, as of August 2018, the EU is still positive in implementing CCS, has spent (at least) 587 million in grants, subsidies and public procurement for CCS and has zero CCS demonstration plants. What happened?
v. Securing financing of large scale CCS deployment through the CCSD
From the outset, it was clear that CCS deployment would not take place in the EU without some form of policy intervention. Especially because, similarly to any other innovative energy technology, public support is necessary to ensure its development in the form of funding for research, capital support and subsidisation of operating costs. The two forms of policy intervention put in place by the EU do nonetheless match the forms of regulatory intervention identified by Meadowcroft et al. to increase the market potential of CCS.
1) Carbon Pricing
During the Directive’s negotiations in the EU Parliament, one of the most contested themes was the possibility of subsidising CCS. EU legislators, as indicated by Recital 20 CCSD, however, deemed the Emission Trading Scheme to be the most important instrument to stimulate the development of CCS. The ETS was established by the 2003 Emission Trading Directive and is the world’s first major and most ambitious carbon trading scheme. It is a market-based approach whereby there is an overall cap on GHG emissions and market players are given emission allowances which can be traded under this cap, ergo, a cap-and-trade system. The economic rationale behind this mechanism is “profitable emission reduction” as trading provides a strong incentive to companies to cut emissions by saving money by either reducing the emissions to sell their surplus allowances or avoiding to buy additional allowances. Thus, the carbon price raises the wholesale price of electricity, which enables carbon generators to compete on the same level as unabated fossil fuels generators.
Article 12(3) of the ETS Directive indicates that, by including CCS projects under the EU ETS, the CO2 captured and stored in accordance with the CCSD is to be treated as an avoided emission. Hence, operators would not be required to surrender allowances. A strong scepticism has arisen vis-à-vis the role of the ETS in stimulating demonstration and adoption of CCS. Policy makers trusted that, by adopting a carbon pricing mechanism, the market itself would determine the price of carbon, and hence, how to achieve emission reductions. However, it can be clearly said today that the ETS per se was a failure, mainly due to an oversupply in Phase II (which is one of the ETS trading periods where the requirements to surrender emission allowances differ), which rendered the carbon price (14 euros) too low and unstable to attract significant investment in low carbon generation technologies. Especially in the context of CCS, the EC had predicted that, to drive CCS deployment, a carbon price of 40 € or above was necessary. This because the costs of projects to demonstrate the effective functioning of CCS at a large scale is extremely high and unlikely to be fully compensated if the price of carbon is that low. And even if such carbon price were present, the ETS would only be efficient in eliminating one of the market barriers to incentivise large-scale deployment of CCS: the carbon externality. The latter is a cost suffered by a third party as a result of an economic transaction, which, in the context of climate change, is the cost of pollution that has been “ignored” by the industries, which did not recognise it as part of the product price, and borne by the members of the wider public.
In any case, market mechanisms of this sort usually tend to favour technologies that are nearly commercially viable and therefore cheaper, such as wind energy. Technologies at an early stage, which could have greater long-term emission abatement potential but that are currently more expensive, like CCS, risk being locked out from devices like the ETS. Additionally, due to the pure mitigatory and bridging nature of CCS as a technology, which does not generate energy per se and will have to be retrofitted in the future, it is unlikely to develop on a commercial scale if left entirely to the private sector, especially if the only incentive remains the ETS. The latter does not provide the incentives needed to compensate innovators for inducing this technological change and the high costs associated with it. Initial government intervention in terms of funding is a key requirement for enabling such development to take place.
2) Governmental support for technology development
It is clear that additional capital support in terms of research, development and demonstration is necessary for a technology to establish itself. First, because research and demonstration produce knowledge, which is a public good, private stakeholders tend to under-invest in these areas. Second, first demonstration projects involve upfront high capital costs and uncertain return. In those instances, initial capital support is necessary to provide the commercial funding necessary for these projects to take place.
The EU put in place a number of programmes and regulatory instruments to promote the development of CCS. First, the NER300 programme was established in 2009 by Art 10a(8) of the Emissions Trading Directive. It is a subsidy scheme financed by the sale of 300 million emission allowances from the New Entrants Reserved under the ETS. The revenue from the sale would be used to fund CCS demonstration projects and renewable projects. To date, no CCS project has been supported for three reasons. First, because its revenue was dependent on the price of carbon, the EU has predicted it could have raised 4 billion euro. Conversely, as explained above, the price of carbon dropped rather than increased, thereby only raising 2 billion euro. Second, Member States themselves failed to deliver and confirm the projects that they would support and the amount of co-founding that they were able to contribute. Third, in June 2015, the EU commission published an evaluation of the NER300 programme, where it established that the lack of CCS project funding was caused by the financial interest inherent to this technology. However, it has been contested that such failure could have been attributed to the criteria set out by NER300 for a project to be eligible for funding, requiring all elements: capture, transport and storage while companies were strictly interested in the capture element. The only project that had been accepted by NER300 was the UK White Rose coal-fired electricity plant, which was cancelled in 2016 after the UK government decided to cancel its own £1 billion funding. Second, the European Energy Programme for Recovery was established in 2009 with Regulation 663/2009, which granted a budget of (euro) 200 billion to assist the recovery of the European economy after the 2008 financial crisis and stimulate investment in Europe. Six CCS projects received 26% (1 billion) of the 3.9 billions (euro) as part of one of the three categories of projects that are co-financed by this programme. These projects were being carried out in Germany , Italy , Poland , Spain , UK , and in The Netherlands. As of August 2018, all these projects have been terminated both because of uncertainty relating to the technology’s performance and its cost. The EU Research and Innovation Programme Horizon 2020 is the biggest EU Research and Innovation programme, which provides nearly 80 billion euro of funding available from 2014 to 2020. Of that sum, it has been calculated that around 154 million were made available for CCS scientific programmes. The Connecting Europe Facility (CEF) is an EU instrument that promotes growth, jobs and competitiveness by selecting the relevant infrastructure that can receive its funding in the fields of transport, energy and digital services. Over 24 billions euro have been made available from the 2014-2020 EU budget. In order to be eligible for financial support under CEF, a project must be identified as “Projects of Common Interest” (PCI). Four projects for the transport of CO2 have been submitted to date as PCIs and adopted by the High-Level Decision Making Body, composed of senior officials of the Member States and the Commission. Finally, the Innovation Fund is underway and it will be the successor of NER300. Differently from the latter, the innovation fund will be endowed with 450 million allowances to support both CCS and renewable projects on a commercial scale from 2021 to 2030. Yet, this support at the EU level is not sufficient, as CCS is still at demonstration stage and projects cost much more as they are first-of-a-kind. Furthermore, even if there was one successful large-scale CCS project in the EU, the latter also fails to provide revenue support grants to private stakeholders. This kind of funding is necessary, especially vis-à-vis CCS, due to the “energy penalty” and higher costs associated with CCS infrastructure and functioning compared to unabated fossil fuels generators. Additionally, being CCS a low carbon generator, it is more subject to the shift in electricity prices. For these reasons, revenue support is necessary to provide a stable stream to attract funding from private investors.
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