Standardizing legal framework for CCS to reduce costs and risks

Ingvild Ombudstvedt

1                    Introduction

In November 2022, the UN Climate Change Conference (COP27) was hosted in Sharm el-Sheikh, Egypt. COP27 brought the world’s nationstogether to discuss how to tackle the global “climate emergency”. [1] The term climate emergency refers to global warming and the resulting climate change,[2] extreme weather events, and the urgent need to act to slow down and abate the rise in global temperature.[3] Global warming and climate change impact sea levels, results in loss of habitat and biodiversity, and affect human lives, food sources, livelihoods and economies. Climate change is, to a large extent, driven by human activities, and by emissions of greenhouse gases such as carbon dioxide (CO₂),[4] stemming from among other things burning of fossil fuels.[5]

To reduce greenhouse gas emissions in the atmosphere, there are severalnature-based[6] and industry-based methods available and in use today. One such industry-based method is carbon capture and sequestration[7] (CCS). CCS entails capturing CO₂ fromanthropogenic emission sources, compressing the CO₂ before transporting it by ship, pipeline or truck and then injecting and storing it in a geological formation.[8] The United States (US) has a number of CCS facilities and is one of the front-runners deploying CCS large-scale.[9] Many oppose CCS, due to its ability to prolong the life of “dirty energy”, such as oil and coal.[10] Critical voices emphasize incentives for CCS and CCS infrastructure as provided for by the Inflation Reduction Act (IRA) in reality result in an increase in emissions due to increased output of coal and gas for the power plant operators receiving public funds for implementing CCS.[11]

While it is important to support less polluting forms of energy other than fossil fuels, many countries around the world have been struggling with energy security for a long time.[12] More recently, the ongoing war in Europe is leading to, among other things, a reduction in energy supply from Russia. In addition, there has been sabotage of European energy infrastructure,[13] also contributing to energy shortages and all time high energy prices.[14] Thus, continuing fossil energy production will be needed to meet an increasing global energy demand, or even crisis, for many years to come. CCS lowers the emissions related to the processing and burning of such fuels, implying that major energy producing countries like the US should continue their efforts to deploy more CCS facilities. Further, CCS is a tool for crucial but emissions intensive industries, such as cement and steel, to continue production with a reduced carbon footprint.

CCS is expensive and challenging to implement without huge private investments or public funding through instruments such as tax credits. Reducing costs is therefore an important issue for CCS. In order to reduce the costs, we need both refinement of technology and legal frameworks. Regulatory refinement entails both identifying and closing gaps, as well as standardization to reduce risk, time and resources spent preparing, permitting and operating projects. Across the US, many states have their own framework for CO₂ sequestration, effecting predictability, transparency and efficiency for both operators and regulators, especially for projects crossing state lines.

2                   the legal framework for ccs in the united states

In addition to the US being an important energy producer and supplier, and one of the countries in the world with the most CCS facilities, the country is also one of the leading nations for CCS legal frameworks. In the US, CO₂ geological storage is regulated under the Safe Drinking Water Act and the comprehensive Underground Injection Control (UIC) Program, Class VI.[15] The program’s main focus is protecting the underground drinking water in the US and is complemented by a number of other state and federal frameworks for administration, management and conservation of natural resources, climate and environment.[16]

The UIC Class VI framework contains minimum requirements for permitting, operation and decommissioning of CO₂ storage projects but leaves a lot of issues for individual states to regulate directly, such as property rights and land-use, permits related to characterization of the storage sites, and long-term liability for the storage site after decommissioning, to mention some.[17]

3                   Gaps, barriers and issues falling through the cracks

This interaction between federal and state frameworks is something US regulators and industry are used to dealing with. Through decades, or even centuries, of industrial ventures in the US, gaps and barriers resulting from these dual or interlinked frameworks have been carefully identified and addressed through case law, amended frameworks and new regulations. For CCS, we are in the early stages of commercialization, implying that the framework is not yet fully tested on projects.[18]

Several states are applying for primacy[19] with the US Environmental Protection Agency (EPA) to take over the primary enforcement authority for the CO₂ sequestration activities within their state border. There are also efforts setting up state specific framework for CCS to regulate issues such as permitting, operational and long-term liabilities and property rights. However, there are still many unanswered questions, remaining gaps and individual differences from state to state, implying the location of the project will heavily influence the risk, predictability and long-term liability of the project.[20] The individual state frameworks reduces predictability in a number of things, such as how the courts will address questions related to for example trespass resulting from CO₂ migrating subsurface from one property to another after injection.[21]

Having major differences from state to state may potentially reduce the willingness of experienced operators to engage in projects in multiple states, or establish multi-state projects with shared infrastructure. It may further reduce the value of potential standard off-take agreements for CO₂ to be stored, as they would have to be adapted to accommodate for individual state frameworks. Even more importantly, these differencesresult in the need to engage local expertsas well as more time and resources spent sorting out local frameworks and permitting regimes when, for example, planning a project, applying for a permit to drill a characterization well, or assessing the long-term responsibility and liability for the storage site after decommissioning.[22] As an observation, the differences may also reduce the value of sharing experiences between CCS regulators across the states, as well as complicating the regulatory oversight and interaction between the US EPA and the state regulators, as there is no common approach.

4                   standardization

Legal and regulatory gaps, barriers and uncertainties contribute to increased costs deploying projects, both directly and indirectly. One well-known method of reducing costs is to standardize production, operations or methodology.[23] There are many ways of standardization. For CCS, there are already several technical standards available which allow CCS operators and regulators to access the best practices and methods to, for example, monitor, quantify and verify CO₂ injection operations.[24] The standards are privately negotiated and voluntary to use, usually as part of contractual framework. They are already taken into use by industry around the world. They are also recognized by regulators in countries like the US and Norway and referred to as part of the regulatory regime. In the US, the Internal Revenue Service (IRS) has recognized a technical standard for enhanced oil recovery as a method for quantification and verification of CO₂ stored as part of CO₂ enhanced oil recovery (CO₂-EOR) for the purpose of obtaining tax credits for CO₂ stored under the 45Q regime.[25] Meanwhile, in Norway, standards for pipeline transportation and CO₂ geological storage are recognized in the guidance document to the CO₂ Safety Regulation to ensure safe transport and storage operations.[26] In both the US and Norway, these standards are filling out performance-based criteria on a voluntary basis, implying that the operators may pursue other methods instead.

Another method to standardize operations and reduce costs is standard contracts. Standard contracts are already used for many industrial operations around the world, such as for construction, production and sales of oil and gas, wind energy and other major industries.[27] Standard contracts help, among other things, to reduce costs through simplification of procedures.[28] Also, such contracts can reduce the time spent negotiating contracts between the commercial partners in the projects.

For CCS, it could be beneficial to look into development of standard offtake agreements for CO₂, both for the reasons mentioned above and to enable more investments into these expensive projects. An offtake agreement is a long-term agreement between a buyer and a seller, in which there is a commitment to buy or take all or a portion of the future outcome or production over a pre-determined period.[29] For CCS, the storage operator could guarantee to take the CO₂ captured from a specific emission source even before the capture facility is build, which could help the emission source seek funding to build the capture facilities in the first place. The offtake agreement can be presented to an investment bank as a guarantee for future tax credits under the 45Q regime,[30] which the IRA of 2022 increased to 85 USD per metric ton captured and geologically stored.[31] Said differently, the investment bank may place an investment in the emission source’s capture facility against a guarantee of the future tax credits. These sort of agreements are well-known already to the CO₂-EOR industry.[32] For CO₂-EOR, the operator undertakes to buy a certain amount of CO₂ being produced from a CO₂ reservoir[33] or captured from an emission source. The CO₂ is then injected into the petroleum reservoir to increase the amount of petroleum produced. If the CO₂ comes from an emission source, the emission source will be eligible for a 45Q tax credit of 60 USD per metric ton stored.[34] For CCS, the emission source often depends on a reversed value chain, with the emission sources paying the operator to take the CO₂ off their hands rather than selling the CO₂ for CO₂-EOR operations.

In a standard contract, several elements should be included, such as allocation of liability. This brings us back to the point of individual and separate frameworks from state to state, and also to the topic of this blog, which is the importance of standardizing the legal framework for CO₂ storage in the US beyond the current Class VI Program. As mentioned, the UIC framework in the US does not regulate long-term liabilities for CO₂ storage sites. While the 27 countries in the European Union have a mandated transfer of liability to the competent authorities a certain period after decommissioning of a CO₂ storage site,[35] many US states have not addressed long-term liability at all, and many of those that have do not recognize any transfer of said liability.[36] Meanwhile, some states recognize transfer of liability in their state CCS framework.[37] This variety of such fundamental elements poses a challenge to a wide use of standard offtake agreements for CO₂.

Also, the lack of a standardized legal framework in the US results in operators or project owners spending more time and resources to commence projects in the first place. It could be assumed that the EPA and other regulators are spending more resources on regulatory organization and oversight. EPA, which would also be permitting a lot of the CO₂ injection operations around the US, would have to pick up projects in the intersection of state and federal frameworks. A more streamlined approach to CCS projects on a state level could potentially save EPA efforts when, for example, handling permit applications, which may also reduce the overall time it takes to process such an application and get the project up and running.

5                   A way forwad?

Since CCS can play a role for both energy security and emission reduction for energy and carbon intensive industries, the US should consider standardizing the legal framework beyond the current state of the UIC Class VI Program. In particular, the US should address the long-term liability and other variations in state framework. This may be done either federally, or as a coordinated state effort. Being mindful of state sovereignty in addressing property rights, imposing a federal framework for this may be challenging. However, EPA could draw up guidelines and encourage state implementation. There are also possibilities for the federal authorities to take on some of the liabilities for the storage sites, to further incentivize deployment of CCS to ensure the US meets its Paris Agreement obligations.

Settling some of the above-mentioned issues through a standardized framework could support deployment of standardized industry contracts for the CCS value chain, allowing for cost reductions and time savings in planning new projects, as well as predictable allocation of liability. This is not just an important step for each individual project, but would simplify the use of shared infrastructure and value chains crossing state borders, which inturn reduces the costs to CCS even further. It may further help industry deploy climate change mitigation value chains across the US, focusing first and foremost on where the best value chains, infrastructure and geology are and not so much on where the best lucrative legal framework is.