Too little, too late? Challenges to deploying CCUS at scale

As we continue to face a global climate crisis, there is an urgent need to decarbonise all sectors of the economy. Ambitious global commitments such as the Paris Agreement of 2015 have been set by governments over the past decade. We can expect further global commitments to be made at COP28, which starts this week.

Although some industries have potential to switch to renewable energy sources to minimise greenhouse gas (GHG), others like cement produce CO₂ as an unavoidable by-product, with alternative solutions unavailable currently at cost effective prices. This is especially critical considering that cement production alone contributes to around 8% of global GHG emissions (source).

The role of CCUS in decarbonisation

Carbon capture, use and storage (CCUS) is a suite of technologies that allows the capture of CO₂ at the point of emission, after which it can be transported then either used (e.g. for feedstock in industrial processes) or permanently stored underground, ensuring it is never released into the atmosphere. CCUS is a potentially useful component of the ‘toolkit’ necessary to achieve global climate mitigation targets. 

CCUS is not a new technology and there are currently around 41 operational facilities globally but, to date, it has historically only been deployed at a small scale in R&D projects and for enhanced oil recovery (Global Status of CCUS Report 2023, CCUS Institute). The potential contribution of CCUS to global mitigation scenarios, including the IEA’s Sustainable Development Scenario, suggests the amount of CO₂ captured would need to grow from current levels by around a factor of 20 by 2030 to meet global climate change goals (source).

Challenges with deploying CCUS at scale

One of the challenges with deploying CCUS at scale is that there are many different stakeholders to align, as can be seen in the below diagram, including: (i) CO₂ emitters who, from carbon intensive processes like cement and steel production, generate CO₂ emissions; (ii) providers of technology used to separate and capture CO₂; (iii) providers of transportation, processing and compression solutions to move CO₂ towards storage sites from emitting facilities (such as via truck, pipeline or ship); and (iv) storage providers who inject and store the CO₂ underground. The many roles involved in the process are often carried out by different, distinct entities. Given the nascency of the industry, it is challenging for one stakeholder to take on all the roles given that differing expertise is required (and technology is current unproven at scale), and the capital expenditure and cross-project risks across the entire value chain would be too great for one entity to take onto its balance sheet. As the industry matures, vertical integration of this value chain may occur over time (as we have seen in the hydrocarbon industry) or may be successful when deployed by state-owned enterprises such as in the MENA region (see below).

Encouraging each of the stakeholders in a CCUS project chain to make positive financial investment decisions together is a challenge and poses a coordination problem; in practice it is difficult for emitters of CO₂ to develop a CCUS solution if they cannot be confident that there will be transport and storage solutions available for that CO₂. Meanwhile, transport and storage providers will have to invest in permitting and development of expensive infrastructure at their own risk until there is clarity as to sufficient supply of captured CO₂ emissions from customers. In a nascent, complex industry like CCUS, there is an understandable reluctance to be a first mover and risk being stranded with an asset.

Global trends

In the last few years, there has been a significant increase in the appetite to develop CCUS projects: a 50% increase in capture capacity from 2022 to 2023 alone (Global Status of CCUS Report 2023, CCUS Institute). This has been driven by governments around the world under increasing pressure to meet global climate targets, implementing robust regulatory interventions and providing clear price signals in order to make CCUS commercially viable. Through these policies, governments are beginning to create capacity in transport and storage facilities for emitters to use, who are now more willing to invest in carbon capture given the likely availability of transport and storage solutions – hence beginning to resolve the issue of coordination.

Different policy approaches are being taken by governments to encourage the deployment of CCUS at scale, for instance:

Europe: in addition to a large number of subsidies and grants available for ‘first mover’ projects (in both capture technology/facilities and transport and storage solutions), the EU approach to decarbonisation rests on a high and ever-increasing price on carbon under the EU ETS (which is continuing to increase in sectoral coverage) as well as a carbon border tax (the Carbon Border Adjustment Mechanism (CBAM)) (see our blog here) to incentivise abatement activities such as CCUS outside the EU.

UK: the UK has taken a formalised, prescriptive regulatory approach towards its goal of setting up four industrial CCUS ‘clusters’ (i.e. projects arranged in regional hubs around the UK where multiple emitters can benefit from shared transport and storage infrastructure) by 2030.

The UK business model is split into two elements:

• on the emitter side, the government will provide project developers with subsidies on a similar basis to existing renewable energy support to help with their incremental capital and operating expenditure costs. Emitters will also have relief against certain cross-chain risks along the CCUS value chain, protecting against unavailability of transport and storage infrastructure in certain circumstances;
• meanwhile, private entities providing transport and storage infrastructure will benefit from a regulated utility style arrangement and government support package, respectively providing a regulated revenue stream and protecting against high impact risks such as long-term liability for CO₂ leakage from transport and storage infrastructure.

United States: incentives under the Inflation Reduction Act provide project developers with a 50 dollar per metric tonne of CO₂ tax reduction where CO₂ is stored in dedicated storage sites.

Middle East and North Africa (MENA): CCUS in MENA now accounts for approximately 8% of operating global capacity (Global Status of CCUS Report 2023, CCUS Institute). Projects showing the most promise across the MENA region are being developed by national companies such as Saudi Aramco and ADNOC where an entire integrated chain of capture, transport and storage is being established (including in partnership with international companies). As noted above, these vertical integrated structures are typically difficult to establish in nascent industries, but the MENA approach has so far been successful due to being led by state-owned companies which are able to deploy government influence and large capex towards projects. There is also significant potential for establishment of CCUS hubs using shared transport and infrastructure given the region’s existing assets such as natural gas fields and industrial clusters.

Asia-Pacific (APAC): a fragmented scope of regulatory approaches is being taken across APAC. Although we are seeing increasing interest in setting up these value chains and ecosystems across the region, development of policy, regulation and direct government intervention is behind other regions such as Europe, with much of the current activity currently following a merchant model approach. APAC has substantial long-term potential for CCUS capabilities, serving as a unique basin ecosystem from North China to Australia, with significant opportunity for cross-border collaboration. However, greater clarity on regulation will be required in the coming years for projects in development to become operational.

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Although there is no one solution to deploying CCUS at scale, effective government intervention and policy is crucial in enabling CCUS and providing the right environment to encourage its large-scale deployment.

As the industry matures and economies of scale develop, the need for government intervention will likely reduce, much like the trajectory of other low-carbon industries such as offshore wind in the UK. In the meantime, it is an exciting time as advisors and stakeholders in this space to develop these first-of-a kind projects, work with governments and find unique solutions to support the growth of the CCUS industry into a mature market and asset class.