EU climate change package – impact on carbon capture and storage

On 17th December 2008, the European Parliament adopted the EU's climate change package, which aims to ensure that the EU will achieve its climate targets by 2020: a 20% reduction in greenhouse gas emissions, a 20% improvement in energy efficiency, and a 20% share for renewables in the EU energy mix. This article summarises the impact of the package on the nascent carbon capture and storage (“CCS”) industry.

Directive on the Geological Storage of Carbon Dioxide (CCS Directive)

The main scope of the CCS Directive is the regulation of CO2 storage and the removal of barriers in existing legislation to CO2 storage. The CCS Directive goes further than the UK’s Energy Act in that it covers CO2 storage onshore as well as offshore. The CCS Directive contains a regulatory framework addressing site selection, exploration permits, storage permits, operation, closure and post-closure obligations and third party access to CCS infrastructure.

Site Selection and Exploration Permits

Member States retain the right to select CO2 storage sites, as long as there is no significant risk of leakage at such sites and no significant environmental or health risks exist. Where exploration activity intruding the subsurface is required in order to determine the adequacy of a site for CO2 storage, such exploration must only be carried out with a permit.

Storage Permits

The storage of CO2 must be authorised through a permit. To this end, the CCS Directive sets out:

• the information to be contained in storage permit applications, which would include proof of an applicant’s technical competence, the characterisation of a storage site, the proposed quantity of CO2 to be injected and stored at the site, a description of measures to prevent significant irregularities, the applicant’s proposed monitoring, corrective measures and provisional post closure plans for the storage site and proof of financial security;
• the conditions for the grant of such permits, which would include the competent authority being satisfied with the applicant’s financial capability and technical competence;
• the information to be contained in the permit itself, which would include the precise site location, the total quantity of CO2 to be stored, the applicant’s approved site monitoring plan and the requirement for financial security.

Priority for the granting of a storage permit for a given site will be given to the holder of an exploration permit for that site provided that the exploration activity is complete, the conditions of the exploration permit have been complied with and the application for a storage permit is made during the validity of the exploration permit.

Review of Storage Permits

The competent authority shall review and where necessary update (or as a last resort withdraw) a storage permit:

• if it has been notified or made aware of significant irregularities or any leakages; or
• if the reports submitted or the inspections carried out show non-compliance with permit conditions or risks of significant irregularities or leakages;
• if it is aware of any other failure by the operator to meet the permit conditions; or
• if it appears necessary on the basis of the latest scientific findings and technological progress; or

without prejudice to points above, five years after issuing the permit and then every ten years.

Operational Obligations

The CCS Directive states that the CO2 stream shall consist “overwhelmingly” of carbon dioxide, although it may contain associated substances from the source, capture or injection process and trace substances added to assist in monitoring and verifying CO2 migration. The acceptability of the CO2 stream will be based on a risk assessment of the impact of the level of other substances in the CO2 stream. The CCS Directive places obligations on the permit holder to monitor storage sites for significant irregularities, CO2 leakage and migration as well as detecting any significant adverse effects for the surrounding environment (including in particular on drinking water), human populations or users of the surrounding biosphere.

At least once a year the operator will submit the results of his monitoring to the competent authority together with the quantities and characteristics of the CO2 stream delivered and injected. The operator will also submit proof of the financial security required.

Member States will be obliged to carry out routine inspections at least once a year until 3 years after closure and then every 5 years until transfer of responsibility to the competent authority, together with such non-routine inspections as are necessary. Where there are significant leakages or irregularities the operator will be obliged to take the necessary corrective measures.

Closure and Post-Closure Obligations

On closure of the storage site the operator will remain responsible for ongoing monitoring, reporting and corrective measures as well as all obligations regarding the surrender of allowances in the case of leakage and all preventative and remedial action. The operator shall also be responsible for sealing the storage site and removing the injection facilities. In the UK the Energy Act has extended the provisions of the Petroleum Act 1998 regarding the abandonment of offshore installations to apply to carbon storage installations.

The responsibility for a closed site will transfer to the competent authority if and when all available evidence indicates that the stored CO2 will be completely and permanently contained and a minimum period of 20 years has elapsed. It is open to Member States to apply more stringent criteria i.e. a minimum period of more than 20 years. This is a significant length of time given that the monitoring, reporting and corrective measures obligations will have been ongoing throughout the operational phase too, for tens of years prior to closure of the storage site. It will also be necessary to prove that all financial obligations under the permit have been fulfilled and that the site has been sealed and the injection facilities removed.

Financial Security

Member States will be required to ensure that proof that adequate provisions can be established (by way of financial security or otherwise) for the obligations under the storage permit (and all obligations regarding the surrender of allowances in the case of leakage) is presented by the applicant as part of the application for a storage permit, to be effective from the date injection starts to the date that responsibility is handed over to the competent authority. Therefore companies wishing to carry out storage activities will have to secure funding for their projects ahead of the permitting process and this could involve significant costs for the applicants with no guarantee that the storage permit will be granted to them, particularly if the application is made pursuant to a competitive tender process.

In addition to the financial security required for the operational and post-closure phase, before the transfer of responsibility to the competent authority, the operator shall make a financial contribution (to be determined having regard to the site characteristics and the CO2 storage history) to cover at least the anticipated cost of monitoring for a further 30 years.

Third Party Access

The CCS Directive provides that Member States take the necessary steps to ensure that potential users are able to obtain access to CO2 transport network and storage sites for the purpose of geological storage of CO2.

Other

The CCS Directive contains amendments to three existing Directives so that the risks of CO2 capture, the assessment of the environmental impact of CCS projects and any liability for local environmental damage arising from CCS projects are all covered by existing EU legislation. Member States will be required to transpose such provisions into national law, and for the UK this will mean amending the provisions of the existing implementing legislation.

Operators of new installations with an output of more than 300MW will be required to assess whether storage sites are available and whether CO2 transport and retrofit for CO2 capture are technically and economically feasible. If the conditions are met, suitable space must be set aside on the installation site for the equipment necessary to capture and compress CO2.

EU ETS

From 2013 onwards CCS will be included in the EU ETS; however allowances will not need to be surrendered for CO2 emissions that are permanently stored or avoided. In addition 300 million allowances will be set aside from the new entrants reserve to help stimulate the construction and operation of up to 12 commercial demonstration projects. The value of this support mechanism will depend on the price of CO2 when the gas is eventually injected and stored; it is anticipated that this number of allowances could generate in the region of 6 – 9 billion euros.

Next Steps

Member States have a period of 2 years to transpose the CCS Directive into national law. There may be a further opportunity for companies to be consulted on the terms of such implementing legislation. Of particular interest to companies wishing to carry out CO2 storage activities will be the form and extent of the required financial security, the extent of post-closure and post-termination obligations of the licence holder and the conditions for termination of the licence. Key investors will also want to be involved in any consultation process to ensure the legislation is developed in a way that will enable the delivery of viable and bankable CCS projects.

To read our recent law-now on the European Parliament’s adoption of the climate change package, please click here.