Abby L. Harvey
GHG Monitor
1/16/2015
The treatment of natural gas electricity generation with carbon capture and enhanced oil recovery under California’s cap-and-trade program is uncertain, presenting a key obstacle to the deployment of that approach, according to a report released late last week by the California Council on Science on Technology. “The current regulatory uncertainty creates challenges for key decision makers—including regulated parties, project developers, and regulatory authorities—and compromises their ability to effectively advance important climate policy objectives. It also confounds decision making in jurisdictions still considering the policy options for implementing coherent climate regulation,” the report says.
At the center of the problem with the current cap-and-trade program’s treatment of natural gas electricity generation with carbon capture and enhanced oil recovery is uncertainty surrounding emissions accounting for such projects. According to the report, while the program’s language is clear about accounting for individual “covered entities,” it is not clear on accounting when more than one “covered entity” is involved in a project. “The NG-CCS-EOR configuration modeled here includes at least four separate ‘covered entities’: the natural gas supplier; the power plant; the crude oil producer; and the refinery. The regulation is not clear how CO2 sequestered via enhanced oil recovery should be allocated among these various entities. In theory, policy incentives should reflect physical carbon flows, reward entities responsible for achieving emissions reductions, and support efficient reporting and enforcement. It is not obvious how these goals can best be achieved in CCUS projects. This reflects the distribution of responsibilities, costs, and carbon flows among CCUS project participants (e.g., power plants capture CO2 and oil-field operators ensure its long-term sequestration),” the report says.
Who Gets to Retain the Benefits?
The report identifies several options to address this uncertainty based on which entity within the CCUS chain receives the benefit of the sequestered carbon under the cap-and-trade program; the CO2 provider, the oil producer or the refinery. Determining which entity would receive the benefit is in itself a policy issue, according to the report. “The appropriate treatment of CO2 supplied for sequestration via CO2-EOR operations appears to hinge on whether CO2-EOR is interpreted as an industrial process or as a method of CO2 sequestration, for which a ‘Board-approved carbon capture and geologic sequestration quantification methodology’ is established,” the report says. If the process is determined to be industrial, the CO2 supplier would likely retain compliance obligations for the CO2. If the process is determined to be a method of sequestration, the CO2 supplier could subtract the quantity of CO2 supplied for EOR from its compliance obligation.
Allowing the CO2 supplier to retain the benefits of CCUS would incentivize the supplier to invest in CCS, but it would disincentive EOR, which may not be ideal, according to the study. “This regulatory approach moves the policy incentives away from the point of sequestration, away from the party responsible for both ensuring that captured CO2 is not emitted to the atmosphere and for documenting this via implementation of [Measurement Reporting and Verification (MRV)] protocols,” the report says. To address this issue, the report suggests that oil producers using captured CO2 for EOR be able to seek benefits for carbon sequestration, though in that case the CO2 supplier would be responsible for their compliance obligation. “If CO2 suppliers retain compliance obligations for CO2 delivered for EOR, then an alternate approach would be for emissions benefits of CO2 sequestration to be realized by the oil producer. A benefit of this regulatory treatment is to provide policy incentives to the entity responsible for injecting CO2 underground, thereby avoiding its emission to the atmosphere, and for implementing MRV protocols to document effective sequestration. This may be important for supporting effective CO2 recycling, sequestration, and MRV investments,” the report says.
