EU’s new CCS strategy shows risks of UK regulatory drift

A lack of alignment on key policies like investment support and cross-border CO2 transportation risks slowing the progress of carbon capture and storage across Europe.

• The EU is belatedly ramping up efforts to create a continental market for CO2 storage with a new Industrial Carbon Management Strategy (ICMS) that calls for EU-wide policy on infrastructure and more financing from member states. 
• A commercially viable CO2 market is only likely to emerge after 2030. National and cross-border projects will have to proceed without clarity on EU regulation, creating considerable uncertainty around how the market will develop.  
• The UK has real potential to be a player in European-wide CCUS, although its near-term focus is on storing domestic emissions.
• If the UK does want to become an importer of European CO2, it will need to make sure its emissions trading system (ETS) and legal regime comply with those of the EU. Political tension between Westminster and Brussels will only make this harder

The European Union – rarely associated with regulatory rapidity – has so far failed to accelerate the roll-out of CCUS. 

Back in 2009, a European parliament directive created a legal framework for geological CO2 storage. Chris Davies, director of campaign organisation CCS Europe and a former EU parliament member, bemoans the fact that 16 years later there is still zero CO2 being stored. 

What progress there has been is largely in the form of targets and statements of intent. The Net Zero Industry Act includes a target of 50 million tonnes of CO2 stored annually by 2030, and requires oil and gas producers to make the necessary infrastructure investments. There are 20 member states with industrial carbon management solutions in their draft national energy and climate plans. But CCS Europe says the number of projects that have taken a final investment decision (FID) remains in the low single digits.

There is the Kalundborg Hub project in Denmark and the Porthos transport and storage project in the Netherlands – both rare examples of EU countries with active subsidy schemes for carbon capture. Two of the four customers for Porthos have also made FIDs in the last few months. French multinational Air Liquide and US industrial gas firm Air Products have both confirmed they will build capture facilities on their grey hydrogen production plants in Rotterdam. Norway – although not in the EU – is expecting its Northern Lights project to receive CO2 from Europe in 2025.

Many more EU CCS projects have been proposed. The latest list of EU projects of common interest has 14 carbon storage projects and another two are on the list of projects of mutual interest (see table). The European Commission (EC) says the combined capacity of these 16 projects is 103 million tonnes per annum across four onshore storage sites and eight or more offshore locations.

The CCS industry has signaled to the Commission that capturing up to 80 million tonnes of CO2 by 2050 would be possible – well in excess of the NZIA target – but only with more supportive investment conditions. For firms looking to provide storage, costs are high and demand is uncertain. Project risks are significant, especially in the absence of a comprehensive regulatory framework across the CCUS value chain. The handful of projects that are proceeding are the beneficiaries of major financial support. 

In the case of Kalundborg, Ørsted received a 20-year contract from the Danish Energy Agency and around half of Denmark’s DKK16bn (US$2.3bn) CCUS subsidy fund. Porthos received over €100m from Brussels for infrastructure costs. The Dutch government has set aside €2.1bn for the project’s four main customers to bridge the gap between the current rates for CO2 EU emission allowances and the costs of capture and storage. The Norwegian state has taken on 80% of the overrun costs of Northern Lights and 75% of the operating costs for the first 10 years.

A new strategy 

The latest effort to speed up CCUS is the European Commission’s long-awaited Industrial Carbon Management Strategy (ICMS). Published on 6 February, the strategy promises action in several key areas. The commission will create an “EU CO2 aggregation platform” by 2026 that matches storage demand and storage availability across time and location. This platform could also provide transparency for contracting and procurement, and give transport and storage providers information on infrastructure planning, according to the ICMS.

E-FWD has covered the challenges investors face in determining where to direct their investments. There are only four member states where application for storage permits is in progress, although eight member states project they will be storing CO2 from 2025. The ICMS states the commission will “kickstart” the creation of an EU-wide investment atlas of potential CO2 storage sites labelled for “storage readiness level”. 

The strategy also identifies a problematic lack of regulation on cross-border CO2 transportation. A Commission study estimates that an EU CO2 transport network could span 7,300km across pipelines and shipping routes by 2030 and cost up to €12.2bn. Pipelines are hard and expensive to build, and in their absence the EU will need a fleet of specialised ships. There will have to be standardisation for CO2 stream quality and common guidelines for CO2 storage permits.

The ICMS is clear that creating a “non-discriminatory, open-access, transparent, multimodal, cross-border CO2 transport and storage infrastructure” requires a dedicated policy and regulatory framework across the EU. As such, starting this year the commission will work towards proposing an EU-wide CO2 transport infrastructure planning mechanism. It will also look at nominating European “coordinators” to support the early development of cross border projects. 

When it comes to the regulatory framework, however, the ICMS is careful not to overpromise. The strategy says the commission will “initiate preparatory work” for a “proposal for a possible future CO2 transport regulatory package”. The industry is not holding its breath. 

The CCUS Forum only sees a commercially viable CO2 market emerging after 2030. A report prepared by industry stakeholders for the forum puts the funding shortfall for announced CCS projects at €10bn.

Onus on member states

In terms of funding, there is only so much that the Commission can do. The ICMS notes that the Innovation Fund has provided more than €3.3bn in grants under the ETS Directive to CCS and CCU projects. The Connecting Europe Facility for Energy has granted around €680m to CO2 projects on the PCI list.

In principle, market-based finance for “economically viable” projects can be supported through the InvestEU Fund. The European Investment Bank has included CCS in its financing package to support the Green Deal Industrial Plan. 

But this is not enough. The CCUS Forum – which brings together stakeholders from industry, member states and EU institutions among others – only sees a commercially viable CO2 market emerging after 2030. A report prepared by industry stakeholders for the forum puts the funding shortfall for announced CCS projects at €10bn. The ETS will be a key driver in making CCS projects commercially viable, but the ICMS highlights that new financing instruments, guarantees and risk instruments are also needed to facilitate investments. Significant state funding has been crucial to the small number of projects now underway and this will remain the case. Most of the financial support for the EU’s CCS roll-out is going to have to come from member states, many of whom, as the ICMS notes, “still need to recognise CCS as legitimate and necessary”. 

Outside looking in

Crucially for the UK – blessed with storage potential but now outside the EU – the ICMS highlights the benefit of international cooperation. The strategy notes that the UK has its own plans to capture 20-30 million tonnes of CO2 annually by 2030. “Cooperation with other frontrunner countries with the aim of pricing carbon and reducing the costs of value chains will also provide opportunities to accelerate the pace of GHG emission reductions world-wide,” the ICMS says. 

Of the projects on the PCI and PMI lists, however, only one mentions the UK as a storage option. ECO2CEE is backed by Air Liquide, Polish oil refiner Orlen and French industrial company Orlen. The project aims to create an open access CCS system for central and eastern Europe, and has identified Denmark, Norway, the Netherlands and the UK as potential storage sites.

The only other project to mention the UK is Norne, a Danish project that sees potential to import CO2 from the UK in addition to Denmark, Sweden, Belgium and Sweden.

The UK does indeed have ambitious targets and favourable geology, but it is not aiming to become an import destination in the near term. Given its status as one of Europe’s heaviest emitters, the government has understandably decided to prioritise domestic storage.

“The way the UK is incentivising the build out of its clusters means support is only available to domestic projects for the first four clusters, which will aim to meet the 20-30 million tonnes of CO2 per year target for 2030,” says Lucy King, a senior analyst in Wood Mackenzie’s CCUS team. “But the UK does have plans to expand its infrastructure to receive international CO2 further down the line”. 

If I were an international emitter and I wanted to jump on the trend, I’d be looking to Norway given that they are focussed on receiving CO2 from mainland Europe

Lucy King, senior analyst at Wood Mackenzie

At least one of the UK’s early stage projects could include a CO2 terminal. In December, Acorn Partners and Uniper signed an MOU to ship captured CO2 from Uniper’s power station on the Isle of Grain to Peterhead Port in the north east of Scotland. The CO2 will be piped to permanent storage in the North Sea. If and when the UK decides to explore importing CO2 after 2030, some of the infrastructure should already be there.

In the short term, however, the biggest non-EU beneficiary of the emerging CCUS landscape is going to be Norway. 

Wood Mackenzie’s database indicates Norway only has 62 million tonnes per annum of announced storage potential, relative to the UK’s 125 million tonnes. But – crucially – the majority of Norway’s storage is expected to be open to imports from day one. Ørsted plans to store power plant CO2 at Northern Lights, as does Yara Sluiskil – a Netherlands-based fertiliser plant owned by Norwegian firm Yara. 

“If I were an international emitter and I wanted to jump on the trend, I’d be looking to Norway given that they are focussed on receiving CO2 from mainland Europe,” says King. 

Politics causing problems 

There are so many uncertainties about how Europe’s CCUS system will evolve that assessing how the UK might fit into it becomes highly speculative. Christopher Jones, a Professor at the Florence School of Regulation (FSR), notes the CO2 grid will be far more atomised than natural gas, with more entities in the storage market and many more options when it comes to transport. Some parts of the CO2 supply chain will likely be regulated as essential service, others will not. 

Nor is there likely to be rapid progress on these key regulatory issues. During a recent FSR policy debate on CCS infrastructure, Jones said that even if the Commission moves as quickly as it can there will not be a directive on regulating CCS infrastructure before 2030. In its absence, he argues for an ad-hoc regulatory regime where national regulatory authorities create market expectations that allow projects to sign contracts for difference (CfD) based on estimated CO2 volumes.

Denmark and the Netherlands have both opted for CfD schemes as part of their support strategy, as has the UK. “But it’s hard to say which is the right approach because the industry is still at such an early stage that it’s hard to see what method will work best,” says King.

“Just having one support system in place probably isn’t enough. You need a blend of different incentives that potentially includes carbon pricing, which is where Norway excels.”

Leaving aside the uncertainties around infrastructure, financing and market design, one of the biggest hurdles is likely to be political. The London Protocol prohibits the shipment of waste – including CO2 – between countries for dumping at sea. An amendment to Article 6 that was agreed in 2019 makes allowances for CO2 projects if both countries ratify the amendment. The EU’s own CCS Directive, however, does not allow storage outside the European Economic Area (EEA). 

Norway and the UK have both ratified the Article 6 amendment, but Norway is an EEA member and the UK is not. When the UK does turn its attention to the CO2 import market, this is going to be a problem. 

The ICMS is explicit on this point – for now the only solution for non-EEA countries is to operate storage sites under an ETS linked to the EU ETS and under a framework that provides legal safeguards equivalent to the EU’s CCS Directive. Davies notes that the EU ETS was always supposed to be able to link up with other systems. “Because the bigger the arrangement the more flexible and cheaper it should be for all emitters,” he says. “But this requires co-operation.” 

The outlook for co-operation between the UK and the EU – to put it mildly – has been better. Earlier this month, UK Secretary Claire Coutinho told POLITICO that riots and protests across the continent were the result of clumsy climate policies that Britain would avoid. The response from European diplomats was predictably scathing. 

Whether a more collaborative atmosphere will prevail in the coming years may depend in large part on the outcome of the looming UK’s general election.

In the meantime, what the UK’s CCS industry should do is lobby for greater engagement with the EU and its ICMS. Cross-border projects are a clear EU priority, the North Sea is a treasure trove of sequestration and there will be designated EU coordinators to help problem-solve. The UK-EU border is more problematic than most, but regulatory compatibility is completely feasible. As Brussels moves to lock in standards and legal regimes, there is a strong economic and environmental argument for partnership on CCS.