ESG Explainer: Sucking up to Carbon Capture

Sometimes viewed with scepticism, carbon capture and storage (CCS) could be coming into its own as a mitigating factor in hard-to-abate sectors.

The recent Intergovernmental Panel on Climate Change (IPCC) working group III report on climate change mitigation identified carbon capture and storage (CCS) as an integral element in reducing GHG emissions across the energy sector.

“Net-zero CO2 energy systems entail: a substantial reduction in overall fossil fuel use, minimal use of unabated fossil fuels, and use of CCS in the remaining fossil system,” says the report. Moreover, limiting global warming to 2⁰C or below will leave a substantial amount of fossil fuels unburned and could strand considerable fossil fuel infrastructure. “Depending on its availability, CCS could allow fossil fuels to be used longer, reducing stranded assets.”

This explainer looks at the potential of CCS in CO2 emissions reduction and the net zero pathways of investee firms in asset owners’ portfolios.

What is carbon capture and storage?

The IPCC says CCS is an option to reduce emissions from large-scale fossil fuel-based energy and industry sources, provided geological storage is available. CCS provides the storage component of the carbon dioxide removal (CDR) methods of direct capture from the atmosphere (DACCS) or from biomass (BECCS). While CCS is a mature technology in the oil and gas industry (used for gas processing and enhanced oil recovery), it is less mature in the power, cement and chemicals production sectors. In these industries, says the IPCC, CCS is “a critical mitigation option”.

UK-based analysts Carbon Brief describe ten carbon removal technologies, including DACCS whereby carbon is sucked out of the air and either buried underground or used in chemical processes; BECCS, in which crops that extract CO2 from the atmosphere are burned for energy with the resulting emissions sequestered underground; and afforestation and reforestation.

CCS initiatives under way include Shell’s Quest facility in Canada, which to date has captured more than six million tonnes of CO2. Shell says it is the largest onshore capture facility in the world with dedicated geological storage. An upgrader turns bitumen from oil sands into synthetic crude that can then be refined into products such as gasoline and jet fuel. Shell uses hydrogen to upgrade the bitumen to a lighter oil and the CO2 created by this process is captured, pressurised into a liquid that can be transported by pipeline to well sites, where the liquid CO2 is injected more than two kilometres underground into a layer of rock filled with interconnected pores. Shell says Quest is on track to capture and store more than one million tonnes of CO2 every year.

What role can CCS play in net zero transition?

Gerben Hieminga, Sector Economist at ING, says CCS has a huge role to play in energy transition and net zero ambitions. “At present, CCS removes around 40 megatons of CO2 (MtCO2) from the atmosphere, annually but by 2030 under a net zero scenario, this must rise to 1,700. A huge increase in capacity is required to stay within warming targets, so from an energy transition point of view CCS is very important.”

His colleague, Gido van Graas, global head of New Energy Technologies at ING, says CCS is a very important technology for hard-to-abate sectors, where 15-20% of the global CO2 generated could be reduced by carbon capture by 2050. “There are a few challenges to address and industry, governments and financial institutions will have to play an important role in doing that.”

Making CCS happen is at the forefront of the strategies of traditional oil and gas companies, but also companies involved in heavy industries like steel and cement, adds van Graas.

The IPCC estimates the technical geological CO2 storage capacity globally is around 1000 gigatonnes of CO2, which is more than the CO2 storage requirements required through to 2100 to limit global warming to 1.5°C. “If the geological storage site is appropriately selected and managed, it is estimated that the CO2 can be permanently isolated from the atmosphere,” said its latest report.

The International Energy Agency (IEA) says direct air capture plays an important and growing role in net zero pathways. “Capturing CO2 directly from the air and permanently storing it removes the CO2 from the atmosphere, providing a way to balance emissions that are difficult to avoid, including from long-distance transport and heavy industry, as well as offering a solution for legacy emissions.” In its Net Zero Emissions by 2050 Scenario, the IEA said direct air capture technologies must capture more than 85 Mt of CO2 in 2030 and around 980 in 2050, requiring a large and accelerated scale-up from the current almost 0.01.

The IEA says governments and industry are “getting behind” direct air capture, with commitments of almost US$4 billion made since the beginning of 2020 to fund DAC initiatives. Research and development funding has been created in the US, Australia, Canada, Japan and the UK.

While CCS can play an important role, even under “favourable conditions” its role is likely to be limited, according to research commissioned by the Asia Investor Group on Climate Change (AIGCC). The analysis of CCS projects in China, India, Japan and South Korea found technical challenges around the scalability of CCS. AIGCC said “significant research” would be required to assess the sustainability of storage formations, such as how to reduce the risk of carbon leaks. It also identified a “financing dearth”, noting that some commercial banks are reluctant to finance CCS due to “a lack of revenue stream and high commercial failure rate”.

What role are governments playing to facilitate growth?

The UK government has identified carbon capture, usage and storage (CCUS) as a technology that will play an “essential role” and is a “necessity, not an option” in achieving net zero. The government plans to deploy CCUS in a minimum of two clusters by the mid-2020s, and four clusters by 2030 at the latest, with an ambition to capture 10MtCO₂ per year by 2030.

In the US, the American Jobs Plan put forward the largest proposed investment into carbon capture commercialisation by a single government, according to the Global CCS Institute, an international CCS think tank. If enacted, the policies could increase US carbon management capacity 13-fold by the mid-2030s. The policies include development of direct air capture facilities, power plants with carbon capture and saline CO2 storage commercialisation.

The European Union’s climate-neutral by 2050 target depends in part on CO2 removal techniques based on CCS either in combination with DACCS or BECCS. In April, EU farming ministers adopted conclusions on carbon farming, which aim to encourage agricultural practices that help to capture carbon from the atmosphere and store it in soil or biomass in a sustainable way. The conclusions specify Council expectations from the certification framework for carbon removals, for which a legislative proposal will follow at the end of this year, to ensure that economic value is attached to practices that increase carbon removal and storage, based on scientifically proven measurement requirements.

In the Netherlands, the Dutch government is to invest €2.1 billion in what it says will be Europe’s first and largest CCS project. The Porthos project is being developed by a group of companies including Shell and ExxonMobil. It will capture carbon emissions from factories and refineries in the Port of Rotterdam and transport and store them in empty gas fields beneath the North Sea.

China has completed 35 CCUS projects, but most are on a demonstration-scale and largely implemented by state-owned enterprises under the government’s guidance, rather than as commercial projects, says a report by the Oil and Gas Climate Initiative (OGCI). A large-scale CCUS project is in operation at China National Petroleum Corporation’s (CNPC’s) Jilin oilfield, five are due to start operation in 2021, and ten are under consideration or in development, including China’s first CCUS hub, part of OGCI’s KickStarter initiative (designed to shift from one-off facilities to low-carbon industrial hubs) and three other CNPC-led hubs. Together, these projects have the capacity to capture and store over 19 million tonnes of carbon dioxide per year.

In Australia, the government is investing more than A$300 million in CCUS over ten years, including a A$250 million CCUS Hubs and Technologies programme. The technologies stream will help fund the research, development and commercialisation of CCUS technologies and identification of viable CO2 storage sites, while the hubs stream will help fund the design and construction of shared CCUS infrastructure between co-located CO2 emitters.

What more is required to facilitate CCS development?

The deployment of CCS at scale will rely on policymakers giving further direction to utilities and investors, says the IEA. “Policy actions will need to take into account local and regional power market characteristics and the anticipated role of CCUS-equipped plants in the market, which may evolve over time as flexibility requirements increase. The availability of CO2 transport and storage infrastructure or demand for CO2 from users will be critical to underpin investment in CO2 capture facilities at power plants.”

Policymakers are likely to need a range of approaches to support successful business cases and accelerate deployment of carbon capture technologies in power generation, including capital support, such as grants and provisions, public procurement, tax credits, regulatory standards and obligations, and operational subsidies.

CCS is necessary for a 2°C scenario, but won’t work without public-private collaboration, says energy consultancy Element Energy. Policy instruments should be tailored according to regions where the specific political, legal and cultural contexts are considered. It adds that a policy instrument should not be solely focussed on providing revenue for stored carbon but also needs to incentivise efficient investment in CO2 network infrastructure. “Finally, all parties will have to contribute to the scale-up costs of CCS: governments in terms of tax breaks or investment, the private sector via investment measures or certificates and end users via levies (e.g. fuel consumers).”

In developing the Quest initiative, Shell says close engagement with policymakers, other industrial emitters and regional organisations was key. This ensures that oversized transport and storage infrastructure is fully used, as other emitters are incentivised and encouraged to capture and supply carbon dioxide.

What are the challenges with CCS?

An ING report says the biggest challenge to the scaling-up of CCS has been cost. For instance, the cost of production with CCS can range from US$70-US$130 per tonne in cement production, featuring an increase from US$30-US$80 per tonne when production is unabated.

However, if industrial producers are looking to reduce their emissions, which they will increasingly be required to do as companies and governments work toward realising their net zero targets, CCS is now one of the cheapest options. In ammonia and ethanol production (that is based on natural gas), incorporating CCS would raise the cost by 20%-40%, whereas electrolytic hydrogen would increase the cost by 50%-115%. “This is why CCS—with its potential to capture large amounts of CO2 per year—is likely to be particularly attractive for hard-to-abate sectors such as cement, steel, and fertiliser,” says the report. “The technology is gaining additional attention with its potential to be paired with bioenergy [BECCS] and generate negative emissions,” said ING.

As fossil fuels are unlikely to be completely phased out by the middle of the century, CCS will become a crucial way of reducing net emissions. ING warns that because of this, CCS also risks being used to delay disruptive carbon reduction as opposed to being viewed as an adjunct to decarbonisation efforts. “To tackle this problem, a range of efforts is needed from governments, investors, corporates, environmental groups and the public, to keep CCS in check. It’s become clear that CCS used for coal-fired power generation will be way less tolerated in the future.”

CCS infrastructure is crucial and the most efficient solution is a cluster approach, where facilities are located in proximity to the carbon emitters, says van Graas. “The North Sea area has ample opportunities to develop CCS clusters and the UK, Norway, Denmark and the Netherlands have initiated projects there. Also in the US, we see CCS activity in the Gulf of Mexico. To expedite CCS on a global scale, governments must develop and support these CCS projects and associated infrastructure.”

A UK government consultation on CCUS found support for the technology was conditional “above all” on safety. “Participants were concerned about the safety of both the storage and transport of CO2, in particular the perceived risks of leaks and earthquakes, and the harm these might cause to marine life. Participants’ support was also conditional on CCUS making a significant and timely contribution to reaching net zero by 2050. They wanted its costs to be weighed against its impact on the net zero goal. A small group of participants were strongly opposed to CCUS because they saw it as not addressing the problem of producing CO2 emissions and they regarded it as unsafe and unnatural.”

Because of their concerns about safety in particular, participants in the consultation felt that there should be oversight and regulation of all stages of CCUS projects which is independent of government and industry.

While most risks in CCS are general and can be mitigated over the course of a project, there are other risks, which have emerged from several market failures that the private sector considers too great to accommodate, says a report from the Global CCS Institute. These risks include revenue risk due to insufficient value on CO2, inter-dependency risks as some CCS facilities may involve single sources, sink and/or pipelines; and unlimited long-term storage liability risk. “Investors are unlikely to generously fund projects exposed to any of these risks. If they do, capital will be expensive. To achieve net-zero emissions, governments must implement policy frameworks that mitigate and manage risks, allocating them to organisations best placed to manage them at lowest cost.”

How can asset owners support the development of CCS?

ING’s Hieminga says the current carbon price in Europe of €70-80 per ton makes the CCS business case viable “on paper”, but the region is still lacking the essential infrastructure for CCS. “Governments are in the driving seat to develop infrastructure and once it is in place, asset owners will have a strong incentive to invest in CCS. Large oil and gas infrastructure companies are already working with governments on the types of facilities required, but they take time to put in place.”

CCS makes sense from an economic point of view as it is one of the key technologies to reduce carbon emissions and can help in hard-to-abate industries where renewables are not perfect substitutes for fossil fuels and long-term options such as hydrogen are not yet cost effective, he adds. Moreover, CCS is likely to not just be an intermediate technology, as it could play a role in dealing with the temperature overshoot forecast by the IPCC report. “In the longer term, CCS will be required to remove carbon from the atmosphere, for example by applying it to/on bioenergy plants.”

The definition of a sustainable investment in the EU taxonomy, adds Hieminga, will help CCS development, as gas has been labelled as a green investment. “For emissions targets to be compliant for gas plants, CCS has to be applied.”

Van Graas says there is an “interconnection” between what governments can do in terms of subsidies and carbon pricing and the decisions investors make. “Investors and the industry are ready to support CCS projects and an increased cooperation between all the stakeholders including governments will expedite the process. CCS is a key technology in decarbonising society and as a financial institution we are very keen to support that.”

Building CCS facilities and infrastructure requires a lot of capital, he adds, but with the right policy support and long-term capacity contracts from emitters they will provide cash flows that match the risk/return profiles of investors and banks, which is “extremely important for growth in CCS to take off”.

Van Graas likens CCS to the renewable industry 15 years ago: “To materialise, most of the projects relied on subsidies from governments. I believe it is imminent that more CCS projects will come to market and be backed by government support and banks and asset owners will be more willing to finance these.”

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