Can a technology specific policy exist in a carbon market?

In conjunction with its request for submissions on the 2030 policy framework, the EU Commission posed a series of questions on carbon capture and storage (CCS) to be answered separately. This follows on from the failure of the NER300 policy framework to deliver an EU CCS demonstration programme.

One question within this new consultation is of particular interest in that it opens up the possibility of a dedicated instrument designed specifically for the deployment of CCS. The Commission asked;

Should the Commission propose other means of support or consider other policy measures to pave the road towards early deployment, by:

a.      a support through auctioning recycle or other funding approaches

b.      an Emission Performance Standard

c.       a CCS certificate system

d.      another type of policy measure

One of the leading CCS focused industry / society groups (European Technology Platform for Zero Emission Fossil Fuel Power Plants, or ZEP) responded to this and argued for consideration of a CCS Certificate system should its preferred Feed-in-Tarrif approach not be acceptable. Such a system would require a certain (and annually increasing) amount of CO2 storage for each tonne of CO2 emitted, but the storage could take place in another location with proof of such storage coming in the form of a tradable certificate. But ZEP noted that;

Any system of certificates should be designed in such a way as to avoid any negative interaction with the existing ETS. Measures to ensure this could include making CCSCs fungible with a certain number of EUAs, or retiring EUAs, as CCSCs are supplied into the market.

While a robust carbon market is the preferred approach for driving investment in technologies such as CCS, frustration with price development is leading policy makers and some CCS proponents to consider targeted policies. The ZEP caveat is important in that overlapping policies have been a real problem for the EU ETS. With other polices taking away the need for the carbon price to trigger investment,  higher overall  costs of mitigation result, but at the same time weakening the visible CO2 price.  The same would be true of a CCS policy instrument. However, an EU wide CCS Certificate mechanism which operates for all the same facilities as the ETS could be designed as follows, delivering a first round of CCS projects but working within the ETS to at least mitigate the overlap issue to some extent:

• For the period 2021-2025, each 100 tonnes of CO2 emitted would require the surrender of 99 EUAs (EU ETS Allowances or equivalent instruments) and 1 CCSC (carbon capture and storage certificate).
• The CCSCs are tradable instruments and would be granted for each tonne of CO2 stored in the EU from 2015 onwards. This would give the EU some lead time to build up a modest bank of CCSCs.
• From 2026 onwards, the CCSC requirement would increase by 1 in 100 each year, i.e. by 2030 the minimum compliance requirement for each 100 tonnes of CO2 emitted would be 6 CCSCs and 94 EUAs (or equivalent).
• A facility that generates CCSCs would be deemed as emitting one tonne of CO2 for each CCSC sold into the market.
• CCSCs could be banked for future use.
• The initial 2021-2025 period would require about 20 million CCSCs in each year across the EU, therefore underpinning a number of projects.
• As a “relief valve” mechanism for the period 2021-2025 only, an EUA could be converted to a CCSA for a fee, for example at the current ETS non-compliance penalty level (€100), with the money being placed in a CCS technology fund for disbursement to CCS projects.
• Total EU allowance auction / allocation for the period 2020-2030 would be adjusted downwards on the basis of the creation of a certain number of CCSCs.
• The approach could also inspire the EU to lead the development of an international CCSC at the UNFCCC which could also be used for compliance in the EU.

A CCS Certificate approach has a very modest price impact on the consumer (of electricity). Under an ETS, the marginal cost of compliance is reflected in the cost of everyone’s electricity and this must rise to levels above €50 per tonne before any CCS project activity is firmly triggered. This equates to quite an increase in electricity prices. But the CCSA not only ensures delivery but quickly socializes the cost of CCS, in that each electricity purchaser pays a fraction of the cost of the first CCS facilities. If a CCSC was trading at €80 per tonne of CO2 stored, then in the period 2021-2025 the consumer would see a cost per tonne of CO2 of only 80 € cents, or for coal fired power generation at 900 gms CO2/kWh, a price increase of less than a tenth of a €-cent per kilowatt hour.

So should we opt for CCS Certificates? Although they will deliver CCS, the approach isn’t as economically efficient as the carbon market left to its own devices. But as already noted, carbon markets aren’t being left to their own devices as other policies continually encroach on their turf (e.g. renewable energy targets), which means that CCS may be significantly delayed.

One further thought. Arguably, the increasing requirement to provide CCSAs could continue past 2030 until the ETS is fully replaced later in the century. This would at least align any use of fossil fuels with the long term requirement to store all the resulting CO2.