July 28, 2016

Achieving Carbon Capture and Storage

On July 13, Senators Heidi Heitkamp and Sheldon Whitehouse introduced a bill to extend and expand certain federal tax credits (known as “45Q” credits after that section of the Internal Revenue Code) for carbon capture and sequestration (“CCS”).  The bill has received bipartisan support from climate hawks, coal boosters, and now Democratic vice-presidential candidate Tim Kaine. Since for now and the foreseeable future there is no alternative to fossil fuels for U.S. baseload electricity generationaside from hydropower (currently 6 percent of generation – with limited ability to grow), and nuclear (doomed – unless and until the cost and safety issues can be fixed)CCS could serve an important role in U.S. climate change efforts . . . but only if two barriers can be overcome: cost (compared to non-CCS coal and gas), and the lack of any credible regulatory regime governing CCS safety issues.

The first barrier is simple: it costs a bundle (about 50% more) to build and to operate a fossil-fuel plant with CCS compared with its non-CCS counterpart. There are two main reasons for this. Firstand this is by far the most serious cost problemis that the power load required to capture the CO2 from the exhaust stream can be as much as 30% of the plant’s power output (meaning, the plant has to be 25% larger than if it did not have CCS). The second barrier is the cost of the gathering and storage facilities.  As things stand now, the only incentive to build a plant with CCS is the hope that there will be a market in the United States (or elsewhere) for this technology in the future.  Plants built today are just a development cost for industry. But that future market necessarily depends on a carbon tax or other carbon price. The only commercial advantage CCS has versus non-CCS plants is that the former will be paying far less of a tax than the latter.

The second barrier is regulatory. While we are accustomed to barriers created by regulation, in this case the barrier is the lack of regulation.  Section 45Q (and other CCS-related Code provisions, such as Sections 48A and 48B) does not (yet) have any requirements governing such things as whether the geology of the storage area is appropriate for keeping the CO2 underground, the amount of time the CO2 has to stay there, and who is responsible for any leakage.

Start with keeping the CO2 where it is put.  If the goal of CCS is to avoid that CO2 winding up in the atmosphere, then presumably it makes sense for there to be some requirements that the geology be conducive to keeping it in the ground, for a certain amount of time.  But there aren’t any.

When Congress enacted 45Q back in 2008, it required the Department of the Treasury (in consultation with EPA and the Departments of Energy and the Interior) to issue “regulations for determining adequate security measures for the geological storage of carbon dioxide . . . such that the carbon dioxide does not escape into the atmosphere.”   Eight years on, Treasury still has not done soalthough that has not stopped it from granting hundreds of millions of dollars in 45Q credits since then.

In 2009, Treasury did issue “interim guidance”, which provided that until it got around to writing those regulations, EPA’s Underground Injection Control (“UIC”) regulations would apply to all CCS operations that were permitted under that regime, and Intergovernmental Panel on Climate Change (“IPCC”) guidelines would apply to any other CCS project.

Unfortunately, EPA’s UIC regulations do not require that the CO2 remain underground. The UIC program is part of the Safe Drinking Water Act, and those regulations are designed solely to ensure that the CO2 does not contaminate drinking water aquifers.  Ironically, the absolute easiest way to guarantee that there is no such contamination is to allow the CO2 to escape, and that the UIC regulations contain no prohibition on atmospheric release.  None.  We don’t think companies will be crazy enough to spend billions of dollars relying on this loophole, but it is an unsatisfactory regulatory position, to put it mildly.

The IPCC guidelines (as summarized in the Treasury guidance) are equally flawed.  They require only a) a “site characterization” assessment, b) “an assessment of the risks of CO2 leakage”, and c) monitoring for leakage “conducted according to a suitable plan.”  But note that, unlike UIC projects that must provide regulators with massive amounts of that sort of technical data before project approval (and periodic monitoring data afterwards) Treasury does not require that any project plans or monitoring data be submitted to them,  or anyone else. To be fair, Treasury does require “recapture” of the tax credit for any CO2 that does leak, but this relies entirely on taxpayer self-reporting, based on whatever monitoring the taxpayer chooses to conduct.

And, related to that CO2 not staying put, it is entirely unclear who (if anyone) would be responsible for damages if that CO2 escapes.  Climate effects aside, we tend to think of CO2 as benign, but in high volumes it isn’t.  In 1986, 1,700 people near Lake Nyos in Cameroon died when a cloud of volcanically-created CO2 was released.  Storing tens or hundreds of millions of tons of CO2 creates the (probably remote) risk of similar catastrophic release and ensuing destruction.  Before we start creating such depositories, neighboring communities will want the confidence that the regulatory regime and the liability provisions ensure that every possible precaution is being taken to avoid a mass release of the stored CO2.

We can understand Treasury’s (and EPA’s, and DOE’s, etc.) reluctance to wade into this issue. Such regulations would have to do (at least) one unpalatable and one unthinkable thing.  The unpalatable is having to say how long the CO2 must remain underground in order to be considered “stored.” Climate change means it will have to stay there for hundreds of years. And that leads directly to the unthinkable. Since no company pumping CO2 down there in 2016 is going to be around in, say, 2300, this ultimately means a federal guarantee of storage quality, and in practice that means federal storage management.  And while Congress seems perennially willing to throw billions of dollars at CCS in order to appease coal interests and the rent-seekers who profit from these (and other) subsidies, Congress is not going to create a new federal environmental regulatory system or a CCS storage and oversight agency anytime soon.

So, unless and until these issues are addressed as part of federal carbon tax legislation (which is necessary to create large-scale demand for it in the first place), CCS will remain just another rat hole of federal subsidies.