Suitability of climate finance for CCSin developing countries

CCS: Perspectives for the Southern African RegionJohannesburg, 31st May 2011

Paul Zakkour, Carbon Counts

CCS in developing countries: context

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• CCS demonstration has focused on developed (Annex I) countriesDemonstration stage, high up-front costs and project risks, large CO2 abatement potential

Policy and regulatory frameworks emerging in Europe, US, Canada, Japan, NZ and Australia

• However, significant and growing potential for CCS in developing regions

Emerging economies e.g. China, India, S Africa increasingly reliant on fossil-fuels (power, industry)

High potential for low-cost “early opportunity” deployment e.g. high-CO2 gas fields + in situ storage

IEA CCS Technology Roadmap (BLUE Map scenario) - non-OECD deployment dominates after 2020

• Will be essential in longer-term due to rapid increases in coal-fired power

generation development, including in Southern Africa

Challenges for CCS demonstration

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Issue Challenges

Technical • All elements of CCS chain proven, but not at scale• Proven technologies for high volume, dilute streams of CO2 not fully

developed• Storage availability and large scale transport infrastructure yet to be proven

Finance and economic

• Costs of operating plant need sustainable source of revenue• Project finance challenging due to demo status and lack of revenue

Legal and regulatory

• Need to develop appropriate legal and regulatory scheme, esp. for storage

Methodological and GHG accounting

• Permanence and liability still a major issue to resolve for climate finance• Concerns expressed over possible perverse outcomes from supporting CCS

with climate finance

Demonstration phase essential to test approaches to all of the

challenges

Climate finance for CCS so far

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COP11/CMP1 request for workshop. Parties submit views

SBSTA24:2 x CCS workshops

EB26: Legal/tech issues

COP12/CMP2 more proposals; capacity bldg, Parties submit more views. COP14/CMP4 to decide

SBSTA27: request 2 x synthesis reports, plus more submissions from Parties

2 x synthesis reports produced

COP14/CMP4: EB to recommend COP/MOP what to do. Use Experts

EB50 recommend Positives & Negatives for CCS

Expert Report produced for EB

COP15/CMP5: “New” list for SBSTA to work on and advise CMP what to doMore submissions from Parties

SBSTA32: Continued discussion of draft text.

COP16/CMP6Decides CCS eligible provided a number of issues resolved. New M&Ps for CCS to be developed by COP17

CCS in post-2012 mechanisms?

2011 2013

SBSTA31: Draft text with bracketed for/against inclusion

Two NM & PDDs submittedEB22: boundaries, leakage, permanence. Need COP guidance

2005

• CCS so far received < 0.001% of available climate finance flowsGEF - historically limited; $3m grant recently provided for bio-ethanol capture pilot, Brazil)

CDM - protracted discussions since 2005; CCS inclusion subject to range of pre-conditions

Multi- and bilateral support – Some bilateral initiatives. Not currently eligible under CTF (although “capture ready” is)

Mobilising climate finance will be critical to support technology demonstration phase

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Current CCS activities in developing regions Political activities In country activities

China CSLF: Member CCUS: Participant IEA Roundtable

Post combustion power (Gaobeidien) and pre-combustion power (IGCC; GreenGen) pilots & demo. Bilateral and multilateral initiatives include UK/EU funded NZEC Programme, COACH and the China-Australian Geological Storage (CAGS) project

India CSLF: Member UK Government funded assessment of CO2 storage capacity and capture-ready potential of Ultra Mega Power Plant (UMPP) projects

Latin America and Caribbean

CSLF: Colombia, Mexico, Brazil (Members) CCUS: Mexico (Participant) IEA Roundtable (Brazil)+ Brazil and Caribbean states opposed to CCS in CDM

Brazil: EOR trials ongoing in Reconcavo Basin; Petrobras has two other CCS pilots (Bahia State). BECCS from ethanol pilot under GEF SCCF. Established the Carbon Storage Research Centre, CEPAC . Mexico: Pemex trialing CO2-EOR. CFE working on CCS strategy. NACAP (North American Carbon Atlas Partnership) working with Mexico to map storage potential Trinidad & Tobago: academic research in to CCS potential.

Other developing Asia

Indonesia supportive of CCS in CDM (3 x submissions) IEA Roundtable: Indonesia IEAGHG: South Korea (member)

Vietnam: White Tiger CCS CDM proposal Thailand: feasibility study conducted for offshore CCS project Malaysia: Bintulu CCS CDM proposal. Petronas undertaking CO2-EOR and CO2 storage assessments Indonesia: National agencies, Shell and World Energy Council have undertook national CCS assessment

Africa

CCS in NAMA: Botswana CSLF: South Africa, Member CCUS: South Africa, Participant IEA Roundtable (South Africa) IEAGHG: South Africa (Member)

Algeria: In Salah project capturing c.1MtCO2 from high-CO2 field. Other developers exploring similar projects (e.g. GdF) South Africa: SACCCS; Geological Storage Atlas compiled. Draft regulations on capture readiness for power plants. Botswana: CCS feasibility study at Mmamabula Power CCS Africa: awareness raising in SA, Botswana, Mozambique, Senegal and Namibia

Middle East CSLF: Saudi Arabia, UAE (Members) CCUS: UAE (Participant)

UAE: MASDAR Carbon 3 project plans (Abu Dhabi). Ongoing CO2-EOR trials. Saudi Aramco undertaking CCS application assessments (Saudi Arabia)

Other CSLF: Russia (Member) Russia: some academic studies on CCS have been undertaken Uzbekistan: Underground coal gasification (UCG) demonstrated. Balkans: World Bank techno-economic assessment of CCS potential

CCS deployment in 2020

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Limited deployment of CCS envisaged in Africa in next 10 years – likely more “In Salah’s” plus a pilot/demo

coal-fired plant in Southern Africa Region

CCS deployment in 2030

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Scale-up in Africa envisaged after 2020. Number of

sectors, especially cement, biomass power plant

(BECCS) and coal power plant

CCS (additional) investment needs

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US$25 bn total to 2020US$300 bn total to 2030

Africa: US$ 1.4 bn total to 2020

Africa: >US$ 7bn total 2020-30

Marginal abatement cost curve in 2020

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0

25

50

75

100

125

150

0 20 40 60 80 100 120

Abatement cost $/tCO2 avoided

Abatement potential MtCO2per year

Otherdeveloping

AsiaLatin America

China

India

Other

Middle East

Africa

Wide variety of costs: 1. Low cost opportunities

(“In Salah’s”, CtL) 2. More expensive pilot/demo plant

(coal power and cement)

Framework for climate finance to 2020

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Market mechanisms for early opps

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Market-based support only @

< $50/tCO2

2020: 80 MtCO2 per year

Early technology demonstration in Africa using market-based approaches

(c. 5-6 MtCO2 /yr @ US$10-15/tCO2 ).

MACC => up to 70% of IEA Roadmap deployment in developing countries could be delivered via market mechanisms

Technology in the low cost sectors more mature (integrated capture, in situ storage)

• Project-based instruments (CDM/JI) could be well suited to these CCS applications at the lower end of the cost curve (e.g. natural gas processing like In Salah, Sleipner, Snohvit, Gorgon projects)

• How feasible are carbon prices of up to $50/tCO2 by 2020?

Upper end of literature ranges; primary CER prices currently in range $6-10/tCO2

Market mechanisms for early opps

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• Would demand for offsets support 50 large-scale CCS projects by 2020?

• Choice of baseline could effect the estimated levels of offsets presented:Maybe as low as 40-60% of estimated supply shown above because of different assumptions about the level of emissions “avoided”Market mechanisms will also be need to combine with non-market based sources of climate finance to support higher costs projects

Study Potential offset supply from CCS in 2020 (MtCO2)

Portion of total offset supply in 2020 (percent)

Bakker et al. (2007) 158 5-10%

IEAGHG (2008) 117-314 6-9%The World Bank (2011); this study

26-80 (market only)114 (for all projects) 9-23%

Combining sources of climate finance

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• At high carbon price ($50/tCO2)

Carbon markets provide around 80% of CCS cost (2010-2020)

• Non-market finance leverages in additional market-based finance at rate of 1:2

• Annual costs broadly split 35:65 for financing (debt repayment) and variable costs (fuel, O&M )

• Suggests upfront support would be sufficient for high cost opportunities, with market covering variable costs

Africa has projects at this end of the cost curve that can be incentivised

solely through market-based approaches (e.g. CDM)

But for other projects, market-based approaches will not be

sufficient to support deployment

Combining sources of climate finance

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Additional support needed

> $50/tCO2

2020: 34 MtCO2 per year

Other sources of finance (e.g. grants, soft loans, funds, domestic PAMs under

a NAMA) + carbon market revenues needed in higher cost sectors, especially

power plant (c. 3-4 MtCO2/yr @ US$60-100+/tCO2)

MACC => 30-74% of IEA Roadmap deployment in developing countries (34-84

MtCO2 per year in 2020) will need market + additional mechanisms.Less mature (higher risk) capture technology, harder to raise capital through debt or equity

• Project-based instruments (CDM/JI) not generally well suited to projects at demonstration stage with high up-front investment costs

• Combination of mechs to support upfront investment and ongoing costs

Non-market mechanisms for costlier opps

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Types of non-market based support that could emerge include:

• Green Climate Fund (GCF)A large portion of the Cancun Agreement pledge of US$100 bn/yr in 2020 could flow through GCFPresent scope and priorities unclear, and may flow through other channels

• Technology MechanismPotential provision of soft support (e.g. R&D finance, technical studies, loan guarantees, carbon floor prices etc.) to help demonstrate low-carbon technologies such as CCS in some sectorsCould also support in infrastructure development (e..g incremental finance for pipeline oversizing)

• NAMAsOffer the scope for “layered” support: combination of (1) domestic PAMs (e.g. Capture-ready mandates, taxes) (2) Grant and/or concessional finance, and (3) carbon market support.

Public fund to support upfront investment needs, coupled to carbon market support will be needed for CCS demonstration

Fund could be in the range US$4-20 billion over next 8-10 years, depending on how successful carbon market is in leveraging private investment

Near-term issues to resolve for CCS

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• Issues relating to the “permanence” of emissions avoided by CCSRisk of carbon reversal as a result of seepage in future - lack of national GHG limits in developing

countries means no mechanism for recourse

Proper site characterisation and selection, coupled to appropriate operational practice, MRV and

good closure all essential elements to ensure permanence in the first instance

• Liability needs to be allocated to maintain environmental integrity of CCS(i) Couple liability to any offsets created (“buyer liability”) e.g. tCERs or lCERs; or

(ii) De-couple liability to any offsets created (“host liability). Creates fungible offsets but places

greater requirements on host country

• National laws and regulations may be needed to accommodate CCS

Set standards (e.g. for site selection, operation etc.) and determine modalities (e.g. license regime)

Handle longer-term liability, potentially including liability transfer from operator to host govt.

• Unclear on the scope and extent of national legal and regulatory

requirements due to uncertainties in international frameworkNegotiations on CCS in CDM in Durban could/should provide guidance

Conclusions

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• CCS deployment likely to require only modest share of all climate finance

• CCS deployment pathway - low-cost “early opportunities” in near-termSpill-over learning effects relating to sub-surface aspects (site selection, MRV, project approvals)

• Combined approaches needed to demonstrate CCS across other sectorsCombination of market and non-market based support critical to wider deployment of CCS

• Dedicated funds for CCS in range US$4-20 billion could be sufficient to meet

CCS Roadmap deployment profile in conjunction with carbon markets

• Key learnings include: technology demonstration; cost reduction; testing legal and

regulatory frameworks; project finance models; public acceptability etc.

Timing is critical! Need near-term demo needed to support wider deployment >2020 in

key GHG emitting sectors. Need positive signals towards the end of this decade that the technology works, and significant finance

can be mobilised for CCS beyond 2020

Ways forward

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• Need to build a consensus around eligibility of CCS and provide clarity

around levels of, and modalities for, provision of climate finance for CCS

• Generate and share good-practice for carbon assets creation in relation to

e.g. baselines, monitoring and reporting, permanence

• Need greater discussion on risk management options such as risk pooling in

order to lower entry barriers to demonstration and deployment

• Need to consider piloting risk management options and develop lessons-

learned in order to fast-track a workable scheme

Thank you

Paul ZakkourEmail: paul.zakkour@carbon-counts.com

Web: www.carbon-counts.com

SPARES

Paul ZakkourEmail: paul.zakkour@carbon-counts.com

Web: www.carbon-counts.com

Combining sources of climate finance

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Market-based support only?

< $50/tCO2

2020: 80 MtCO2 per year

Additional support needed

> $50/tCO2

2020: 34 MtCO2 per year

Early technology demonstration in Africa using market-based approaches

(c. 5-6 MtCO2 /yr @ US$10-15/tCO2 ).

Other sources of finance (e.g. grants, soft loans, funds, domestic PAMs under

a NAMA) + carbon market revenues needed in higher cost sectors, especially

power plant (c. 3-4 MtCO2/yr @ US$60-100+/tCO2)