This working paper explores some of the key issues emerging around the effective financing of carbon dioxide capture and storage (CCS) demonstration projects in developing countries. It presents a series of options and recommendations to international policymakers and agencies working to support CCS development in a non-OECD context.
Climate Change and CCS
In facing the challenge of mitigating global climate change, world leaders have acknowledged that no single solution exists, and therefore, a portfolio of carbon dioxide (CO2) reduction technologies and methods will be needed to successfully confront rising emissions. Due to their dependency on fossil fuels, the energy supply and industrial sectors are the greatest contributors to CO2 emissions, accounting for 25.9 percent and 19.4 percent of the total respectively.
In addition to efficiency improvements and enhancing clean energy use, one key option for limiting future CO2 emissions from fossil fuel energy use is carbon dioxide capture and storage (CCS). CCS is a suite of technologies integrated to capture and transport CO2 from major point sources to a storage site where the CO2 is injected down wells and then permanently trapped in porous geological formations deep below the surface. Candidates for CCS technology include fossil fuel power plants; steel, cement, and fertilizer factories; and other industrial facilities.
CCS in Developing Countries
Despite often-aggressive programs to promote energy efficiency and deploy nuclear, renewable, and other low-carbon energy sources, many developing countries will still rely heavily on fossil fuel energy to power their development for decades to come. There is therefore a need for developing countries to create strategies that address fossil fuel emissions in a way that minimizes the costs of doing so, and consequently minimizes impacts to their national development goals.
CCS is currently the only near-commercial technology proven to directly disassociate CO2 emissions from fossil fuel use at scale. Its deployment could potentially allow developing countries to gradually shift away from fossil fuels for energy and industrial needs with relatively little disruption to their long-term development strategies. If deployed as an interim measure, it could allow time for other alternative low-carbon technologies to be developed and deployed, permitting fossil fuels to be gradually phased out. This strategy could assist developing countries to transition to a low-carbon economy in the next 15–50 years.
While CCS is potentially attractive to some developing countries, there has been limited development of demonstration projects in Africa, Asia, or Latin America due mainly to their high cost in the absence of expected profits or significant carbon financing. The International Energy Agency (IEA) estimates the total cost for a new average-sized coal-fired power plant that captures up to 90 percent of its CO2 emissions to be US$1 billion over 10 years.
Existing financing for CCS is grossly insufficient to enable demonstration projects in developing countries. The few available funds are either spread over the full array of low-carbon technologies, or fall short of the magnitude or the mandate needed to propel commercial-scale CCS demonstrations forward. Current carbon offset mechanisms are not sufficient to spur CCS deployment in developing countries in today’s context either. Overall, existing CCS financing mechanisms help grow capacity, but their support is insufficient to leverage enough funding from capital markets to implement projects in a non-OECD context.
The IEA CCS Roadmap proposes 50 CCS projects in developing countries in the next 10 to 20 years. As well as reducing the developing world’s greenhouse gas emissions, accelerating CCS demonstration efforts in non-OECD countries can likely also improve technologies, increase efficiency, reduce uncertainty and risk, and initiate learning-by-doing at a lower cost than would be possible in OECD countries. The captured benefits from doing so will be more significant the sooner acceleration in CCS development in developing countries begins.
About this Paper: Topics of Discussion for Financing CCS in Developing Countries
This paper seeks to promote the effective deployment of CCS demonstration projects in developing countries. Aimed at international policymakers and agencies engaged in CCS funding and deployment negotiations and discussions, the paper explores some of the key issues emerging around this critically important topic, and it presents a series of options and recommendations to international policymakers. WRI’s aim is to assist the initial design of an effective approach for financing CCS demonstration projects in developing countries over the next 10 years. Below is a summary of the key topics and options explored in the paper.
Topic 1: Aims of Financing CCS Demonstrations in Developing Countries
The main goal for developed countries to provide financing for early-stage CCS demonstrations in developing countries should be to support non-OECD countries in fulfilling their share in global climate change mitigation efforts.
A financing mechanism for CCS in developing countries should aim to foster tangible CO2 emission reductions through a clear focus on storage goals. The level of ambition for CO2 storage should support current CCS deployment requirements in developing countries. While it is impossible to objectively ascertain what proportion of this total a dedicated OECD country–funded CCS financing mechanism should support, it is evident that developing countries will need support for a significant share of these projects.
Implementing CCS demonstrations that lead to the storage of 45–60 million tons carbon dioxide (MtCO2) over 10 years could significantly spur the research and deployment rates needed for CCS development to take off in developing countries.
Topic 2: Eligible Costs for Financing
Most CCS demonstration projects will operate in conjunction with new or existing power plants or industrial facilities that may also function without the technology. Funding for CCS demonstrations can therefore be structured around whole projects—including the non-CCS components of the facility under consideration—or just the specific CCS components that would enable the facility to effectively capture and store its carbon dioxide emissions.
Funding should only be eligible to finance incremental costs incurred as a result of CO2 capture, transport, and storage efforts—not the full cost of the project.
Topic 3: Project Eligibility Criteria
Project objectives: Finance should be primarily directed toward projects that either actively store CO2 or directly provide the basis for near-future CO2 storage locally, avoiding duplication with other existing funding mechanisms.
Project scales and types: To maximize both near-term and future storage, eligible project types should cover geological site characterization and integrated CCS projects, both at the pilot and commercial demonstration scales.
Project sectors: CCS projects in fossil fuel power plants are likely to be the largest recipients of funding. However, some industrial CO2 sources may present advantages that could facilitate timely and cost-effective development of CCS projects in developing countries. “Low-hanging fruit” projects in industrial facilities with high-purity CO2 streams can advance infrastructure and technologic know-how in developing countries at a fraction of the cost of implementing CCS at a power plant. Funding criteria should therefore not discriminate against industrial sources of CO2.
EOR and other CCUS projects: Enhanced oil recovery (EOR) and other carbon capture, usage and storage (CCUS) projects have multiple advantages for early CCS development and can result in the net storage of CO2, warranting their inclusion in financing opportunities. However, awarding of CCS financing to CCUS projects should occur only where projects are managed and monitored with the aim of permanent CO2 storage.
Additional project requirements: Funding criteria should stipulate that awarded projects employ sound procedures for CCS site selection, operation, and stewardship. Site selection must be based on specific geologic characteristics. Awarded projects must also have monitoring plans in place for both the operational and the post-closure stewardship phase and ideally demonstrate local government support and local community buy-in.
Topic 4: Project Selection Process
In order to make the selection process as equitable and objective as possible while maximizing CCS deployment goals, projects that meet funding demonstration objectives should be awarded on a competitive basis under a points-based system to judge applications. Such system should reward, among other factors, storage efficiency, geographic diversity, and contribution to wider CCS advancement in developing countries.
The selection system should also favor improving knowledge of storage opportunities through projects implemented in deep saline formations, since they represent the largest knowledge gap and the largest storage potential in the future.
Topic 5: Financing Mechanism Characteristics
Significant attention has been focused on creating an international public fund solely dedicated to CCS, or a CCS window within a larger fund that may also finance other pre-commercial, low-carbon technologies in developing countries. Additional research is needed to ascertain the pros and cons of different structures in a developing country environment. However, there are several advantages of adopting a CCS-only mechanism for the early demonstration phase, instead of having CCS in direct competition with other technologies for the same pool of funds.
In order to meet the IEA-recommended storage goal of 45–60 million tons of CO2 in 10 years, a CCS fund needs to be able to invest or leverage total investments of US$5– 8 billion and have the capacity to disburse its resources effectively over the same period.
A CCS fund should employ strong early-mover and CO2 storage incentive provisions to leverage its goals. A 10-year storage incentive on a rising scale could be applied to ensure project operators act to permanently reduce emissions.