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Posted by: David Hone

A Major Setback for Carbon Capture & Storage

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Perhaps the best thirty minutes I spent at COP18 in Doha was listening to a presentation by Myles Allan, Professor of Geosystem Science in the School of Geography and the Environment, University of Oxford and Head of the Climate Dynamics Group in the University’s Department of Physics. The presentation was given at the opening of the WBCSD Business Day on Monday 10th December and focused on the root issue that must ultimately be dealt with, the accumulation of carbon dioxide in the atmosphere. Myles made the point, very clearly with the aid of props, that while the UNFCCC and others argue endlessly about the flow rate of CO2 into the atmosphere (i.e. the emissions at some point in time), that fossil carbon continues to add to the carbon stock in the biosphere and that this stock is linked directly with global temperature, ocean acidity and so on. A portion of his presentation is available on YouTube. In short, the CO2 issue is a stock problem, not a flow problem. Dealing with it in terms of flow will not resolve the stock issue, at best it may delay it by a few years. At the current rate of accumulation, the 2 deg.C stock equivalent is passed in about 2043.

Myles concluded with just one key observation: that the logical conclusion of the stock approach to climate change (rather than the flow approach) is that CCS is the game changing technology. This comes from the view that the global use of fossil fuels for energy will not go away (and possibly not even decline) and therefore, to prevent the stock of carbon continuing to accumulate in the biosphere, fossil carbon must be returned to its source, the geosphere. As such, the focus of efforts in policy circles should be in getting CCS going as fast as possible.

Against this background came the news of last Friday from the European Commission regarding the award of the 1st round of NER300 project funding for CCS and novel renewable energy projects.

Nearly all RES projects were confirmed. Most CCS projects were, however, not confirmed by the Member State concerned, and therefore could not be retained. Member States were unable to confirm the projects for various reasons: in some cases there were funding gaps, while other CCS projects were not sufficiently mature to allow for such confirmation under the first call for projects.

Only one CCS project was mentioned, but this had already been withdrawn, so no CCS projects made it through to receive funding through the 1st call for projects. There is at least the small consolation that the money earmarked for the withdrawn CCS project will roll through to the 2nd call for projects, but this guarantees nothing for CCS. By contrast, 23 renewable energy projects are listed in the Commission document.

But the NER300 is a mechanism that was initially proposed to support CCS and underpin the construction of some ten demonstration projects across the EU.

It was first suggested in early 2008 by various proponents of CCS both within and outside the EU Parliament and consisted of a pool of 500 million allowances which could be drawn on in exchange for future stored CO2. In very simple terms, it would “multiply the prevailing carbon price”, which was seen as a necessary early step to kick-start this key technology. Throughout the negotiations surrounding the Energy and Climate package, the mechanism morphed somewhat: it linked itself to the New Entrant Reserve (NER), adopted novel renewable technologies, fell to as low as 100 million allowances at one point but ended up at the 11th hour as the final gavel fell at 300 million allowances (hence the name – NER300). As I described back in June;

The mechanism, in combination with a robust underlying carbon price, meant that a viable demonstration programme could emerge. The 300 million allowances could conceivably generate €9 billion in funds, which meant up to €1.35 billion for some projects (i.e. the 15% limit). With potential Member State co-funding adding additional support, a 500 MW end-to-end CCS power station was even feasible and some of the projects originally submitted to the Commission for consideration were on this scale.

But the collapse of the CO2 price in the EU throws a huge question mark over the viability of the programme. So far the European Investment Bank (charged with monetizing the 300 million allowances) have sold over a 100 million allowances at a price of around €8.10 each. That’s a good effort in the current market, but it substantially changes the economics of a project. Now the maximum grant that any given project can collect is €360 million and it will be operating in a €6 CO2 market. Even with matching funds from the relevant member state, now much more challenging due to EU financial circumstances, a large scale project looks very unlikely. Large scale early CCS projects require a CO2 price in the range €60-100, not €20-25 (assuming €6 ETS price, maximum NER 300 financing and some member state co-financing).

The selection process for projects will proceed over the balance of this year with an announcement expected in December, but at least for the CCS part of the NER300 (innovative renewable energy projects are also supported) one wonders how this will pan out.

This had all the hallmarks of a train wreck waiting to happen, with the observers watching from the sidelines. Sadly, despite the efforts of groups such as ZEP, the trainwreck is now underway. The EU Commission has followed the NER300 rules to the letter (which arguably it has to), the market isn’t providing the necessary carbon price for CCS investment and Member State support is lacking given the EU financial situation.

The end result is the sad but unfortunately predictable absence of CCS projects from a funding mechanism specifically designed to support them. While CCS projects will still develop in the UK, Australia, Canada and the USA, no single country has the ambition of the original EU demonstration programme. The NER300 process will continue but CCS may fare no better in Round 2 if action isn’t taken. The Commission and Member States need to reflect on the outcome of the first round of the NER and learn the lessons, perhaps looking again at the conditionality of the funding to ensure that the second round awards result in an overall balance between renewables and CCS across the mechanism as a whole.  The EU Commission has a real challenge in front of it to rescue the situation, although with 200 million allowances now allocated in the first round (albeit with some money returning for the failed CCS project), there is limited resource remaining for a meaningful demonstration of CCS.

If CCS is the game-changing technology for the climate issue, then we may well be on our way to a very different but much more significant trainwreck.



Authored by:

David Hone

David Hone serves as the Chief Climate Change Advisor for Royal Dutch Shell. He combines his work with his responsibilities as a board member and Chairman of the International Emissions Trading Association (IETA). Additionally, he works closely with the World Business Council for Sustainable Development and has been a lead contributor to many of its recent energy and climate change ...

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December 24, 2012

Derek Taylor says:

I am not sure that I agree with Rex about the EU ETS not working. After all we appear to be hitting our 2020 Kyoto target - which was its main or only objective. Selling the NER to fund CCS demonstration could even have worked, if there had been enough new fossil-fuelled installations coming on line in Europe. There has not been. In a way this is, of course, a good thing - though not for the carbon market! A rapid rethink is urgently required. Simply tinkering with the ETS will not now support CCS demonstrations anywhere near as soon as is necessary.

i agre with Rick on the lack of leadership and (high level) discussion on CCS. It is clearly a subject that has lost its sex-appeal very quickly. This is nothing short of disastrous given the IEA's recent announcement of world coal demand continuing to rise to record levels.

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December 21, 2012

Wilmot McCutchen says:

CCS never was realistic, and the danger to the groundwater from displacing an ocean of brine from deep saline formations was ignored,  This is a good example of what the GAO (Sep. 2012) called the stove-piped science separating experts in considering the water-energy nexus.  For more information on the reason CCS is a stupid and dangerous idea, see http://www.vorsana.com/co2andairpollution/ccstimetopunt.html

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December 21, 2012

Nathan Wilson says:

This dismissal of CCS is just hand waving and arm-chair science.  Only large scale (many gigaWatts) field trials (over decades of study time) will conclusively answers the question of safety and effectiveness of CCS.  The longer we delay these much needed real-world tests, the more climate risk we take.

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December 22, 2012

Wilmot McCutchen says:

So what would you do with the brine?   

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December 20, 2012

Rajat Sen says:

I agree that cost-effective CCS is important since our heavy reliance on coal for electricity will continue for a while. I also agree that robust funding of CCS technology development and demonstration is important. My issue, however, what CCS technologies to pursue. It is highly unlikely that the current technolgies will be economic and I am not aware of any new technologies that are practical. I think the focus must be on finding new innovative low cost CCS technologies. Support for research for such an effort should be increased substantiallty.

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December 20, 2012

rex gaisford says:

I am curious as to why anyone thought that the EUETS was going to work in the first place. The paper I wrote in Feb 2011 ( http://www.rexconsult.com/Pricing%20Carbon%20under%20a%20CPI%20program.htm ) demonstrated that this was never likely to happen.

The EU has gone ahead with selling a large number EUA's to furnish NER 300. It has flooded the EUA market and has created even more excess liquidity in the EUA "currency". The predictable outcome of "currency" devaluation has occurred and the currency to fund CCS has become effectively useless. Many other fundamental flaws in the EU ETS concept are discussed in the paper. So why do we continue to put our faith in a system that is by all normal standards unsound?

We need to deal with the carbon problem as it is quite likely to cause world catastrophe. CCS is probably the best short/medium term measure available to deal with it quickly and effectively. Other jurisdictions are funding CCS in conventional ways so they are pressing ahead with deployment. In Europe we are stuck with egos snared in a failed system and no action.

It is time to move on.  

 

 

 

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December 20, 2012

Rick Engebretson says:

Finally, a discussion of carbon cycles. As a biophysical chemist, I remember this is represented in chemical kinetics as forward and reverse reactions and some steady state equilibrium. Otherwise, input and output might also be useful terms.

I don't know anything about all the carbon finance schemes, but I do know forests are rapidly being plowed under to grow $8/bu. corn or soybeans. These crops grow for a few months before tractors again pass over every inch to harvest and fill waiting trucks. Instead of pushing carbon sequestration, current economics makes conservationists look stupid and incompetent.

Coal mines and oil wells are big, but our farmlands and forests are far bigger. I don't know exactly how to change a system that feeds us and powers us. But as this article suggests, we don't just have one train speeding toward destruction; we have two trains speeding towards each other for double destruction.

And there isn't a bit of discussion or leadership to be found. The windmill salesman hates you and calls you a denier, and the plunderer hates you and calls you a tree-hugger greenie. So you end up writing dumb comments on TEC.

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December 20, 2012

Derek Taylor says:

I agree very much with David.

The important thing now with the NER300 is that the second round of funding is successful from the point of view if CCS. We need to urge the Commission to consult thoroughly with relevant Member States to be certain that at least three CCS demonstration projects are in a position to be given all the necessary government support guarantees and to take advantage of the possible funding - and then to time the launch of the round accordingly. 

The criteria also need to be examined closely and modified to increase flexibility and to ensure that all potential demonstration projects, including natural gas-fired power plants, would have a proper opportunity to win funding.

Delaying the timing of the award decision for the first round could have avoided David's "trainwreck". While we should appreciate the Commission's sense of urgency to get projects moving forward, they must not repeat the same mistake by rushing the second round.

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