CENTRE FOR EUROPEAN REFORM - EUROSFAIRE · commercially viable CCS system at our power station at Longannet in Fife, Scotland, by 2014. We have made great strides already, but know

CARBON CAPTURE ANDSTORAGEWhat the EU needs to do

Stephen Tindale with Simon Tilford

CENTRE FOR EUROPEAN REFORM

Carbon capture andstorage:What the EUneeds to do

Stephen Tindalewith Simon Tilford

Published by the Centre for European Reform (CER), 14 Great College Street, London, SW1P 3RXTelephone +44 20 7233 1199, Facsimile +44 20 7233 1117, [email protected], www.cer.org.uk© CER FEBRUARY 2010 ★ ISBN 978 1 901229 95 0

The Centre for European Reform is a think-tank devoted to improving the quality of the debate onthe European Union. It is a forum for people with ideas from Britain and across the continent todiscuss the many political, economic and social challenges facing Europe. It seeks to work withsimilar bodies in other European countries, North America and elsewhere in the world.

The CER is pro-European but not uncritical. It regards European integration as largely beneficialbut recognises that in many respects the Union does not work well. The CER therefore aims topromote new ideas for reforming the European Union.

Director: CHARLES GRANT

ADVISORY BOARD

GIULIANO AMATO.............................................................................................. Former Italian Prime Minister

ANTONIO BORGES.................................... Chairman, Hedge Fund Standards Board and Former Dean of INSEAD

NICK BUTLER .................................................................. Senior Policy Adviser to Prime Minister Gordon Brown

IAIN CONN ................................... Group Managing Director and Chief Executive, Refining & Marketing, BP p.l.c.

HEATHER GRABBE .................. Director, Open Society Institute–Brussels and Director of EU affairs, Soros Network

LORD HANNAY.................................................................................... Former Ambassador to the UN & the EU

LORD HASKINS .......................................................................................... Former Chairman, Northern Foods

FRANÇOIS HEISBOURG................................................ Senior Adviser, Fondation pour la Recherche Stratégique

WOLFGANG ISCHINGER.................................................................... Global Head, Government Affairs, Allianz

LORD KERR (CHAIR) ................. Chairman, Imperial College London and Deputy Chairman, Royal Dutch Shell plc

CAIO KOCH-WESER................................................................................ Vice Chairman, Deutsche Bank Group

FIORELLA KOSTORIS PADOA SCHIOPPA............................................... Professor, La Sapienza University, Rome

RICHARD LAMBERT........................................................ Director General, The Confederation of British Industry

PASCAL LAMY......................................................... Director General, WTO and Former European Commissioner

DAVID MARSH...................................................... Chairman, Advisory Board, London & Oxford Capital Markets

DOMINIQUE MOÏSI................................................ Senior Adviser, Institut Français des Relations Internationales

JOHN MONKS.............................................................. General Secretary, European Trade Union Confederation

BARONESS NEVILLE-JONES......................................... National Security Adviser to the leader of the opposition

CHRISTINE OCKRENT............................................................................ CEO, Audiovisuel Extérieur de la France

STUART POPHAM............................................................................................. Senior Partner, Clifford Chance

LORD ROBERTSON............................................. Deputy Chairman, TNK-BP and former Secretary General, NATO

ROLAND RUDD......................................................................................... Chairman, Business for New Europe

KORI SCHAKE............................................. Research fellow, Hoover Institution and Bradley Professor, West Point

LORD SIMON ............................ Director, GDF Suez and former Minister for Trade and Competitiveness in Europe

PETER SUTHERLAND........................................................................... Chairman, Goldman Sachs International

LORD TURNER ..................................................................................... Chairman, Financial Services Authority

ANTÓNIO VITORINO...................................................................................... Former European Commissioner

IGOR YURGENS..................................................................... Chairman of the Board, Bank Renaissance Capital

Contents

About the authors

Authors’ acknowledgements

Foreword

1 Introduction 1

2 The technology 7

3 Policy and practice outside the EU 13

4 Policy and practice in EU member-states 21

5 EU performance 29

6 Recommendations 39

7 Conclusion 45

ABOUT THE AUTHORS

Stephen Tindale is the co-founder of Climate Answers(www.climateanswers.info). His previous roles have included: headof communications and public affairs for RWE npower renewables;executive director of Greenpeace UK and chair of GreenpeaceEuropean Unit; adviser to environment minister Michael Meacher;founder of IPPR environment group; and adviser to shadowenvironment secretary Chris Smith. His previous CER publicationis ‘How to meet the EU’s 2020 renewables target’, September 2009.

Simon Tilford is chief economist at the Centre for EuropeanReform. His previous CER publications include: ‘Rebalancing theChinese economy’, November 2009; (as co-author) ‘The Lisbonscorecard IX: How to emerge from the wreckage’, February 2009;‘The euro at ten: Is its future secure?’, January 2009; (as co-author)‘State, money and rules: An EU policy for sovereign investments’,December 2008; ‘Is EU competition policy an obstacle to innovationand growth?’, November 2008; and ‘How to make EU emissionstrading a success’, May 2008.

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AUTHORS’ ACKNOWLEDGEMENTS

The authors would like to thank all those who provided input andideas for this report, in particular Jesse Scott, Craig Jones and BenCaldecott, and also Kate Mullineux for layout and production. Theviews expressed in this publication, and any remaining errors, arethose of the authors alone. The publication of this report would nothave been possible without the sponsorship of ScottishPower.

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Copyright of this publication is held by the Centre for European Reform. You may not copy, reproduce,

republish or circulate in any way the content from this publication except for your own personal and non-

commercial use. Any other use requires the prior written permission of the Centre for European Reform.

Foreword

As we enter a new decade, energy providers across Europe are findingthemselves with three fundamental challenges: the need to maintain securepower supplies; the need to keep that power affordable for our domestic,commercial and industrial consumers; and the need to ensure that theenergy we produce is both reliable and sustainable in the long term.

At ScottishPower we, alongside government, believe that the response tothese three challenges lies in having a threefold solution. First, we need tomove rapidly towards greater energy efficiency through smart meters andsmart grids. Second, we need to continue to develop our portfolio ofrenewable energy sources such as wind and marine. And third, we need todevelop reliable and flexible low carbon electricity generation which willinclude a fresh role for nuclear and a long-term future for coal.

In taking these steps towards our energy future, we have been at theforefront of carving out a new role for coal in the energy mix. Coal presentsus all with a particular challenge. On the positive side, it is relatively cheap,it is abundant, and it can be easily extracted from most parts of the world.Set against that is its environmental price tag. It emits carbon dioxide whenburned, which all the available science tells us is a key contributor toclimate change. So, if we are to continue to be able to use it and meet theappropriately tough emissions reduction targets set for the end of thisdecade, then we have to tackle head on the CO2 that this remarkable sourceof energy gives off.

We believe the answer lies with carbon capture and storage (CCS). We arecommitted to being among the first in the world to deliver a full-scale,commercially viable CCS system at our power station at Longannet in Fife,Scotland, by 2014. We have made great strides already, but know we aren’tthere yet. To take CCS out of the lab and make it an operational reality willtake national and international support and collaboration.

This report is an eloquent argument for concerted European action topromote CCS. It paints a picture of uneven political focus in Brussels. Itoutlines too what could be achieved if politicians and energy providers allpull in the same direction. I am proud that we at ScottishPower havesponsored this insightful document. We support its findings and urge thosewho can make a difference on the European stage to act on therecommendations it makes without delay.

Nick Horler

Chief Executive, ScottishPower

1 Introduction

The global demand for electricity is set to boom. As people in China,India and other developing countries become wealthier, their use ofelectricity will rise dramatically, in spite of growing efforts to curbthe use of energy. Electricity is already the main source of power fortrains and will almost certainly replace oil as the power source formost road transport, as cars switch from internal combustionengines to batteries. Rising temperatures mean that electricity-hungry air conditioning will become more widespread. And heat forbuildings will increasingly be provided by electricity rather than oilor gas boilers. Europe will be no exception to this global trendtowards higher electricity consumption, notwithstanding its effortsto improve energy efficiency.

The challenge the world faces is to meet the burgeoning demand forelectricity while delivering big cuts in emissions of greenhouse gases.Renewable energy will become an increasingly important source ofelectricity. The EU may well reach its target of meeting 20 per centof its energy needs from renewable sources by 2020.1 But it will notbe until 2050 – and probably well beyond then – that energy in theEU or elsewhere could feasibly be fullyrenewable. In the meantime we must produceelectricity in a way that involves pumping lesscarbon dioxide into the atmosphere.

At present, around half of the EU’s electricity is produced by burningfossil fuels, of which two-thirds is accounted for by coal. EUcountries are currently planning to build 50 large conventional coal-fired power stations, a move which would severely compromiseEurope’s efforts to reduce its emissions of greenhouse gases. Somepeople therefore argue that governments should leave coal asideand instead focus on an aggressive expansion of nuclear energy,

1 Stephen Tindale, ‘How to meet the EU’s2020 renewables target’,CER policy brief,September 2009.

an integrated fashion. The world needs to see that CCS works justas well on a large scale, through each step of the process.Unfortunately, the EU has not yet put in place the policies todemonstrate the commercial viability of CCS and bring about itsmass deployment. But if Europe fails to do so, it is very hard to seehow it will be able to make the big cuts in emissions of carbondioxide needed to meet its environmental targets. And Europe willfail to assume leadership of what promises to be a crucial 21st

century technology.

The problem is money. Industrial emitters of carbon dioxide are notprepared to invest in CCS because they fear that they will be unableto recoup the investment. The costs of CCS are formidable. There isno agreement over how much it would cost to construct anintegrated CCS demonstration project that captures, transports andstores carbon dioxide, and then there is the ‘energy penalty’ toconsider. In theory, the EU’s emissions trading scheme (ETS) shouldprovide financial compensation for investment in CCS: from 2013carbon dioxide captured and stored will not be counted as emittedunder the ETS. The EU’s carbon market caps the volume of carbondioxide that heavy industry is allowed to emit and auctions emissionpermits to companies that need them. If utilities stored and capturedcarbon they would be freed from having to purchase carbon permits.But unfortunately carbon prices – around S13 per tonne in February2010 – are too weak to provide sufficient financial incentives toinvest in low-carbon technologies, such as CCS, and are likely toremain so for several years.

The construction of large demonstration projects will thereforerequire a lot of public financial support. The EU wants ten to 12large-scale CCS demonstration projects to be in operation across theEU by 2015 and has made two sources of funding available for thispurpose. First, in 2008 the European Commission set aside S1billion from the EU’s European Economic Recovery Plan (EERP),and has since allocated this to six CCS projects spread across thedifferent member-states. Second, the revenues from the sale of 300

Introduction 3

which is close to being carbon neutral. The tide is certainly turningin favour of nuclear across Europe. Italy is rethinking its ban on newnuclear capacity, Britain is gearing up for the construction of a largenumber of new plants, and France remains as committed as ever tonuclear energy. The recent election of a centre-right government inGermany could lead to that notoriously nuclear-sceptic countrypostponing the closure of its nuclear power plants and conceivablyto it constructing new ones. But nuclear power stations will onlyever be part of the solution to the energy challenge, because nuclearenergy is very costly.

As a result, coal will continue to be the most important single sourceof electricity in Europe for decades to come. It will also be thedominant source globally, not least because most of the new energycapacity coming on stream in India and China will involve burningcoal. The EU needs to burn coal and gas in a way that is lessdamaging to the environment.

The technology to do so does exist. Carbon capture and storage(CCS) involves capturing carbon dioxide from power stations andother major industrial users of coal and gas, compressing it,transporting it, and then storing it safely underground. EmployingCCS does impose an ‘energy penalty’: a coal or gas-fired powerstation incorporating CCS technology will use more fuel to produceelectricity and operate more expensively than a plant that simplyreleases the carbon dioxide into the air. The reason for this is that itrequires extra energy to separate and capture the carbon dioxide.But the world is not short of coal. What is required is a way of usingit to generate electricity in a less carbon-intensive fashion.Approximately 500 industrial facilities account for 25 per cent of theEU’s emissions of carbon dioxide. Fitting CCS technology to themall would make a dramatic contribution to decarbonising theEuropean economy.

The capture, compression, transport and storage of carbon dioxidehave all been shown to work, but only on a small scale and not in

2 Carbon capture and storage

Commission president, José Manuel Barroso, must work closelytogether to ensure that CCS is demonstrated and deployed as fast aspossible. The time for debate about which low-carbon technology is‘best’ has passed. The EU needs to accept that in order to reducecarbon emissions far enough and fast enough to meet its targets, itwill have to support a range of low-carbon technologies.

Chapter two of this report discusses the technology of CCS and thepractical (as opposed to financial) obstacles to its use. Chapter threereviews what steps governments outside the EU are taking toaccelerate the take-up of CCS, while the fourth chapter contrasts thiswith what EU governments are doing. Chapter five lays out theEU’s current strategy for CCS and assesses its chances of success.The final chapter makes a series of recommendations to the EU. Thereport concludes that CCS is an invaluable bridge technology untilcountries can rely fully on renewables, but that much more needs tobe done in the EU to secure its mass deployment.

Introduction 5

million emissions permits under the ETS willbe put into the so-called New Entrant Reserve(NER) and used to fund investment in lowcarbon energy sources.2 Unfortunately, themoney from the EERP (even taking into

account the need for member-states to provide matching funds) willnot be enough to get the demonstration projects off the ground. Andit is unclear how much money from the NER will be available forCCS because of uncertainty over the level of carbon prices. The UKgovernment wants to introduce levies on electricity suppliers inorder to help finance investment in CCS, but there appears littleappetite for such an approach among other EU governments.

The mass deployment of CCS will also need a clear regulatorysignal. Without it, energy companies will instead invest in newconventional coal-fired power plants, or in more gas-fired generatingcapacity – which is less environmentally polluting than coalgeneration without CCS, but worse than coal with CCS.Unfortunately, the EU has not agreed a date after which all

generators and intensive industrial users offossil fuels will be required to incorporate CCStechnology. The EU’s 2009 Carbon DioxideGeological Storage Directive does not makeCCS mandatory; it simply requires member-states to ensure that the carbon can be legallyand safely stored.3

CCS must be a top priority for the new European Commission thattook office in February 2010. The new commissioner for climatechange, Connie Hedegaard, has primary responsibility for ensuringthat the EU meets its emissions targets, and that the ETS functionseffectively. The new energy commissioner, Günther Oettinger, hasresponsibility for bringing about the decarbonisation of EU energysupplies, while Janusz Potocnik, the environment commissioner, ischarged with promoting eco-innovation and the adoption of newenvironmental technologies. All three commissioners and the


2 The New Entrant Reservecomprises emissionsallowances which have beenset aside for new entrants tothe EU ETS.

3 Directive 2009/31/EC ofthe European Parliamentand of the EuropeanCouncil on the geologicalstorage of carbon dioxide,European Commission,April 2009.

2 The technology

The impact of CCS on carbon emissions

Carbon capture and storage will not make coal a fully sustainablefuel source, so the label ‘clean coal’ is not strictly accurate. But CCShas the potential to make coal a low-carbon fuel source. Forexample, according to the UK Energy Research Centre (a publicly-funded research institute looking at sustainable energy), aconventional coal plant releases 950 grams of carbon dioxide perkilowatt-hour of electricity generated. The same plant fitted withCCS would emit between 50 and 90 grams per kilowatt-hour. Byway of comparison, a typical gas-fired power station produces 400grams of CO2 for every kilowatt-hour generated; a nuclear plant 120grams; and a solar plant 110 grams. Only wind power does betterthan a coal plant incorporating CCS technology, producing just 25grams per kilowatt-hour.

CCS is also required to reduce emissions from industrial sectors,such as the cement and petrochemicals industries. The InternationalEnergy Agency (IEA) announced in December 2009 that the cementsector could reduce its emissions by 18 per cent by 2050 (comparedwith the current level) by incorporating CCS and increasing theefficiency with which plants use energy. The IEA estimated that 20-33 per cent of the world’s existing cement kilnswill be replaced before 2020, rising to 40-45per cent by 2050.4 However, energy-intensivesectors such as cement and petrochemicals raiselegitimate concerns about ‘carbon leakage’. Thisrefers to the relocation of industries from countries with tightenvironmental standards to those with lax ones. For example, if EUregulations requiring industrial plants to incorporate CCS

4 Michael Taylor, ‘Cementscenarios for 2030-2050:Energy technology perspectives’, InternationalEnergy Agency, 2009.

power stations, but unlike the pre-combustion and oxyfuelapproaches it does not necessarily cover the entire capacity ofthe plant.

All three technologies must be demonstrated at scale in order toassess which deliver the greatest climate benefits and which aremost cost-effective. Oxyfuel is very promising because it can befitted to existing plants. But it would be premature to focus allpublic subsidies for CCS on this technology, not least because itsenergy demands could reduce its attractiveness, especially indeveloping countries. Post-combustion technologies also need to bedemonstrated: the rapid reduction of carbon emissions will requireretrofitting coal plants in China, India and other developingeconomies, as well as in the developed world.

Transport and storage

Carbon dioxide must be transported from the power plant (orindustrial facility) to a site where it can be safely storedunderground. The most obvious answer to the transportationquestion is to move the gas by pipeline. This is a proventechnology: it has been used since the 1970s to transport carbondioxide in oil fields where it is used to enhance oil recovery. Forexample, the 225 kilometre Canyon Reef Carriers Pipeline in Texashas been in operation since 1972, and there are now approximately5,800 kilometres of CO2 pipeline in use across the United States.Carbon dioxide could also be moved by ship, in much the sameway that liquefied natural gas is transported, although transportinglarge volumes by sea is likely to be much more costly than usingpipelines, and would increase marine tanker traffic and henceemissions. CO2 could also be carried by rail or road tankers, butthis would be unlikely to be suitable for large-scale transportationfor safety, cost and environmental reasons.

The need to identify secure ways to store the huge amount ofcarbon dioxide produced during the burning of coal or gas

The technology 9

technology were not replicated elsewhere, there would be a riskthat industrial capacity would move from the EU to China or otheremerging economies.

The currently available carbon capture technologies can be dividedinto three categories:

★ Pre-combustion. This approach involves capturing the carbondioxide before the fuel is ignited and burning the remaininghydrogen-rich gas to produce power. The technology shouldreduce carbon emissions by 90 per cent. It is widely used in theproduction of fertiliser and hydrogen, and can be employedwith ‘integrated gasification combined cycle’ (IGCC) powergeneration, which works by converting coal into gas. However,pre-combustion technology cannot be retrofitted to existingpower stations.

★ Oxyfuel. This approach captures carbon dioxide during thecombustion process. Prior to combustion air is separated intonitrogen and oxygen. Fuel is then burned in the oxygen,producing carbon dioxide and water vapour, which can easilybe separated. This process should enable up to 90 per cent ofthe carbon dioxide emissions to be captured, although theinitial process of separating the oxygen from air demands a lotof energy. The technology can be retrofitted to existing plants,whereas pre-combustion CCS cannot. The largestdemonstration facilities operating in the EU use oxyfueltechnology: a 40 megawatt test facility in Scotland, a 30megawatt retrofitted gas plant in France and a 30 megawattretrofitted coal plant in Germany.

★ Post-combustion. This technology is well understood and isalready used in other industrial applications, though not at thelevel required for a large commercial power plant. It involvescapturing the carbon dioxide after the fuel has been burnt.Post-combustion CCS can be added to existing coal or gas-fired


storage of carbon dioxide in saline aquifers should be demonstratedon a large scale, particularly since these are likely to be the bestoption for storing the CO2 from Chinese power stations. TheNorwegians already capture carbon dioxide from the Snøhvit andSleipner gas fields and store it in saline aquifers. By contrast, freshwater aquifers offer less potential as storage sites, as they areimportant sources of drinking water and used for irrigation, and arein any case being rapidly depleted in many countries.

Other storage options are also problematic. There is strong popularopposition in many EU countries to storing carbon dioxideunderground in old onshore gas fields and coal mines. Carbondioxide is not toxic, but it is heavier than air, so leakage carries therisk of suffocation. In March 2009, a Dutch council objected toShell’s plans to store CO2 in depleted gas fields under the town ofBarendrecht, near Rotterdam, following strong local opposition. InNovember 2009, the national government overruled the council, andannounced that the project would be allowed to proceed, but onlyon the condition that strict safety conditions are met. There is alsostrong popular opposition to onshore storage of CO2 in Germany.The carbon dioxide from the oxyfuel demonstration plant operatedby Vattenfall in eastern Germany was to be stored in an old onshoregas field, but is now simply being released in the atmosphere.

The storage sites for carbon dioxide will need to be monitoredaccurately over very long periods of time. In order to demonstratecompliance with emissions reductions targets, and to maintainpublic support for CCS, there will have to be rigorous verification ofthe amounts of carbon dioxide being stored, plus regular testing forpossible leakages.

The technology 11

arguably presents a bigger challenge than capturing it. Depleted oiland gas fields are one obvious option. As already mentioned, theAmericans have been doing this since 1972, and the Norwegiansstarted to do so in 1996. The Norwegians extract carbon dioxidefrom natural gas – they need to do this since Norwegian gas has amuch higher CO2 content than customers would accept – and thenpump it into an aquifer. Since the natural gas stayed in these fieldsfor millions of years, there is no obvious reason why carbondioxide cannot also be stored in them for a very long time. TheIntergovernmental Panel on Climate Change (IPCC) concludes that“the fraction [of carbon dioxide] retained in appropriately selected

and managed geological reservoirs is verylikely to be 99 per cent over 100 years and toexceed 99 per cent over 1,000 years.”5

The pumping of carbon dioxide into oil and gas fields reduces thenet cost of storage because it leads to enhanced oil or gas recovery.However, it could also reduce the climate benefit if it leads to morefossil fuels being readily available from known and accessible fields,thus reducing pressure on governments to expand the use ofrenewable energy. Nevertheless, while oil and gas are being used –which they will be for the next three decades at least – it is better forthe environment to extract oil from the North Sea than it is from theCanadian tar sands. It is also better in terms of energy security forthe EU to use North Sea gas than, for example, to import more gasfrom Russia.

The obvious drawback with relying exclusively on offshore oil andgas fields to store carbon dioxide is that they are not evenlydistributed around Europe. An elaborate pipeline infrastructurewould be needed to connect the sources of carbon dioxide with thestorage sites. Such a network would be costly to construct andwould doubtless generate considerable opposition from affectedcommunities. CO2 can also be stored in fresh or salt-waterunderground aquifers, which are better distributed and havesignificantly greater storage capacity than oil and gas fields. The


5 Edward S. Rubin, ‘Report on carbon dioxideand storage’, IPCC, 2005.

3 Policy and practice outside the EU

The EU is far from being the global leader when it comes to thedemonstration and deployment of CCS. As noted in the previouschapter, the US has been using carbon dioxide to enhance oilrecovery for over 30 years, and Norway has been actively using CCSfor 15 years. Indeed, carbon capture and storage is now beingpromoted all over the world: major economies such as China, theUS, Canada and Australia are developing large demonstration plantswith the benefit of substantial public subsidies. This is good news. Itis unavoidable that coal will be burnt, so it is crucial that it is burntin a way that limits the damage to the environment. But it is lessgood news for European businesses that hope to become worldleaders in this technology. Unless Europe gets its act together it risksgetting left behind.

The United States

The US is home to a quarter of the world’s known coal reserves, andrelies on coal for half of its electricity. Had the country ratified theUN’s Kyoto protocol, its target would have been a 7 per centreduction in emissions of greenhouse gases from their 1990 levels by2012. By 2007, US emissions had risen by 17 per cent comparedwith 1990. The country will struggle to bring about rapid reductionsin its emissions without the mass deployment of CCS.

During President George W Bush’s second term of office, the USDepartment of Energy started a Regional Carbon SequestrationPartnership (RCSP). This is a joint government/industry initiativecharged with determining the most suitable CCS technologies,and the regulations and infrastructure needed to bring about the

In December 2009, the Energy Secretary, Steven Chu, alsoannounced further awards totalling $1 billion to three more powerstations to incorporate either pre- or post-combustion CCS. He alsoawarded $22 million each to 12 industrial facilities (such as cementand chemical plants, as well as major manufacturing facilities) tohelp finance the adoption of CCS technology.

Canada

Canada’s Kyoto target is for a 6 per cent reduction in greenhousegases by 2012. The country has no chance of meeting this target: by2007 greenhouse emissions had increased by 55 per cent comparedwith 1990. Much of this rise reflected the impact of changes inland-use, such as the cultivation of more land for agriculture, andrising emissions from road transport, rather than from increasedelectricity generation.

Over half of Canadian electricity is produced by hydroelectricschemes; only 17 per cent is accounted for by coal and just 5 percent by gas. Nevertheless, the Canadian government and privatesector are investing heavily in CCS. Canada’s Economic Action Plan,introduced in the aftermath of the financial crisis, created aC$1billion (S683 million) Clean Energy Fund. The government ofthe state of Alberta has also established a C$2 billion fund tosupport CCS.

Both Canada’s federal and state governments have moved quickly toallocate the funds. TransAlta (a Canadian energy company) andAlstom (a French transport and energy conglomerate) will build anew coal-fired power station in Alberta, and then ‘retrofit’ post-combustion CCS. (They will build a new plant first and then fit post-combustion CCS, rather than retrofit the technology to an existingplant.) Some of the CO2 will be used to enhance oil recovery whilethe remainder will be stored in saline aquifers. The Canadiangovernment has awarded C$343 million (S233 million) to theproject, while the government of Alberta has invested C$436 million.

Policy and practice outside the EU 15

take-up of CCS in different parts of the country. Local variationsin the use of fossil fuels and the distribution of potential storagesites across the United States mean that such a regional approachmakes sense.

The incoming Obama administration moved quickly to providemore money for carbon capture and storage. The federalgovernment allocated $2.4 billion (S1.8 billion) to CCS under theAmerican Recovery and Reinvestment Act (ARRA), the economicstimulus package introduced in February 2009. This money isintended to promote the use of CCS in industrial plants and in theenergy sector. The government has also made available an additional$2.3bn in tax credits to manufacturers of clean energy equipment.This covers not only CCS but also fuel cells, batteries, electric cars,advanced grid systems, solar, wind and other energy conservationtechnologies. In addition, the US also intends to set aside substantialfunds – the bill before the senate proposes $1.1 billion a year – fromthe sale of carbon permits under a future federal emissions tradingscheme for the research and development of CCS.

The American authorities have also made progress in selectingspecific CCS schemes to spend money on. In July 2009, a projectcalled the FutureGen Alliance, a public-private partnership, wasawarded $1 billion from ARRA funds. FutureGen will nowconstruct a 275 megawatt pre-combustion coal plant in Illinois.The private sector members of the Alliance have agreed tocontribute $400-600 million. Hydrogen Energy International, ajoint venture between BP and Rio Tinto, plans to build a 250megawatt pre-combustion CCS plant in California. The estimatedcost of the project is $2.3 billion: the Californian government hasawarded $30 million and the Department of Energy $308 million.The carbon dioxide will be piped to local oil fields and used toenhance recovery, and the plant is due to enter operation in 2016.The Department of Energy has also provided $100 million toretrofit post-combustion technology to a 120 megawatt coal powerstation in North Dakota, which is due for completion in 2011.


constructing GreenGen, a 250 megawatt pre-combustion CCS plantthat is due for completion in 2011. There are plans to expand thisto 650 megawatt by 2016.

Duke Energy, the third largest electricity producer in the US, iscollaborating with the Chinese company Huaeng, which generatesmore than 10 per cent of the electricity consumed in China and isone of the firms behind GreenGen. Together with Duke, Huaeng isconsidering building a large CCS plant near Shanghai. TheAustralian government also worked with Huaeng to build a smallpost-combustion CCS demonstration plant near Beijing, whichopened in July 2008.

By contrast, there is little in the way of EU-China co-operation tohasten the roll-out of CCS in China. In 2005, the EU and Chinaagreed to build a large CCS demonstration plant in China, but thedeadline for construction has been pushed steadily back, and it isnot now expected to enter operation until 2020 at the earliest.Moreover, the European Commission has only agreed to provideS50 million of the estimated S550 million cost of constructing theplant. Private businesses will have to provide the rest, but have yetto commit to doing so, casting doubt on the likelihood of the plantever being built.

Japan

Japan’s Kyoto target is for a 6 per cent reduction in emissions ofcarbon dioxide between 1990 and 2012 – in 2007 emissions were 6per cent up on their 1990 level. Japan may still meet the target, butonly because of the severity of the country’s economic recession,which has depressed energy consumption.

The country now produces three times as much electricity fromburning coal as it did in 1988, but is wholly dependent on importsas it has no domestic coal reserves. A quarter of Japan’s electricity isgenerated from coal, and a quarter from gas. The Japanese


In another scheme in Alberta, Shell, Chevron and Marathon OilSands will use CCS to reduce emissions from an existing plant toturn oil sands into petroleum. Around 40 per cent of the emissionswill be captured and transported by pipeline to a nearby fresh wateraquifer. The federal and Alberta governments announced in October2009 that they would provide a total of C$865 million in publicsubsidy to this project. Finally, in Saskatchewan, SaskPower plans toretrofit a 100 megawatt plant with post-combustion technology,and have this fully operational by 2015. The Canadian governmenthas provided C$240 million to this project, with the private sectorexpected to provide the remaining C$400 million. The CO2 will betransported to a nearby oil-field and used to enhance oil recovery.

China

China now produces more carbon dioxide annually than any othercountry in the world. The country accounts for 46 per cent ofglobal production of coal, and 20 per cent of global consumption,and relies on it for almost 80 per cent of its electricity. The Chinesehave considerable domestic reserves of coal and intend to use themto produce electricity. According to the International Energy

Agency (IEA), Chinese coal-fired generatingcapacity is set to expand from 350 gigawatt in2006 to 950 in 2030.6

The Chinese authorities are very concerned about climate change,not least because of desertification in northern China and because ofthe vulnerability of the country’s low-lying coastal regions to risingsea levels. The country is engaged in a number of international CCSprojects and programmes, such as the Carbon SequestrationLeadership Forum, and Chinese companies are working closely with

foreign firms on CCS schemes in China.7 Agroup of investors, including the US coalcompany Peabody Energy, five of China’slargest power companies, two Chinese coalcompanies and the Chinese government, is


6 A gigawatt is equal to athousand megawatt.

7 The Carbon SequestrationLeadership Forum is aninternational initiative toadvance carbon capture andstorage technology.

capacity of the plant will be expanded to 300-500 megawatt. Theaim is to have the plant operational by 2015.

Norway

Norway’s Kyoto target is for a 1 per cent increase in emissions ofcarbon dioxide by 2012. By 2007 they were 11 per cent higher thanin 1990, mainly due to increased road transport. The Norwegiangovernment has set a target of making the country carbon neutralby 2030.

Norway relies for its electricity almost entirely on hydroelectricpower stations. But it is the world’s leader in CCS largely becauseit uses the technology to maximise gas extraction by pumping CO2

into offshore gas fields. Norway has a public organisation calledGassnova, which is responsible for encouraging the take-up of CCSby the oil and gas industry as well as the electricity sector. In 1991Norway introduced a carbon tax covering its substantial offshoreoil and gas industry. The tax – levied at $50 (S37) per tonne –helped to encourage firms to store unwanted carbon dioxide underthe sea bed. Firms extracting natural gas off the coast of Norwayproduce particularly large amounts of surplus carbon dioxide,because the gas contains far more CO2 than is acceptable tocustomers. Statoil has separated and stored carbon dioxide from theSleipner offshore gas field since 1996, while in 2007 the companybegan capturing the gas from the Snøhvit gas field and storing it inan offshore saline aquifer.

As a result of rising domestic demand for electricity, Norway plansto build a number of gas-fired power plants. The Norwegiangovernment has announced that all of these new plants will berequired to capture and store the carbon dioxide released throughthe burning of the gas. The Mongstad plant (on Norway’s coast),which is due to enter operation in 2010, will burn gas to generateelectricity and at the same time use the heat produced in the processfor domestic heating. Another Norwegian scheme to deploy CCS is


authorities have invested heavily in R&D into CCS, including intohow to store carbon dioxide in aquifers. Japanese firms such asMitsubishi are also aiming to be world leaders in pre-combustionand oxyfuel technologies, for both coal and gas generation. A 250megawatt coal gasification plant is operational in Japan, but thecarbon is currently being released into the atmosphere rather thancaptured and stored. Field studies are underway to explore how itcan be piped to and stored in offshore gas fields.

Australia

Australia only ratified the Kyoto treaty in 2008, following a changeof government and the election of the country’s Labor Party.Australia’s Kyoto target is for an 8 per cent increase in emissionsof greenhouse gases by 2012 (from 1990 levels), which it willmeet. The prime minister, Kevin Rudd, has also set a target of a 25per cent reduction in emissions by 2020, which poses a muchstiffer challenge.

Nearly 80 per cent of Australia’s electricity is generated byburning coal; a further 12 per cent is accounted for by gas. Thecountry is working hard to foster the demonstration anddeployment of CCS. The federal government has a A$500 million(S318 million) low emission technology demonstration fund, ofwhich more than half has been allotted to four projects (theprivate sector has already committed to invest a total of A$1billion in these), and an additional A$500 million has been madeavailable through various regional programmes.

The most advanced plan is for a pre-combustion coal-fired powerstation called ZeroGen in Queensland. The project is supported bythe state’s government, the Australian Coal Association, Mitsubishiand Shell. Stage one of the scheme involves the building of an 80megawatt coal gasification demonstration plant, with the carbondioxide to be transported by lorry and stored in deep onshoreunderground geological formations. If this works as expected, the


4 Policy and practice in EUmember-states

The European Commission wants ten to 12 large-scale CCSdemonstration plants to be up and running by 2015. It also wantsthe mass deployment of carbon capture and storage by 2020 tomake a major contribution to reducing EU emissions of greenhousegases. As mentioned earlier, some EU member-states are makingprogress on demonstrating CCS, but only on a small scale; there areno large demonstration plants under construction anywhere in theEU. A brief survey of what individual EU countries are doing tofoster the take-up of CCS illustrates that Europe is at risk of gettingleft behind.

United Kingdom

Britain’s Kyoto target is for a 12.5 per cent reduction in emissions ofgreenhouses gases by 2012 (from their 1990 level). In 2007, emissionswere 18 per cent below their 1990 levels, meaning the country willmeet its target. The cut in UK emissions has largely stemmed from aswitch away from burning coal (and oil) in favour of gas. In 1990, theUK derived 46 per cent of its electricity from coal and 10 per centfrom gas. By 2008, gas accounted for 40 per cent of the total and coalfor 32 per cent.

Successive British governments since the 1990s have talked up thepotential of CCS, but have made little practical progress in rollingout the technology. In 2007 the government launched a competitionfor a substantial subsidy towards the construction of a large-scalepost-combustion demonstration project. But a winner has yet to beannounced, and none is expected before the country’s next generalelection, which must be held by June 2010.

at the existing Kårstø gas-fired power plant, one of the country’slargest sources of CO2. The Norwegian government postponed thisCCS project in June 2009 because the plant had been out ofoperation for extensive periods since it opened in 2007. However, inits 2010 budget the government allocated Krona3.4 billion (S418million) to CCS, which will be divided between the Mongstad andKårstø projects.


station in Fife, and it hopes to expand the capacity of this plant.Scotland’s proximity to the oil and gas fields of the North Sea, andthe existence of saline aquifers, make the country ideal territory forCCS. The Scottish government has published a joint industrial andacademic study which concluded that all of thecarbon dioxide produced by British coal-firedpower stations over the next 200 years could bestored under the Scottish area of the North Sea.8

Germany

Under the Kyoto treaty, Germany – Europe’s largest emitter ofgreenhouse gases – must reduce its emissions by 21 per cent by2012. By 2007 the they had fallen by 22 per cent compared withtheir 1990 level, although to a large extent this was the result of theclosure of industrial capacity in the former-Communist eastern partof the country. Germany also has a domestic target to reduce CO2

emissions by 40 per cent by 2020 (from 1990 levels).

Germany derived 48 per cent of its electricity from burning coal in2006, and 12 per cent from gas. Many of the country’s existingpower stations use brown coal (lignite), which has a particularlyhigh carbon content. Fortunately, the country’s long-standingcommitment to phase out nuclear power is now being reassessedfollowing the formation of a centre-right government after theSeptember 2009 election. Germany’s nuclear generating capacity is40 gigawatt, which is equivalent to around 40 large coal-firedpower stations.

The previous German government – consisting of a grand coalitionof the country’s Christian Democrats (CDU/CSU) and SocialDemocrats (SPD) – promised to help finance the construction of twoor three large-scale CCS demonstration plants. The country’s leadingenergy utilities responded to this by presenting ambitious plans toinvest heavily in CCS, on the assumption that the authorities wouldprovide significant public subsidies. Unfortunately, the German

Policy and practice in EU member-states 23

The UK’s lack of urgency has led to the abandonment of manyplanned CCS projects, such as BP’s plans to build a carbon captureand storage plant at Peterhead (Scotland) and Centrica’s CCSproject at Easton Grange in north-east England. This is a pitybecause the UK is very well placed to become a leader in thedeployment of CCS: it has an established engineering base, anumber of major firms with considerable experience of the relevanttechnologies, and a selection of available storage sites. A project tobuild a 900 megawatt pre-combustion coal gasification plant inYorkshire, northern England, has been awarded S180 million EERPfunding (see chapter five). However, a project of this size willrequire much greater public support than this, and the necessaryprivate investment is yet to be secured.

The UK’s Committee on Climate Change (CCC), which wasestablished to advise the government on the best ways to curb thecountry’s emissions of greenhouse gases, has argued that developmentof CCS must be accelerated. The CCC has called for three or fourdemonstration projects to be operational in the UK by 2015-16, andfor the government to introduce a requirement for all coal-fired plantsto incorporate CCS technology by the early 2020s. The governmenthas accepted the CCC’s proposals in principle, but has not announceda timetable for the selection of the additional demonstration plants.However, it has introduced an energy bill into Parliament, whichincludes a levy to raise funds from fuel consumers to finance subsidiesfor CCS. The opposition Conservative Party backs the bill because itfavours the deployment of CCS on both climate and energy securitygrounds. With Conservative support, the bill may become law beforethe general election.

There has been some progress with small-scale projects, mainly inScotland. In 2009, a consortium of companies including DoosanBabcock, Scottish and Southern Energy, ScottishPower, EDF,Vattenfall and E.ON opened a 40 megawatt oxyfuel test facility inRenfrew, Scotland. ScottishPower has also opened a small post-combustion CCS demonstration plant at its Longannet power


8 ‘Opportunities for CO2

storage around Scotland’,Proceedings of the NationalAcademy of Sciences, 2009.

underground, and the rest used by the local chemical industry. Thisproject would demonstrate pre-combustion CCS at large scale andpromote combined heat and power technology.

The Netherlands

The Netherlands’ Kyoto target is a 6 per cent reduction in greenhouseemissions between 1990 and 2012. By 2007 the country’s emissionshad fallen by 3 per cent and the target should be met. The Dutchgovernment’s ‘Clean and Efficient’ programme calls for a 30 per centreduction in Dutch greenhouse gas emissions by 2020.

The Netherlands relies on coal for 27 per cent of its electricity andon gas for 58 per cent. The Dutch authorities were slow to see thepotential of CCS but are now among the most active supporters ofthe technology in the EU. In November 2008, the Dutchgovernment allocated S30 million each to two demonstrationprojects: one in the south of the country which will use the spaceunder coal seams to store CO2 from an ammonia plant; another –near Rotterdam – will store the gas produced by a Shell oil refineryin depleted onshore gas fields.

In March 2008, the government announced its aim to create large-scale CCS demonstration projects in the Rijnmond region (whichincludes Rotterdam), and set up a public-private taskforce to try toachieve this. Rotterdam is well-placed to become a hub for CCS. Thecity is located between possible storage sites on the continental shelfand large emitters of CO2 in North-Western Europe. Localpoliticians and businesses are strongly supportive, and ademonstration of post-combustion CCS on a coal power station inRotterdam was awarded S180 million of EERP funds in December2009. A similar public-private partnership in the northernNetherlands also published an action plan in early 2009. The aim ofthis initiative is to demonstrate the full range of techniques forcapturing CO2 (pre-combustion, post-combustion and oxyfuel), aswell as transport and storage.


authorities have failed to make adequate money available, and a lawspecifying how carbon could safely and legally be stored waspostponed because of the general election campaign.

In 2008, Vattenfall opened a 30 megawatt oxyfuel demonstrationplant in Brandenburg, East Germany. The original aim was to burythe carbon dioxide three kilometres underground, in a depleted gasfield (in the process enhancing gas recovery). But instead Vattenfallis being forced to pump the CO2 into the atmosphere because of theabsence of legislation allowing underground storage of carbonstorage. There is strong domestic opposition to any change in thelaw, but the government supports it and Vattenfall expects to get apermit to begin storage sometime in 2010. The company has statedthat it hopes to expand the capacity of this demonstration plant to250-300 megawatt by 2015, and to 1,000 megawatt by 2020.Vattenfall has also been awarded S180 million in EERP funds for anoxyfuel CCS project in Jaenshwalde, eastern Germany.

Poland

Poland’s share of the EU’s Kyoto target is a 6 per cent reduction inemissions by 2012. By 2007 emissions had fallen by 29 per centcompared to 1990, largely as a result of the closure of inefficientCommunist-era industry.

Poland remains highly dependent on coal, deriving 93 per cent of itselectricity from it. The Polish government is supportive of CCS, notleast because Poland has huge domestic reserves of coal. However,it lacks the funds to support demonstrations of CCS technology. Theutility, Polska Grupa Energetyczna, has been awarded S180 millionunder the EU EERP to construct a post-combustion CCS at itsBełchatów power station – the biggest emitter of carbon dioxide inthe EU. A second Polish energy company, Południowy KoncernEnergetyczny, is planning to build a 288 megawatt pre-combustioncoal-fired power station, at an estimated cost of S1.1 billion. Twothirds of the carbon dioxide would be stored over a kilometre


scheme was awarded S100 million under the EERP. Enel also hasplans to build a 70 megawatt oxyfuel coal demonstration project,but has not announced a timetable for this.

France

France’s Kyoto target is to hold emissions stable at 1990 levels; by2007 they had fallen by 6 per cent. Almost 80 per cent of Frenchelectricity is produced by nuclear power stations, and 10.5 per centfrom hydroelectric plants, with just 4.5 per cent deriving from coaland 4 per cent from gas. France has concentrated its CCS efforts onthe gas-fired electricity sector. At Lacq, Total has retrofitted one ofits plant’s 30 megawatt gas-fired boilers with oxyfuel technology.The carbon dioxide from the plant is sent down an old pipeline thatused to take natural gas from Rousse to Lacq, and injected into thedepleted Rousse gas reservoir at a depth of around 4,500 metres.The Lacq project will run for two years, after which engineers willmonitor the Rousse gas field to check that the carbon dioxideremains safely stored. The S60 million cost of the project is sharedbetween the company and the French Petroleum Institute. Thereappears to have been little public opposition to the scheme.


Spain

Under the EU’s Kyoto target, Spain is permitted to increase itsemissions of greenhouse gases by 15 per cent by 2012. In reality, thecountry’s emissions have ballooned and are now over 50 per centhigher than in 1990.

In 2006, 27 per cent of Spain’s electricity was generated from coal(the country has substantial coal reserves), and 23 per cent from gas.The Spanish government has established a partnership with theutility Endesa to build a 30 megawatt oxyfuel pilot plant atCompostilla, north-western Spain, which is due to enter operation in2010. Endesa hopes to expand the capacity of the plant to 500megawatt, but it has not set a date for this. Endesa is set to fund 70per cent of the construction costs, with the remaining 30 per centcoming from the public purse. The project at Compostilla has beenallocated S180 million in EERP funds (which the Spanishgovernment will match) but it will also need to receive NER fundsif it is ever to reach full capacity.

Italy

Under the EU’s Kyoto target, Italy is obliged to cut its emissions by6.5 per cent by 2012, but by 2007 they were almost 7 per cent above1990 levels. As a result, there is no chance the country will meet itstarget.

Italy has no significant fossil fuel reserves, but derives half of itselectricity from gas, and a further 30 per cent from coal and oil. Thecurrent Italian government’s main energy policy is to revive nuclearpower; the country abandoned its nuclear power plants in the 1980sfollowing a national referendum. Nevertheless, there is some officialinterest in carbon capture and storage, with the government fundingR&D into the technology. Enel, the country’s largest energycompany, plans a post-combustion CCS demonstration project nearVenice. The technology will be retrofitted to an existing coal station,and storage of the carbon dioxide will be in a saline aquifer. This

26

5 EU performance

The EU has always been involved in coal policy. The precursor to theEuropean Economic Community was the European Coal and SteelCommunity, established in 1951. The original Treaty of Rome givesBrussels substantial powers over energy policy via its market-opening provisions. The Commission has also acquired a role inenergy policy through its powers to enforce anti-trust and state aidrules. The 1992 Maastricht treaty increased the EU’s role inenvironmental policy, and gave it powers to improve cross-borderenergy infrastructure. The Lisbon treaty contains a specific chapteron the need to encourage new and renewableforms of energy. The result is that “Brussels hasgreater potential power to shape the energymarket design of its member-states thanWashington has over US states”.9

The EU has been funding research into CCS for the past 15 years.The Commission supported a project to demonstrate oxyfuel CCS aslong ago as 1994-95, and helped finance the CASTOR (CO2 fromCapture to Storage) project. This small-scale initiative, whichinvolved 11 member-states, focused on the technical obstacles to theuse of CCS. The Commission also supported a S14 million projectto inject CO2 into a deep saline aquifer near Berlin. This started in2004, and was scaled up significantly in 2008.

During the past three years, the EU’s focus has switched fromfinancing research into CCS to the demonstration of thetechnology. In March 2007, national governments agreed that tento 12 large (meaning at least 250 megawatt) CCS demonstrationplants should receive European funding and enter operation by2015. But almost three years after the original agreement, not

9 David Buchan, ‘Energyand climate change: Europe at the crossroads’,OUP 2009.

★ A 500 megawatt, pre-combustion coal-fired plant in Germany.The CO2 will be stored in a saline aquifer.

★ Post-combustion CCS on a 250 megawatt of coal-fired plantunder construction in the Netherlands. The carbon dioxide willbe transported to depleted off-shore gas fields.

★ Post-combustion CCS on 250 megawatt of a coal-fired pantunder construction in Poland. The CO2 will be stored in a salineaquifer.

★ A 500 megawatt oxyfuel coal power station in Spain. The CO2

will be stored in a saline aquifer.

★ A 900 megawatt pre-combustion coal-fired power station inYorkshire, UK. The storage sites for the carbon dioxide are yetto be chosen.

The remaining project will receive S100 million:

★ Post-combustion CCS covering 250 megawatt of an existingcoal-fired plant in Italy.

The construction of these projects would be a significant stepforward in the drive to establish CCS as a viable low-carbon energytechnology. They would demonstrate at large scale both pre- andpost-combustion techniques as well as oxyfuel. But the fundsallocated under the EERP are unlikely to be enough to ensure thatany of these projects actually gets built. Even when the member-state’s equivalent funding is added, the total public subsidy per plantis not enough.

The second source of EU funding will come from the EU’s emissionstrading scheme (ETS). In April 2009, the EU announced that therevenue from the auctioning of 300 million permits under the ETSwould be placed in a so-called New Entrant Reserve (NER). Like the

EU performance 31

nearly enough practical progress has been made. This is bad newsin terms of the EU’s ability to bring about big structuralreductions in carbon emissions, but it also means that Europerisks losing out economically. Investment in low-carbon energysupplies could provide a strong source of economic growth anddemand for skilled labour at a time when European economieswill be struggling with high levels of indebtedness andintensifying international competition. A concerted drive to bringabout the take-up of CCS would help European firms to developexpertise in the design, development and manufacture of thetechnology, and hence to capture a share of what is destined to bea huge market.

Funding

The EU has made two sources of funding available to help financeCCS demonstration projects. At its December 2008 summit, the EUannounced a S200 billion European Economic Recovery Plan(EERP), aimed mainly at boosting confidence and spendingfollowing the financial crisis. Although the vast majority of thismoney comprises expenditure by national governments, the EU didprovide some new money for longer-term objectives, such asupgrading skills and meeting the EU’s environmental policyobjectives. Of this additional money, S1 billion was set aside tofund CCS demonstration projects.

In December 2009, the Commission announced the six projectswhich will receive funding under the EERP. EU financial support isconditional on national governments providing matching funds (so-called co-financing). The requirement that the member-states matchfunds received from the EU is standard practice. However, co-financing could be a sticking point for some of the poorer EUgovernments, such as Poland, which argues that it cannot afford toprovide such support.

The following five projects will receive S180 million each:


and then be free to choose which project should receive the funds.Meanwhile, others had opposed setting aside a proportion of theNER fund for CCS.

The Commission is working on a fairly ambitious timetable for theaward of the NER money. It hopes to call for proposals in thespring 2010 and to draw up a shortlist by the summer. The projectschosen for funding could then be announced in mid-2011. TheCommission will allocate two-thirds of the NER to the selectedprojects by the end of 2011 and the final third by the end of 2013.The deadline for spending any money awarded under the firsttranche would be the end of 2015, and the end of 2017 for thesecond tranche. As a result, the revenue from the auctioning of thefinal 100 million permits will not contribute to meeting the 2015deadline for the construction of the demonstrations. Moreover, theCommission has indicated that it might postpone the auctioning ofpermits until 2013, having previously indicated that the processwould begin in 2011. This could delay the date when money isactually made available, unless the EIB provides the money upfront,and then receives it back once the auctions have taken place.

Even if NER generates substantial sums of money for CCS and thetimetable for distributing the money is kept, more public financialsupport for the demonstration and deployment of the technologywill be required. EU governments could introduce levies onelectricity suppliers in order to help finance investment in CCS. TheUK is already pursuing this avenue. The Energy Bill currently beingconsidered by its Parliament will place a levy on electricity suppliersto help fund up to four commercial-scale CCS demonstrations oncoal power stations. The British government estimates that the levycould raise £9.5 billion (S10.8 billion) over the next ten years.Electricity suppliers will pass on the cost to consumers, adding anestimated 2-3 per cent to average bills. Levies have the advantage ofproviding secure and predictable flows of finance – a number of EUgovernments, notably Germany and Spain, have successfully usedthem to encourage investment in renewables.

EU performance 33

EERP funds, the money distributed from the NER must be matchedby member-state governments.

The Commission estimated in the summer of 2009 that the 300million emission allowances could be worth S7 billion, but the figureis likely to be much lower than this. A total of S7 billion implies anaverage carbon price of S23 per tonne. At a carbon price of S13 pertonne (the level in February 2010), the NER would be worth aroundS4 billion. There is no guarantee that the carbon price will recovermuch by 2013, when the permits will be auctioned. The value ofETS allowances is not fixed: there is no floor price for carbon, andthe Commission has no power to reduce the number of emissionsallowances issued to the industries covered by the scheme withoutthe unanimous consent of the member-states. The economicdownturn has cut emissions of greenhouse gases and with it thecarbon price. The emissions caps for the carbon market were setwith reference to a forecast for economic growth (and henceemissions of greenhouse gases) that is now far too high.

However, at the beginning of February 2010, EU governments didback the Commission’s proposal to ring-fence a proportion of theNER for CCS. National governments will each submit a shortlistof potential projects to the Commission, which will then togetherwith the European Investment Bank (EIB) select eight CCSprojects for financial support and an equivalent number ofrenewable energy schemes. Up to three projects can receivefunding in any particular member-state. In order to ensure that thethree principle CCS technologies are demonstrated, pre-combustion, post combustion and oxyfuel must be covered by aminimum of one and a maximum of three of the eight CCSprojects. Moreover, three of the CCS schemes must demonstratestorage in oil and gas or coal fields and three in saline aquifers.This agreement came as a welcome surprise, given what had beenknown about the negotiating positions of the various governmentsahead of the meeting. A number had argued that member-statesshould be allocated shares of the money according to their size,


mechanism to amend the emissions allocations in the light ofchanged economic circumstances threatens the efficacy of thescheme. The EU carbon market was created to meet specific publicpolicy objectives – greater investment in low-carbon technologiesand improved energy efficiency. If firms believe carbon prices willremain low for a prolonged period because economic growth (andhence emissions) are much weaker than anticipated, they will havea much weaker incentive to invest in new technology. In short, itmatters why emissions of carbon dioxide fall. A structural fallrequires investment in new technologies, such as carbon captureand storage. A cyclical fall will simply be reversed once theeconomy rebounds.

Second, the method of distributing the allowances is exacerbatingthe weakness of carbon prices. In phase two of the ETS (which runsfrom 2008 to 2012), the vast majority of allowances will beallocated for free. In phase three of the scheme (2013 to 2020)energy generators will have to purchase them through auctions. Butauctioning will only be introduced gradually for the other industriescovered by the market. The upshot is that very few businesses areactually paying to emit carbon dioxide at present. And it has becomeapparent that emissions will remain weaker than projected for anumber of years, so businesses will be able to put off buyingallowances until well into phase three. If all businesses had to pay toemit carbon dioxide now (or at least from 2013), prices would notbe as weak as they are at present.

An energy tax would arguably have been a more effective way ofproviding an incentive for firms to invest in CCS than an emissionstrading scheme. Norway’s tax on offshore carbon emissions hascertainly contributed to the economic viability of CCS projects inthat country. Despite the Swedish government arguing that it wouldpromote a carbon tax during its presidency of the European Councilin the second half of 2009, it made little headway. And it seemsunlikely that progress on the introduction of an EU carbon or energytax will be made soon enough to make a significant contribution to

EU performance 35

Market signals and regulation

Public money is needed for the construction of CCS demonstrationplants, but strong regulatory and market signals will be required toensure mass deployment of the technology. Firms will only invest innew low-carbon technologies such as CCS if they are confident thatcarbon prices will be high enough to justify the cost. In earlyFebruary 2010, the EU ETS carbon price stood at S13 per tonne.Although this represented an improvement on the low of S10reached in February 2009, prices are not high enough to make suchinvestment worthwhile.

There are cyclical and structural reasons for the current weakness ofcarbon prices. The cyclical reason is the decline of Europe’sindustrial activity, and hence energy use, since the middle of 2008.With the supply of carbon allowances fixed and emissions of carbondioxide declining, carbon prices have inevitably fallen. The EUeconomy shrank by around 4 per cent in 2009. The release ofcarbon dioxide by industries covered by the carbon market willhave declined by as much as 10 per cent. Moreover, the economicrecovery will be slow to gain momentum, with economic growth(and hence energy consumption) set to remain weak for severalyears. In short, the EU economy will not grow anywhere near as fastbetween 2008 and 2020 as was assumed when the emissions capswere set, which means that emissions will be considerably lowerthan forecast. Economic growth is more likely to be around 1-1.5per cent a year over the next ten years rather than the 2-2.5 per centoriginally assumed by the Commission. The cumulative impact ofthis on emissions will be huge.

The ferocity of the economic downturn has also highlighted twounderlying weaknesses in Europe’s carbon market. First, the EUfixed the supply of carbon allowances until 2020. This was done forgood reasons. Investors needed to be convinced that the cap onemissions would be sufficiently tight to ensure consistently highcarbon prices, and that the emissions caps would not be alteredunder pressure from governments. However, the lack of a

34

mechanism for addressing the emissions of industrial plants. InMarch 2009, a group of MEPs unsuccessfully attempted to insertcarbon dioxide into the proposed IED, but the EuropeanParliament’s environment committee has ruled out the inclusion ofany further amendments before the second parliamentary reading ofthe draft in March.

If the IED does not set maximum CO2 limits for power stations andother industrial plants, an alternative would be for national EUgovernments to set their own limits. However, under the proposeddirective, member-states would be prevented from doing so. TheCommission justifies its opposition on the grounds that it woulddistort competition between energy providers in different Europeancountries. However, it is unclear whether this is legal. For example,the WWF has argued that it is inconsistent with article 176 of theTreaty of Rome, which allows member-states to take “morestringent” environmental protection measures as long as these arecompatible with the treaty.

EU performance 37

the deployment of CCS. Of course, member-states have the power tointroduce their own carbon taxes. France has announced that it willdo so, but it will not cover the electricity sector and so will notprovide an incentive to invest in CCS.

In addition to a robust market signal, it is imperative that the EUputs in place a regulation requiring that CCS be incorporated intoany new coal-fired power station or industrial plant. A reportproduced by a number of environmental non-governmentalorganisations (NGOs) including the Worldwide Fund for Nature(WWF), Bellona Europa, ClientEarth, E3G and the Green Alliance,argues that Europe could cut two-thirds of the greenhouse gases

emitted by large power plants by 2020 ifbinding emission caps are introduced.10 TheEU’s CCS directive requires the harmonisationof the member-states’ regulatory frameworksfor CCS, but only in regard to how the carbonshould be transported and stored; the directivedoes not make CCS mandatory.11 TheCommission considered setting a future date formaking CCS compulsory on all new powerstations, but backed down in the face ofopposition from national governments, whoargued that such a requirement would breachthe EU’s subsidiarity principle.

The EU is currently updating the Integrated Pollution Preventionand Control Directive (IPPC), and integrating six other, more specificdirectives into what will be called the Industrial Emissions Directive(IED). However, this will only cover pollutants, such as sulphurdioxide, nitrogen oxides and not emissions of greenhouse gases,such as carbon dioxide. If the EU were to include CO2 in the IED, allnew coal-fired plants would have to be built with CCS and existingplants retrofitted with CCS or closed down. The EuropeanCommission maintains that including carbon dioxide in the IEDwould undermine the ETS, which must remain the principle


10 Sina Wartmann, PiotrJaworski, Sebastian Klaus,Catharina Beyer, ‘Scenarioson the introduction of CO2

emissions performance standards for the EU powersector’, Ecofys, January 2009.

11 Directive 2009/31/EC ofthe European Parliamentand of the EuropeanCouncil on the geologicalstorage of carbon dioxide,European Commission,April 2009.

6 Recommendations

Carbon capture and storage is not an untried, speculativetechnology. There is no doubt that it works. The problem is that itis very costly, and that it will not be deployed in the absence ofsubstantial public subsidy. The EU needs to do a host of things if itis to meet its target of ten to 12 large CCS demonstration plantsbeing in operation by 2015, and bring about the mass deploymentof the technology by 2020:

★ The demonstration plants must cover the portfolio of potentialCCS technologies.

★ Market incentives must be strong enough.

★ EU money must be used efficiently and there must be no delayin making funds available.

★ CCS needs to be mandatory by a specified time.

★ There should be geographical clusters of CCS projects.

★ There must be full knowledge-sharing between all of theprojects.

(i) Technology: The six projects that have already been selected forfunding under the EERP provide a good mix of CCS technologies:pre-combustion, oxyfuel and post-combustion, with storage in oiland gas fields and in saline aquifers. However, none of the projectsallocated EERP funds are gas-fired plants. Gas is less damaging tothe climate than coal, but still produces significant amounts ofcarbon dioxide. A gas-fired power station emits only 40 per cent as

framework for that regulation in the light of changedcircumstances should not be considered problematic.

The Commission should tighten the ETS’s post-2020 (phase four)emissions cap, which is not yet set in stone. Given that emitters canretain allowances from phases two and three (2008-12 and 2013-20)of the scheme for use in phase four, reducing the number ofallowances available in the post-2020 period would help to preventfurther falls in carbon prices. But this alone will not be enough toensure that prices rise rapidly. The Commission should alsoannounce that from 2013 auctions will be subject to minimumcarbon prices of S30 per tonne. Those allowances that do not meetthe reserve price would then be withdrawn from the market. Such amove would increase carbon prices and reassure firms that priceswill remain high enough to warrant investment in CCS.

(iii) Public money: There needs to be greater certainty about thescale and timing of public funding. Even including matching fundsfrom EU governments, the EERP money of S180 million per projectwill not be enough to guarantee that they get built. The February2010 agreement states that projects which have received EERP fundsshould not be given precedence when it comes to allocating moneyfrom the NER. This is a mistake. In order to prevent EU moneyfrom being spread too thinly, the Commission should give priority toprojects chosen under EERP when distributing NER funds, so longas this does not exclude more advanced schemes.

There must be no delay in making the NER funds available, and theEU needs to set a deadline of the end of 2015 for it to be spent. TheCommission has said that it aims to make NER awards in mid-2011. All EU institutions must ensure that the Commission’stimetable for doing this is met, so that in the spring of 2010 theCommission can call for proposals from national governments, andmake the awards by the middle of 2011. The second tranche of NERfunds should be made available in 2012, rather than in 2013 ascurrently planned. Making extra money available only in 2013

Recommendations 41

much carbon dioxide as a conventional coal-fired power station, butat least four times as much as a coal plant fitted with CCS. Another‘dash for gas’ would not produce the almost completedecarbonisation of the EU’s electricity sector that is needed. Some ofthe ETS’s New Entrant Reserve (NER) should be used to promotethe use of CCS in gas-fired industrial facilities.

The EU’s agreement reached in February 2010 was positive for anumber of reasons: any project receiving NER funds will have toimplement the full CCS chain (capture, transport, storage), and havea capacity of at least 250 megawatt whether it is pre-combustion,post-combustion or oxyfuel; the Commission will retainresponsibility for ensuring that the full range of potential CCStechnologies are allocated funds from the NER; the member-stateswill submit shortlists of projects, and the Commission will thendecide which will receive funding in conjunction with the EIB. TheCommission has performed well in selecting six EERP projects,while the participation of the EIB would inject rigour andimpartiality into the process. The inclusion of the EIB has theadditional advantage that it could make the NER funds availableimmediately, without waiting for the revenue from the emissionallowances to be auctioned.

(ii) Stronger market signals: Public subsidy alone will not beenough to secure the take-off of CCS. Carbon prices will need torise quickly if the ETS is to provide sufficiently strong marketincentives to encourage private sector investment in thetechnology. Given the poor outlook for the EU economy, theCommission may have to intervene in the carbon market to ensurethis happens. One argument against intervention is essentiallyideological, that it would interfere with the working of themarket. Another argument is that intervention would createuncertainty: investors would come to fear that the Commissionwould interfere in the market whenever it was unhappy about theprice of carbon. Both fears are exaggerated. The carbon market,like many others, is the product of regulation, so altering the


Performance Standard but an individual EU member-state does not.EU governments need to challenge the legality of this.

(v) Clusters: The need to allocate money fairly between member-states must not mean that the advantages of connecting CCSdemonstration projects in clusters get overlooked. The creation ofsuch clusters would reduce the unit cost of constructing each plant aswell as the cost of transporting the carbon dioxide. One obviouslocation for such a cluster is Rotterdam, which is situated betweenmajor sources of CO2 in the Netherlands and Germany, and thedepleted oil and gas fields and saline aquifers of the North Sea. TheRotterdam Climate Initiative (RCI) estimates that the cost ofconstructing and operating the network of pipelines needed to connecta cluster of plants fitted with CCS technology with the storage sites(along with the monitoring of the storage sites themselves) would beanything between S13 and S38 per tonne of carbon stored.

The governments surrounding the North Sea and the EuropeanCommission should also promote the idea of a broader CCS clusterspanning the North Sea. This would involve the construction of anetwork of pipelines to transport carbon dioxide to depleted oil andgas fields and saline aquifers. Such cross-border co-operation isessential in order to lower costs and make the most rational use ofpotential storage sites. The North Sea would be turned from a sourceof oil and gas into a location for carbon storage, in the processsafeguarding employment in the off-shore oil and gas industry. All therelevant governments have voiced support for the initiative (althoughnone has yet committed to providing any financial backing).However, the Commission has not yet decided whether to supportthe proposal, simply stating that it will give it consideration during2010. The Commission should state immediately that it backs theestablishment of a North Sea hub, and work with the relevantgovernments to identify the necessary finance.

(vi) Knowledge sharing: The EU’s CCS demonstration programmewill only fulfil its potential if there is adequate knowledge sharing

Recommendations 43

would make it unlikely that the ten to 12 plants would beoperational by 2015. Finally, the EIB also needs to make the NERfunds available in advance of the auctioning of permits, in order toprevent a prolonged delay in the funds being awarded. A mechanismcould be put in place to allow the EIB to claw back the money if aproject failed to get the go-ahead.

However, even if the Commission persuades EU governments to seta minimum carbon price of S30 per tonne and makes sure thatsubstantial funds are made available under the NER for investmentin CCS, much more public support will still be required. With mostEU governments facing acute fiscal pressures, there is scant chanceof them finding additional funds from state coffers. Instead, theyshould introduce levies on electricity suppliers and use the revenuesto help finance investment in CCS.

(iv) Deployment: In addition to substantial public subsidy, a muchstronger regulatory signal is required. The EU’s 2009 CCS Directiveon the storage of carbon dioxide does not make CCS mandatory; itsimply includes regulations to ensure that the carbon is safely stored.Once CCS has been proven on a large scale, coal and gas-firedindustrial plants should be required to retrofit CCS or to close down.The Commission was wrong to rule out including carbon dioxide inthe EU’s forthcoming Industrial Emissions Directive (IED). Itsargument that the inclusion of CO2 in the IED would undermine theeffectiveness of the carbon market is unconvincing. First, it is farfrom clear that the ETS will work as desired; in the absence ofintervention in the market it is just as likely that carbon prices willremain too low to have any impact on investment in CCS. Second,it is unclear why setting emissions standards for industrial plantswould undermine the ETS, whereas the EU’s existing targets forrenewable electricity apparently do not. The Commission’sopposition to member-states going it alone and setting morestringent emissions standards for industrial plants on the groundsthat it would distort competition is similarly problematic. It makesno sense that California has the right to set an Emissions


7 Conclusion

Carbon capture and storage (CCS) does not convert coal into arenewable energy. Coal will never be entirely clean, since somecarbon dioxide and other air pollutants will still be emitted. But acoal-fired power station incorporating CCS technology producesonly around 10 per cent of the carbon dioxide emitted by aconventional coal-fired power plant, and only a quarter as much asa conventional gas-fired power station. As such, CCS (like nuclearpower) must be regarded as an essential bridge technology untilthat time when countries are able to rely fully on renewable sourcesof energy. The ultimate aim must be for all energy to be generatedrenewably. But it will be a long time before the world can feasiblyrely 100 per cent on renewables for electricity, heat and transport.The roll-out of CCS would not be a retrograde step environmentally.Moreover, it would increase the EU’s energy security by reducing theneed to import gas from politically unreliable countries.

Companies will not build large-scale CCS plants unless governmentsprovide substantial public support; there is just too muchuncertainty over the cost of construction and some doubt overwhether the public will accept the use of such a technology.Unfortunately, individual EU member-states have done far too littleto bring about the demonstration of CCS, let alone its deployment.As a result, Europe is getting left behind. Public funding for thedemonstration of CCS is insufficient and uncertain, while the long-term financial and regulatory framework needed to ensure massroll-out has not been put in place.

The European Commission has accepted that large demonstrationprojects will require public money, but the sums so far agreedcompare unfavourably with the amount of support provided by the

between all the projects receiving EU funds. There is no justificationfor restrictions on the sharing of experience gained through theparticipation in publicly-funded demonstrations. The exchange ofknowledge on environmental performance, cost and public healthissues must therefore be made a condition of any project receivingEERP or NER money.


US government, and proportionally, by a number of otherindustrialised countries. Rapid demonstration and deployment ofCCS must therefore be a top priority for the new Commission. Tomake significant progress and meet its target of having ten to 12large scale demonstration plants operational by 2015, the EU mustmake sure that there is no delay in making funds available and thatthese are not spread too thinly. For their part, member-stategovernments will not only need to match the EU’s contribution, butalso provide very substantial additional funds.

The EU must also ensure that it moves as rapidly as possible fromdemonstration to widespread deployment. This will require furtherpublic financial support. But it will also require a strong marketsignal. The carbon price set by the EU’s ETS must be much higher.The European Commission needs to intervene in the ETS toestablish a floor price for carbon and to lower the volume ofemissions permits by cutting the emissions caps for phase four of thescheme, which starts in 2020. As soon as the technology is provenat scale, the EU will have to set a date by which CCS will becomemandatory for new and existing plants. Without it, there is a riskthat energy companies will build conventional power stations ormore gas-fired power plants – which is better in carbon terms thancoal without CCS, but worse than coal with CCS. In the absence ofEU-wide regulation requiring the use of CCS, member-stategovernments should push ahead with their own national rules.

On current trends, CCS will be slow to take off in the EU. As aresult, the EU will struggle to assume leadership of this crucial newtechnology. The rest of the world is not standing still. China, the US,Canada and Australia are all now actively pursuing CCS, makingsubstantial public funds available, and the new Japanese governmentplans to do the same. The potential prize is considerable – a hugeglobal market for equipment and expertise. But if Europe wants tosecure business benefits, it will have to move fast.

★


★ The new Commission’s economic philosophy Policy brief by Katinka Barysch, Charles Grant, Simon Tilford and Philip Whyte(February 2010)

★ Can Turkey combine EU accession and regional leadership? Policy brief by Katinka Barysch (January 2010)

★ How to restore financial stabilityReport by Philip Whyte (January 2010)

★ Cameron’s Europe: Can the Conservatives achieve their EU objectives?Essay by Charles Grant (December 2009)

★ NATO, Russia and Europe’s securityWorking paper by Tomas Valasek (November 2009)

★ Making choices over China: EU-China co-operation on energy and climatePolicy brief by Nick Mabey (November 2009)

★ Rebalancing the Chinese economyPolicy brief by Simon Tilford (November 2009)

★ How strong is Russia’s economic foundation?Policy brief by Pekka Sutela (October 2009)

★ How to meet the EU’s 2020 renewables targetPolicy brief by Stephen Tindale (September 2009)

★ Intelligence, emergencies and foreign policy: The EU’s role in counter-terrorismEssay by Hugo Brady (July 2009)

★ Is Europe doomed to fail as a power?Essay by Charles Grant (July 2009)

★ Medvedev and the new European security architecturePolicy brief by Bobo Lo (July 2009)

★ Multilateralism light: The rise of informal international governanceEssay by Risto Penttila (July 2009)

★ The EU finally opens up the defence marketPolicy brief by Clara Marina O’Donnell (June 2009)

★ Obama, Russia and EuropePolicy brief by Tomas Valasek (June 2009)

Available from the Centre for European Reform (CER), 14 Great College Street, London, SW1P 3RXTelephone +44 20 7233 1199, Facsimile +44 20 7233 1117, [email protected], www.cer.org.ukCOVER IMAGE: CORBIS

CARBON CAPTURE ANDSTORAGEWhat the EU needs to do

Stephen Tindale with Simon Tilford

Coal will be the biggest single source of electricity for decadesto come. Yet the EU is doing far too little to encourage thetake-up of carbon capture and storage, a technology whichcould make coal a low-carbon fuel. This failure threatens notonly Europe’s leadership of global climate change policy butalso its ability to profit from the emergence of a huge globalmarket for equipment and expertise. Stephen Tindale andSimon Tilford argue that more public money is needed for theconstruction of demonstration projects, while regulation andstrong market signals will be required to ensure massdeployment of the technology.

Stephen Tindale is the co-founder of Climate Answers and Simon Tilford is chief economist at the Centre for EuropeanReform.

ISBN 978 1 901229 95 0 ★ £10/G16

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CENTRE FOR EUROPEAN REFORM - EUROSFAIRE · commercially viable CCS system at our power station at Longannet in Fife, Scotland, by 2014. We have made great strides already, but know