Carbon Capture, Use & Storage: what you need to know

Carbon capture, use and storage (CCUS) is a key technology to help achieve global net zero goals,^[1] particularly for hard to abate sectors such as steel and cement.

Increased CCUS investment and proliferation of business models

CCUS is a capital-intensive process requiring a suite of technologies and facilities to capture, aggregate, transport and permanently store CO₂. Globally, there has been a significant increase in the appetite to develop CCUS projects in recent years, with a 50% increase in development of projects from 2022 to 2023 alone.^[2] This has not yet been matched by fully contracted value chains, and as the industry develops we are continuing to see a variety of business models develop to match supply with demand.

Patchwork of government and regulatory interventions

A key driver for increased CCUS activity is the variety of government incentives to encourage investment in CCUS. Approaches differ: 

• The UK is providing a renewable-style subsidy for emitters to assist with incremental capital and operating costs, while also providing direct price support for a utility style shared transport and storage (T&S) infrastructure through a regulated asset base model.
• The EU is providing significant grants and subsidies to support CCUS R&D and demonstration projects, together with regulatory requirements such as the proposed Net-Zero Industry Act (NZIA) which calls for the development of 50 million tonnes operational CO₂ injection capacity annually in the EU by 2030, with oil and gas producers required to contribute according to market share. 
• The US is providing incentives under the Inflation Reduction Act to, among other benefits, provide project developers with significant tax credits for CCUS activities. 
• In MENA, projects are typically being developed on behalf of states which are able to deploy government influence and funding to enable fully integrated CCUS value chains.
• Countries in Asia have less direct government subsidy or significant market or regulatory intervention compared to other regions, with economic incentives being more finely balanced in driving a more merchant model.

Direct and indirect carbon pricing

Many jurisdictions now impose carbon taxes on CO₂ emissions, such as the EU Emissions Trading System (EU ETS). The EU has also made the most wide-ranging interventions to date, including introduction of the Carbon Border Adjustment Mechanism (CBAM), which imposes a levy on importers reflecting the “embedded CO₂” in products. CCUS technologies can avoid or mitigate EU ETS and CBAM costs, impacting the full value chain for a variety of products. 

Coordination along the CCUS value chain

A full CCUS value chain, from capture to storage, is comprised of various stakeholders including: (i) CO₂ emitting/capture facilities; (ii) providers of CO₂ transportation (by way of pipeline, ship and/or road), processing and compression and temporary storage solutions; (iii) permanent CO₂ storage sites; and (iv) technology providers. As this nascent market for carbon solutions develops, tension is emerging between emitters seeking simplicity and certainty in contracting with one counterparty to offtake and store their CO₂, and the variety of CCUS service providers who may each individually only own, operate and specialise in a discrete part of the value chain. While a fully integrated value chain controlled by government-driven stakeholders is emerging in some jurisdictions, other regions are grappling with the need to co-ordinate contracts and operations to provide a “one-stop shop” for emitters. Intermediaries are wrestling with how best to ensure they have robust protections in place for parts of the value chain that they do not own, operate or control. 

Pricing risk and value along the chain

Different parts of the CCUS chain offer a variety of risk/reward/value propositions which draw from traditional business models, from the natural resources/waste approach to storage to midstream infrastructure cost-plus pricing for intermediate transport arrangements. As bespoke point-to-point chains develop into a more fluid ecosystem, we anticipate that regional market prices will emerge, but difficulties in establishing commercial and corporate structures to account for these differences are likely to persist for some time. 

Liability for CO₂ leakage

Crucial to the development of CCUS is certainty of how and when risk and legal title to CO₂ passes along the chain (including in a cross-border context, accounting for international law such as the London Protocol, which governs the trans-boundary movement of waste) so that responsibilities in the event of CO₂ leakage are clear, including how long-term liability for stored CO₂ is apportioned and to what extent governments will share in or ultimately assume this risk. A significant development is the introduction of insurance for CO₂ leakage which would cover: (i) financial losses such as regulatory and third-party liabilities associated with environmental damage; and (ii) project revenue, specifically associated with the loss of carbon credits or allowances.

Cross-border CCUS

Appropriate geography to store CO₂ is neither widespread nor necessarily close to significant emission sources, so the CCUS ecosystem will need to be cross-border, with CO₂ emitted and collected in one country being permanently stored in another. We are seeing increasing alignment between governments to facilitate cross-border CO₂ projects, such as Norway entering into arrangements with various European jurisdictions to support the development of its Northern Lights project. In the Asia-Pacific region, a potentially unique ecosystem from North China to Australia with significant opportunity for cross-border collaboration, new regulatory developments are emerging, such as Indonesia’s recent presidential regulation which allows CCUS operators to set aside 30% of their storage capacity for imported CO₂.

CO₂ as a waste product

In a cross-border CCUS value chain, CO₂ could be classified as a waste product by the domestic laws of certain jurisdictions and under international law (for example, the London Protocol). The implications of CO₂ being classified as waste will be jurisdictionally specific, and may include restrictions on the import of CO₂ and additional permitting requirements. We note that there is no consensus on whether CO2 should be classified as waste under domestic or international law. Accordingly, in many cases, the status of CO₂ as a waste product remains uncertain, so value chain stakeholders should consider what forms of comfort on the waste classification of CO₂ may practically be available from the relevant domestic governments and also address change of law risk in the contractual documents to protect against a future change in the waste classification of CO₂. 

Our teams would be more than happy to support you on your energy transition journey and discuss any aspects with you. Please feel free to contact your usual Freshfields contact or one of the key contacts below if you have any questions.