Incentivising Carbon Capture and Storage under the Emission Trading System – Accommodating Mobile CO2 Transport

This blog post summarizes the topic and findings of research conducted as part of the NCCS research consortium by Heidi Sydnes Egeland, now published in MarIus, issue number 537. Heidi is a PhD candidate part of the Norwegian CCS Research Centre, situated at the Nordic Institute of Maritime Law, University of Oslo.

Emerging CCS projects rely on mobile CO₂ transport – the Emissions Trading System lacks clarity

Large-scale carbon capture and storage (CCS) projects are finally underway in Europe. The Norwegian Longship CCS project spearheads this development in Europe. These emerging projects are characterised by their “cluster-focus”, where the main business idea is to connect decentralised capturing points to a permanent transport and storage infrastructure. Connecting these capturing points to the transport and storage network may require the use of mobile CO₂ transport, such as ships and trucks. Shipping is, for example, a significant feature of the Norwegian Longship CCS project.

The main incentive for employing CCS in Europe is the Emissions Trading System. The trading system incentivises emissions reduction efforts, such as CCS, by holding operators of industrial installations economically liable for their emissions. The system is based on the ‘cap and trade’ principle, where a cap is set on the total amount of greenhouse gases that may be emitted by the activities subject to the scope of the market. The cap is divided into emission allowances that are allocated to participants in the market, primarily by auctioning, and may subsequently be freely traded. The operators are required to surrender allowances equal to the total emissions from the preceding year, thus ‘paying’ for the greenhouse gases emitted. The market mechanism thus incentivises emission reduction efforts that cost less than acquiring allowances.

The legal framework of the Emissions Trading System explicitly sanctions CCS as a possible emission reduction option for the operators in the market. The problem is that the legislation is designed for CCS projects that solely use pipeline transport. Lack of provisions that enable mobile CO₂ transport prompts uncertainty regarding the legal status of the emerging CCS cluster-projects. The main question is whether the incentive set forth by the Emissions Trading System is available for a CCS process that utilises mobile CO₂ transport.

This is an important legal issue to settle because the long-term business case of the forthcoming CCS projects will likely rely on trading system incentive mechanism.

The main legal issues and research findings: an interpretative solution for mobile CO₂ transport

The Emissions Trading System Directive holds that no obligation to surrender allowances arise where CO₂ is permanently stored. The problem is that the monitoring and reporting regulations that implement the Directive solely facilitate the use of CO₂ transport by pipelines. There is only an explicit system in place to account for emissions from pipelines, not from mobile CO₂ transport modalities. A textual interpretation of the relevant rules seems to imply that transfer of CO₂ to mobile CO₂ transport instigates a duty to surrender allowances for that CO₂. In other words, a duty to pay for CO₂ that is eventually stored, and therefore never constitutes ‘emissions’ as defined by the Directive.

Requiring allowances for CO₂ never released into the atmosphere is a conclusion in direct conflict with the superior norms and primary objective of the Emissions Trading System Directive: that emitters are held liable for actual emissions in order to incentivise emission reduction efforts. Liability for actual emissions is underscored as a fundamental principle by the European Court of Justice in C-450/15 Schaefer Kalk. A key finding of this research is, therefore, that where CO₂ transport is concerned, a textual interpretation of the subordinate monitoring and reporting rules do not satisfactorily implement the superior norms set forth by the Directive.

This publication presents a teleological interpretation that overcomes the shortcomings of the legislation. The mobile CO₂ transport is considered an associated activity to the installations it connects in the integrated CCS process. More specifically, the research finds that the ‘installation’-definition allows for an interpretation that considers the mobile CO₂ transport phase as a ‘directly associated activity’ to either of the two ‘technical units’ it connects in a CCS process, i.e. the capturing unit or pipeline network. This teleological interpretation ensures that the duty to surrender emission allowances is allocated to an installation subject to the Emission Trading System. Furthermore, this approach ensures that the operators in question are held liable for the actual emissions associated with CO₂ transport segment, regardless of the transport modality used.

The research finds, in other words, that although the Emissions Trading System does not positively enable mobile CO₂ transport, it is possible to accommodate it by a teleological interpretation of the framework. It is, however, suboptimal for investments that the framework lacks clarity. A long-term solution requires revision of the legal framework. Alternatives for such revision are presented in the publication.

Abstract

The research now published in MarIus, issue number 537 explores the tension between the legal design of the European Emissions Trading System and the reality of the emerging CCS cluster projects relying on mobile CO₂ transport. The critical question is whether the main incentive mechanism for CCS in Europe, as provided by the trading system, is available for emerging projects like Longship. The research concludes that the shortcomings of the legal framework may be overcome by a teleological interpretation, characteristic of the EU legal order. The European Commission recently issued a legal opinion that supports this conclusion, accommodating mobile CO₂ as part of a CCS value chain under the Emission Trading System.  

This publication has been produced with support from NCCS, performed under the Norwegian research program Centres for Environment-friendly Energy Research (FME). The authors acknowledge the following partners for their contributions: Aker Solutions, Ansaldo Energia, Baker Hughes, CoorsTek Membrane Sciences, EMGS, Equinor, Gassco, Krohne, Larvik Shipping, Lundin, Norcem, Norwegian Oil and Gas, Quad Geometrics, Total, Vår Energi, and the Research Council of Norway (257579/E20).