Background

Liability, both compensatory and stewardship, is the legal responsibility that one has to another or society, enforceable by civil remedy or criminal punishment. Post-closure (long-term) liability for carbon capture and storage (CCS) is largely related to potential migration (within the subsurface) or potential leakage (to the surface) of the stored carbon dioxide (CO₂). The IPCC Special Report on Carbon Dioxide Capture and Storage (2005) describes potential pathways for such leakage to take place: for example via poorly abandoned wells (the most likely), through pores of low-permeability caprocks, or migration through faults.  Such leakage could result in environmental risks (groundwater contamination and risks to the ecosystem), subsurface trespass, and climate effects. Potential CO₂ leakage must also be considered in terms of emissions accounting liability where that applies.  It must be recognised that the containment of CO₂ should become safer over time due to geophysical and geochemical processes that can act as trapping mechanisms for the stored CO₂. However, emissions accounting liability under an emissions trading scheme (ETS) can be accumulative and uncertain as to scope and ETS value, which can create great uncertainty for operators and authorities.

During the operational phase of a CCS project until closure (short-term) it is logical to apportion the liability to the operator of the site as they are most able to manage the risk of any leakage occurring (although there could also be a degree of risk sharing with authorities).  For the post operational phase (long-term) however, it is possible that the former operator of the site will not be able to be held accountable over much longer timescales and a not-uncommon expectation is that liability will transfer to the state. A major issue on the liability of CO₂ storage is when to set the shift from ‘short-term’ to ‘long-term’.

There are numerous current regulations and emerging CCS-specific regulations that need to be considered when investigating long-term liability mechanisms. The European Commission (EC) adopted a Directive (2009/31/EC) in 2008 to enable environmentally-safe capture and storage of CO₂ in the European Union (EU). The Directive has been accompanied by EC Guidance Documents, which, though not legally binding, provide guidance on risk management, site characterisation, monitoring, corrective measures, transfer of responsibility, and financial security/contribution. These Guidance Documents consider different types of both compensatory and stewardship liability, with financial liability covering post-closure obligations for surrender of emission allowances under the EU ETS, monitoring, and corrective measures (in the event of leakage).. The US Environmental Protection Agency (EPA) rule on CO₂ storage (2010), requires financial support from the operator until the end of post-injection site care and monitoring (suggested as 50 years).  Financial instruments allowable include trust funds, surety bonds, letter of credit, insurance, self insurance, corporate guarantee and escrow account. In the EU, allowable financial mechanisms (described in EC Guidance Document 4) include funds (or deposits), trust funds, escrows, bank guarantees, irrevocable standby letters of credit, and bonds issued by a bank. Financial mechanisms for long-term liability will be responsible to either the operator or competent authority, depending on the regulations of that specific region. Zurich Insurance have developed a number of insurance policies for CCS although currently they do not cover long-term liability. At the time of the development of the EC and EPA regulations it was viewed that there was a need for information and assessment of such financial instruments and their applicability to CCS projects.

Conclusions

Government financial requirements primarily protect the government/taxpayer from the risk of the operator’s failing to fulfil its obligations, although some acceptable financial mechanisms also may serve as a funding source for the operator.On the other hand, for the benefit of shareholders/owners, an operator may propose a variety of positions regarding its exposure to long-term CCS liabilities, ranging from use of a financial mechanism to self-insurance without a financial mechanism (subject to agreement by the relevant authorities).

This report identifies and describes eighteen types of financial mechanisms.. in relation to long-term CCS obligations.

In most cases, industry will finding that self-guarantees and corporate guarantees present the lowest after-tax costs, if these mechanisms are acceptable in the jurisdiction and if the operator or guarantor can pass the associated financial tests of eligibility.

In developing regulatory frameworks for CCS, legislators and regulators should indicate which financial mechanisms will be acceptable for long-term CO₂ storage liabilities.Governments should allow use of multiple, acceptable financial mechanisms in order to provide compliance options to facility operators.Industry’s position on financial mechanisms for long-term CCS liabilities may differ when responding to government financial requirements as opposed to when managing those liabilities independently of government financial requirements.Industry may want to propose a package of acceptable financial mechanisms that might involve more than one financial mechanism for a given long-term liability.For example, a “sinking fund” approach involves two mechanisms:(1) a fund that is built up over a given time interval (e.g., 5 years) and (2) a complementary guarantee that decreases in amount as the sinking fund increases.The two mechanisms must together equal or exceed the required amount for covering the obligation. Similarly, when an operator faces financial requirements for two or more long-term liabilities, a package of different types of acceptable financial mechanisms may allow for lower costs and a greater degree of risk-sharing with the government.For example, a package might contain a more conservative financial mechanism for post-closure monitoring combined with a potentially higher risk financial mechanism for post-closure remediation, on the theory that the remediation obligation is more unlikely to arise.

Recommendations

This report provides in one document a review of likely financial mechanisms for long-term liabilities relating to CO₂ geological storage. The report does not seek to recommend any one financial instrument or liability transfer framework option, as this is up to the host country and their national interest and policy situation. Although stakeholders may disagree about what ought to be done, this study should assist stakeholders to agree on what can be done, recognizing that different approaches may be preferred in different countries and regions.

Discussion will continue to arise around long-term liabilities within the meetings of the IEAGHG storage networks, and the findings of this study should provide some more understanding of what can be done to manage and finance these.