Carbon capture and storage

1
Carbon capture and storage

• Emission trading / ETS
• State aid issues

08.02.2008 Dag Erlend Henriksen
2
Issues to be addressed

• Norwegian Greenhouse Gas Emissions Trading Act
• Main provisions
• Carbon capture and storage
• The need for incentivising regulatory framework
• How could CCS fit into ETS?
• Challenges ahead

3
Norwegian Greenhouse Gas Emissions Trading Act (I)

• Section 3
• The act applies to CO2-emissions from energy
  production
• The King may lay down regulations providing for
  the application of the act with regard to
  activities not mentioned
• Section 4 Any person engaged in the activities
  mentioned (the operator) is subject to the duty
  to surrender allowances, cf also Pollution
  Control Act section 11 second paragraph
• Section 6 NAP

4
Norwegian Greenhouse Gas Emissions Trading Act
(II)

• Sections 7 and 8
• The four year period 1998-2001 is the basis
  period for allocation of allowances
• Free allowances
• Operators that during this period were engaged in
  any of the land-based activities covered by the
  act
• On average, land-based activities will be
  allocated allowances equal to 100 of their
  emissions from process activities and 87 of
  their emissions from energy activities
• No free allowances
• Offshore petroleum activities regardless of when
  the activity was established
• Operators whose activities started after 31
  January 2001
• A reserve is set a side - a "first-come,
  first-served" allocation of free allowances to
  gas-fired power plants based on carbon capture
  and storage and for highly efficient combined
  heat and power production that holds a license to
  build and operate
• Qualified operators will receive free allowances
  equal to 85 of their emissions
• Need to demonstrate with a significant degree of
  certainty that normal operations will begin prior
  to 1 January 2013

5
Norwegian Greenhouse Gas Emissions Trading Act
(III)

• Section 9
• Yearly issue of allowances in accordance with the
  allocation decision
• Transfer of allowances to the operators account
  in the Emissions Trading Registry
• Section 10 notification required in case of
  expected / experienced long-term outage or
  decision to cease operation
• Section 13 duty to surrender allowances within 1
  May corresponding to emission level for the
  previous calendar year
• Section 15 the King may lay down regulations
  relating to issuance of allowances based on
  emission reducing projects in sectors not subject
  to the duty to surrender allowances

6
Norwegian Greenhouse Gas Emissions Trading Act
(IV)

• Brief comparison with the Emission Trading
  Directive (2003/87/EC)
• On average more allowances allocated free of
  charge in the EU ETS (cf art 10 at least 90)
• No basis period providing a cut-off date
• No CO2 tax Norwegian offshore CO2 tax applies
  in addition to the Norwegian ETS
• higher environmental costs for Norwegian
  operators
• end of free allowances post 2013 for Norwegian
  operators?
• separate Norwegian ETS for the transport
  sector?

7
Carbon capture and storage (I)

• The need for incentivising regulatory framework
• How could CCS fit into ETS?
• Challenges ahead

8
Carbon capture and storage (II)

• The need for incentivising regulatory framework
• At present CCS abatement costs too high cannot
  be internalised through i.e. power prices
• Weak potential for EOR
• Prohibitions / restrictions assumed to be too
  costly
• Stimulations / removal of barriers
• The role of the state
• The role of the ETS
• International legislation

9
Carbon capture and storage (III)

• The role of the state
• Participation (investor) or contribution (public
  authority)?
• Investor
• Investing on commercial terms / equal terms as
  other stakeholders
• Market economy investor principle
• Public authority
• State aid restrictions could apply
  justification required
• If aid is involved, it could be aimed at a well
  defined objective of common interest and be the
  appropriate instrument to address a market
  failure, have an incentive effect to and be
  proportional to correct this market failure, and
  result in limited distortions of competition and
  trade such that an overall positive balance is
  achieved.
• State aid issues could also arise in relation to
  the interface between any of the parties within a
  CO2-chain
• EU Commission several initiatives, a.o.
• EU Sustainable Fossil Fuels Network
• support schemes should be established by Member
  States for early demonstration of CCS

10
Carbon capture and storage (IV)

• The role of the ETS - some questions to be
  answered
• Different owners to different facilities within
  the CO2 chain
• Does the capture facility take over
  responsibility for the flue gas?
• Who is responsible for the emissions from the
  capturing facility?
• Will there to avoid state aid issues have to
  be a pricing mechanism for the interface between
  the flue gas providing facility (e.g. a power
  plant) and the carbon capture facility, and if
  so, what is the correct price?
• Given that the flue gas providing facility is
  subject to ETS, will the establishment of the
  carbon capture facility influence its obligation
  to surrender allowances? Should it not be to the
  benefit of the CO2 producing facility if
  emissions are reduced through CCS?
• Why should the providing facility not be
  responsible for the whole process related to the
  CO2 in its flue gas, including emissions in the
  capturing and separation process as well as
  possible emissions from transportation and
  storage?
• Who will bear the costs of carbon capture and to
  what extent does the polluter pays principle have
  any influence on this?
• Who will be responsible for the final storage of
  the captured CO2?
• Behind all these questions lies one major
  challenge, why should any facility contribute
  with its flue gas to a carbon capturing facility?
  And, how should the regulatory framework be
  amended to incentivise such contribution, or at
  least not to hinder this?

11
Carbon capture and storage (V)

• Is opt-in necessary and what are the
  consequences?
• Or, is CCS already inside the ETS?
• What will it take for CCS or even CC to influence
  
• the allocation / issuance of allowances?
• the duty to surrender allowances?

12
Carbon capture and storage (VI)

• Norwegian government has proposed to include such
  facilities in the ETS through the opt-in
  mechanism provided in art 24 of the Emissions
  Trading Directive (Ot prp nr 66 (2006-2007))
• Commission Communication 23 January 2008
  confirmed that
• ... the current ETS, before 2012, can
  recognize CO2 captured and safely stored as not
  emitted
• Assumed that facilities for capture and storage
  of CO2 fall outside the scope of the Norwegian
  Greenhouse Gas Emissions Trading Act and the EU
  Emissions Trading Directive

13
Carbon capture and storage (VII)

• Emission Trading Directive art 3 (e) - definition
  of installation
• installation means a stationary technical unit
  where one or more activities listed in Annex I
  are carried out and any other directly associated
  activities which have a technical connection with
  the activities carried out on that site and which
  could have an effect on emissions and pollution
• Sufficient connection between the CO2 producing
  facility and the capturing facility?
• Applicable for the capturing facility only or for
  the rest of the CO2 chain?
• Norwegian Greenhouse Gas Emissions Trading Act
  no similar definition, but could the CO2 chain be
  regarded as one activity?
• Different owners to different facilities
• Norwegian regulations define emission source
• separate identifiable point or process
  in an activity where greenhouse gases are
  emitted

14
Carbon capture and storage (VIII)

• Possible consequences of opt-in
• Provides legal basis for CCS to influence duty to
  surrender allowances
• But, if allocation of free allowances is
  reversed, there is no incentive if polluter-pays
  principle requires payment of full capture cost,
  or even CCS cost
• Would opt-in result in a requirement for the
  capturing facility to surrender allowances equal
  to the residual CO2-emission?
• If so, could the CO2 producing facility and the
  capturing facility be regarded as one activity?

15
Carbon capture and storage (IX)

• Why should CCS influence allocation / duty to
  surrender allowances
• Key words are safely stored, cf Commission
  Communication 23 Feb
• Verification of storage, cf proposal for storage
  directive

16
Carbon capture and storage (X)

• How could CCS be promoted
• Engagement from public authorities required Legal
  basis need to be developed for all parts of the
  CO2 chain
• Ability to use CERs through CDM from CCS projects
  
• Verification of safe storage crucial
• Ambitious targets for reductions of greenhouse
  gas emissions