What is CCUS?
Carbon capture, use and storage (CCUS) involves the capture of CO2, generated from energy intensive sources, such as industrial facilities and power generation plants. Once captured, CO2 is used on-site or transported and then either permanently stored underground or used for alternative purposes (e.g. enhanced oil recovery or feedstock for industrial purposes), thereby significantly reducing its release into the atmosphere. CCUS therefore carries significant strategic value as a climate mitigant. In particular, the International Energy Agency’s ‘Sustainable Development Scenario,’ which models how the world might reach its sustainable energy goals, notes that CCUS will play a key role in meeting these goals as it “extends to almost all parts of the global energy system” (source). Meanwhile, in the UK, CCUS been identified by the Climate Change Committee as a “necessity not an option” for meeting net zero targets (source).
There are currently around 300 CCUS projects at various stages of development globally (source). Significant growth in the number of projects is expected to occur in the coming years as companies and governments increasingly look to CCUS technologies to help meet climate targets.
Cross-border CCUS projects, pursuant to which CO2 is generated in one jurisdiction and permanently stored in another jurisdiction, are of increasing interest. This may be an attractive (and even necessary) project structure where the origination jurisdiction lacks appropriate geological formations to permanently store CO2. In such cases, a CCUS project can still be viable if the generated CO2 can be transported and stored elsewhere. For countries which have the ability to store CO2 for neighbouring jurisdictions, this presents a potentially lucrative cost incentive and an opportunity to subsidise domestic decarbonisation efforts.
While CCUS is not a new technology, there are only around 35 operational CCUS projects globally (source), with such operations mostly concentrated in North America and some areas of Europe. In most countries, the underlying regulation required to set up large-scale CCUS projects is nascent (and, in many cases, not yet existent). This provides a unique opportunity for companies and governments to pioneer these ‘first of a kind’ projects and to be at the forefront of global climate change efforts, particularly where cross-border cooperation is involved. However, this will only be possible through the establishment of regulatory regimes which sufficiently incentivise project developers, whilst protecting the environmental and other interests of relevant stakeholders. Such opportunities also present an ‘untrodden path’ of issues spanning local regulation, applicable international laws, and contractual risk allocation, occurring at both local and international levels as CO2 is transported and eventually stored across borders. Accordingly, the stakeholders in any successful cross-border CCUS project will need to carefully consider these issues at an early stage and develop clear strategies to appropriately mitigate risks, including through close dialogue with governments and cooperation across borders.
In this three-part blog series, we will take a closer look at the key issues and considerations involved in cross-border CCUS projects. In this part 1, we outline the overarching issues which are likely to apply across the entire CO2 export chain, as CO2 is transported from an originator country (the Export Jurisdiction) for permanent storage in a different country (the Import Jurisdiction). In parts 2 and 3, we will consider specific issues in more detail as they occur at each stage of the CO2 export chain.
One of the prevailing issues with any cross-border CCUS project is who will carry the emissions liability for the CO2 as it moves through stages of the export chain, and across borders. To make the project commercially viable, it is unlikely that the original CO2 emitters in the Export Jurisdiction will accept a retention of long-term liability for CO2 when it is transported to, and stored in, the Import Jurisdiction. Accordingly, the liability for the CO2 will need to pass from entity to entity as it moves, partly via contractual arrangements and particularly if this is necessary to mitigate against imprecise or unclear legislative regimes. For example, under the UK Emissions Trading Scheme (UK ETS) legislation, liability for the transport of greenhouse gases by pipeline (for geological storage in a storage site) falls to the “operator,” i.e. the entity having control over an installation’s operation at any given time. Since “operator” is not defined by reference to the origin of CO2, liability at law should pass to the various operators within the CCUS export chain from emitter, to transport operator then to permanent storage operator. However, liability under the UK ETS does not dictate common law liability which could look to other operators within the export chain. In addition, if CO2 were to be transferred across the UK border, the interaction of international and/or EU legal principles would also have to be considered.
Allocation of risk
As CO2 moves across borders, it will also be necessary to ensure the entire project chain complies with all applicable legislative regimes. For example, technical specifications in relation to operational assets (such as methods of transport) may conflict across jurisdictions and will require harmonisation. Some of these requirements may be recorded via contractual arrangements between parties but, to ensure a consistent approach is taken across legislative regimes, could also be negotiated in a bilateral treaty between the governments of the Import and Export Jurisdictions or otherwise through regulatory alignment. We will consider, in detail, what such a treaty may address in subsequent parts of this blog series.
International trade, tax and customs
It will also be important to consider the impact of international trade laws on any cross-border CCUS project. For example, any subsidies received for the import or export of CO2 will need to comply with the World Trade Organisation (WTO) Agreement on Subsidies and Countervailing Measures (the SCMA) which prohibits subsidies contingent upon exports. This may affect the project depending on the nature and requirements attached to any government incentives provided for carrying out CCUS activities. In addition, the SCMA requires the withdrawal of any subsidies that have a negative impact on the products of other WTO members in any market. This could be an issue for a cross-border CCUS project if there is a competitive market for CO2 storage.
In addition to trade issues, specialist tax advice will be required due to the complex supply chain and multiple potential profit centres associated with a cross-border CCUS project. Particular areas to be considered include:
- whether VAT (or equivalent) is fully recoverable;
- what capital reliefs are available in each jurisdiction;
- transfer pricing;
- whether there are any relevant conflicts in the respective tax regimes of the Import and Export Jurisdictions; and
- whether there are any tax incentives available from governments in each jurisdiction. For example, this may be relevant if CCUS activities are being used to extend the life of an oil and gas facility (such as by repurposing a natural gas pipeline to carry CO2).
Environmental and waste concerns
The transport of CO2 carries a clear environmental risk. If the CO2 leaks from the transport or storage infrastructure, there will be a question as to who will inherit the environmental liability for this under applicable local and/or international environmental laws. From an immediate health, safety and environment perspective, we would expect liability to lie with the operator of the facility, infrastructure or vehicle from which CO2 leakage occurs, but governments may also be willing to share some of this risk in certain circumstances. We note in many cases (within developed regimes around the world) long-term liability for storage of CO2 will only pass to governments if certain conditions are met e.g. the storage facility has been decommissioned. For example, in Hungary, long-term liability for CO2 storage passes to the government only if, among other requirements, twenty years have passed after closure of the storage facility and the facility operator provides a report confirming that the stored CO2 is expected to permanently remain in the storage facility. To determine the government position on risk and liability allocation, early engagement with relevant ministries and regulatory bodies is strongly recommended.
In addition, from a carbon pricing perspective, where a jurisdiction imposes a carbon tax (or similar) on carbon emissions, if CO2 is captured, transported and stored, but subsequently leaks into the atmosphere, there is a question around: (i) which entity (original emitter (or emitters if there is commingling of CO2), transporter or storage operator) is responsible for the carbon pricing associated with such leakage (assuming such a leak would be caught by the relevant carbon pricing regime); and (ii) under the rules of which jurisdiction such carbon pricing should be applied. As noted above, a bilateral government treaty could prove useful for addressing such issues.
The characterisation of CO2 as a waste product, as is the case under certain legislative regimes, could trigger multiple domestic and international considerations, particularly if CO2 is to be transported across borders. For instance, at an international level, the Basel Convention restricts the transboundary movement of waste. While CO2 is not explicitly listed as a waste product in the Basel Convention, there is currently no clear consensus on its categorisation under this regime. Certain of its characteristics (e.g. corrosiveness and toxicity) mean there is a material risk it could fall within the scope of this regime.
There may also be separate considerations at a local level. For instance, under Indonesian law, there are restrictions on any import of “waste” into Indonesia both from abroad (Articles 69(1)(c) and 69(1)(e) of Law 32/2009) and where activities result in the discharge of waste into Indonesia’s environment (Article 69(1)(f) of Law 32/2009) (relevant for permanent storage of CO2 in Indonesia as an Import Jurisdiction). CO2 does not expressly fall under the definition of “waste” under either of the relevant local regulations. However, these definitions are not intended to be exhaustive. It would therefore be possible for the Indonesian regulator to bring new waste materials, such as CO2, into scope.
As is clear from the above examples, further analysis is recommended on a project specific basis, to determine whether CO2 is classified as waste under applicable international regimes (such as the Basel Convention) and any relevant local regimes, with appropriate steps then being taken to mitigate the resulting implications.
In the next part of this three-part blog series, we explore the first stages of the CCUS export chain: we consider how CO2 will be aggregated and processed in the Export Jurisdiction and then transported to the country border with the Import Jurisdiction.
The final part of this blog series will analyse the issues associated with CO2 crossing the border and its eventual storage in the Import Jurisdiction.
If any of the topics in this series are of interest to you, please do not hesitate to reach out to us for further discussion.