Update:  EPA has extended the comment deadline on its proposed regulatory framework for underground injection control of carbon dioxide to December 24, 2008.

This is the third of a three-part series discussing select legal or policy aspects of EPA’s proposed rule for regulating commercial scale carbon and capture and sequestration (CCS) projects, now scheduled to close for public comment on December 24, 2008.  The first post analyzed the proposal’s treatment of financial assurance requirements for project owners and operators.  The second post analyzed the proposed standards for care and monitoring of a CCS injection site following closure of the facility.  This post analyzes the proposal’s treatment of long-term liability associated with CCS projects.

Example 3 - Long-Term Liability

EPA’s failure to resolve long-term liability issues at CCS facilities remains a significant weakness in the proposed framework.  While underground injection of carbon dioxide has been used for decades in oil and gas production, the science supporting long-term geologic sequestration of large quantities of carbon dioxide is still in the demonstration phase.  CCS projects face lingering uncertainties  associated with unintended release, migration or chemical reaction of substances injected into geologic formations.  Managing these risks facilitates commercialization of CCS. 

EPA appears to lack authority under the Safe Drinking Water Act (SDWA) to regulate long-term liability at CCS facilities.  The most prominent climate change bills of the last year, the Warner Lieberman Committee Bill (S-2191 IS), the subsequent Boxer Amendment (S-2191-RS), the Dingell-Boucher Discussion Draft and the Markey Bill (H.R. 6186), recognize the importance of the issue, but none provides the requisite authority to change the system.  Rather, the bills would establish advisory groups to provide future policy recommendations.  A task force is not necessary - the current liability framework inhibits the deployment of CCS technology. 

Unlimited Liability Will Discourage First Movers

CCS investors, owners and operators could face significant exposure for remediation costs and claims of damage to human health, property or the environment from CCS activities.  CCS sponsors could be exposed to liability under the Safe Drinking Water Act, the Comprehensive Emergency Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and the Clean Air Act.  Project sponsors could also be exposed to state-specific causes of action, under both tort (e.g., claims of trespass, nuisance, negligence, and/or strict liability) and contractual theories.  The risk of legal liability can provide an important incentive for good project design, construction, operation and post-closure stewardship.  Uncertainty about the extent and scope of such liability, however, can create a strong disincentive to meaningful investment in CCS projects, especially during the early phases of CCS commercialization when the outcomes are most variable. 

Failure to Manage Liability Puts Taxpayers at Risk

The existing liability, though onerous, is not particularly protective of the public interest - particularly the interests of taxpayers.  In theory, liability for costs associated with responding to a catastrophic release or other imminent hazard would remain indefinitely with CCS project owners and operators (and, under certain conditions, with the businesses that supplied the injected material).  In practice, however, the proposal provides little assurance that responsible parties will remain capable of covering costs associated with long-term, unanticipated events. The current proposal relies on each company to self-insure for liability during the indefinite lifetime of a CCS site.  At a time of unprecedented financial turmoil, few, if any, companies can meet this expectation.   

Fixing the Problem Without Reinventing the Wheel

EPA has identified models for managing long-term liability. EPA cites a white paper that reviews liability and insurance schemes used to manage risks and encourage investment in other high-risk, high-cost/high-risk industries, ranging from nuclear power, anti-terrorism technology and natural gas transport, to flood-plain construction.  These industries use a variety of approaches to manage risk, including project-specific insurance, industry-wide pooled insurance, liability-trust-funds supported by user fees, liability caps and government assumption of long-term liability.   A number of third-party organizations, including the Interstate Oil and Gas Compact Commission, the World Resource Institute and the International Risk Governance Council, have also offered potential approaches for managing CCS liability.  These resources provide a useful starting point for developing CCS regulatory options-and the legal authority required to support them.

The US is moving toward adoption of aggressive carbon emission reduction goals.  CCS is an essential tool for meeting these goals.  To support the rapid commercialization and deployment of CCS, uncertainties surrounding the issues of long-term liability must be clarified. 

To submit comments on EPA’s CCS framework, follow directions provided in the proposed rule.

For further information about this topic, please contact Akin Gump.