REPORT: EU NEEDS TO BOLSTER ETS, ADD INCENTIVES TO BOOST CCS BUSINESS CASE

Tamar Hallerman
GHG Monitor
08/24/12

While the European Union already has one of the key ingredients in place to help create a long-term business case for carbon capture and storage—a price on carbon emissions—its leaders will need to implement more short- and long-term incentive policies to ensure a strong investment climate moving forward, said Graeme Sweeney, chairman of the Zero Emissions Platform, the group of stakeholders tasked with advising the European Commission on CCS. Sweeney, who is also executive vice president for CO2 at Royal Dutch Shell, said that a combination of targeted and temporary measures will likely be needed beyond the EU’s Emissions Trading Scheme (ETS) over the next several decades to help investors build confidence in the technology as the field moves from the demonstration to commercialization phase. “What we’re seeing in Europe is that the introduction of a carbon price alone hasn’t been sufficient to kick start the technology,” Sweeney said in an interview. “While it’s a necessary part of the story, it’s unlikely to be sufficient enough in the demonstration phase alone…you need to do other stuff to get the show rolling.”

Most critical over the next decade, a report released by ZEP this month outlines, is to fund demonstration projects to gain the confidence of policymakers and members of the public regarding the viability of CCS. “A successful demonstration of CCS is a precondition for commercial deployment; but without a secure environment for long term investment, demonstration projects will not happen,” the report says. Through 2020, the report recommends that the European Commission (EC) and member countries put in place tailor-made “carrots” to help bring first-generation demos online, such as feed-in tariffs with contracts for difference, as the United Kingdom has moved forward on this summer. Capital and operating grants, as well as tax breaks and loan guarantees for early-mover projects, could also help sweeten the deal for potential investors, according to the report. In both the medium and long-terms beyond 2020, the report recommends that the EC put in place incentives that ensure as much investment certainty as possible over time. In particular, ZEP said it recommends measures that attach a monetary value to low-carbon production and CO2 abatement, as opposed to being based on regulatory compliance.

ZEP: CO2 Allowance Price Stabilization a Must

The report places particular emphasis on fixing the ETS as central to the success of the EU’s CCS industry. The ETS has been hit hard over recent years due to the crash of the carbon price. The EU-wide CCS demonstration program, New Entrants Reserve 300 (NER 300), was not given a set amount of money by the EC when it was established, but rather the contest was allocated 300 million CO2 allowances that could be sold in ETS auction over the course of more than a year to earn funding. When NER 300 first kicked off, the price of credits hovered around €30 ($38) each, and analysts estimated that the pot of CCS funding could be as high as €9 billion ($11.3 billion). However, the economic recession, coupled with internal EU debt crises surrounding Greece and other nations, have caused the prices of allowances to nosedive to less than €8/ton, leaving estimates for the NER pot to be a fraction of its original estimate.

The ZEP report says that if low allowance prices continue, they could “seriously undermine” the long-term business case for CCS and demonstration projects moving forward. It recommends that the EC do all it can to prop up and prices and implement provisions to ultimately help prices recover like setting aside credits and shepherding legislation to cap the future amount of credits available on the market. “As the long-term economic viability of CCS depends on a strong [CO2 credit] price, it is therefore essential to correct the current policy framework with additional financial incentives—and ensure a level playing field for all low-carbon energy technologies,” the report says.

Sweeney said that the actions must be implemented as soon as possible. “I think there is a sense in a number of places that because we may not need to actually have the widespread deployment of CCS by 2030, we have a lot of time, which is far from the truth,” he said. “We only have just about enough time go get ready to be able to do this, because the timeframe for developing technologies is long and the whole idea that it seems a long way away actually doesn’t help with the political urgency that’s required in order to drive the change.”