This is the first of a two-part series reviewing recent Congressional efforts to encourage development of the carbon capture and sequestration (CCS) industry in the United States.  The first post focuses on the CCS provisions in the recently-released House Climate Bill, H.R. 2545, the American Clean Energy and Security Act of 2009.  The second post will focus on the recently introduced Department of Energy (DOE) Carbon Capture and Sequestration Program Amendments Act of 2009, S.1013, and the recent hearing on the bill conducted by the Senate Energy and Natural Resources Committee.

In the recent surge of activity on comprehensive climate change legislation, carbon capture and sequestration (CCS) policy is taking a prominent position in both the House and Senate.  Both Houses have put the spotlight on fundamental legal, economic and policy issues that will drive the success or failure of geological sequestration as a carbon-mitigation strategy and shape the development of the CCS industry.  While the stimulus funding for CCS authorized under the American Recovery and Reinvestment Act (ARRA) and 2009 Omnibus Bill will provide a much-needed capital investment boost to the CCS industry, more than a one-time economic stimulus will be necessary to move CCS from a model technology to a national standard.

In the House

On Friday, May 15, 2009, Congressmen Henry Waxman (D-CA) and Ed Markey (D-MA) released an expanded revision to their earlier comprehensive climate change bill.  No longer a mere “discussion draft,” the 932-page “American Clean Energy and Security Act of 2009,” H.R. 2454, includes a prominently-placed 48-page subtitle on Carbon Capture and Sequestration.  The CCS provisions of the bill would-

• Revise the Clean Air Act and Safe Drinking Water Act to expand EPA’s authority to regulate siting, construction, operation and closure of CCS facilities and to require operators to demonstrate the financial resources needed to operate the facility safely from construction through closure (Section 112)
• Create a ten-year, billion-dollar annual funding stream generated by a per kilowatt hour assessment on carbon-intensive power generation, to support early investment in CCS construction at major fossil-fuel-fired power plants and industrial facilities (Section 114)
• Subsidize the day-to-day operation of CCS equipment at early-mover facilities by rewarding high-efficiency CCS operations with tradable emissions allowances created under the bill’s cap-and-trade framework (Section 115)
• Impose performance standards on newly-permitted fossil-fuel power plants, requiring 50 to 65 percent reductions in CO₂ emissions as the industry matures (Section 116). 

The CCS portions of the bill track closely with the approach from the original “Discussion Draft” with a few notable exceptions.  First, the revised bill also provides more detail on how EPA would finance its incentive program for day-to-day operation of CCS equipment at CCS-equipped facilities.  The operational incentive in Section 115 is critical because not only are CCS facilities capital intensive, they also present significant operational challenges.  DOE estimates that operation of currently-available carbon capture technologies can increase the cost of power production by 30 to 80 percent and reduce the power generated by 20 to 30 percent.  This “parasitic loss” of power remains a disincentive to day-to-day operation of CCS equipment well after capital expenditures are recovered.  The initial Waxman/Markey discussion draft proposed a per-ton operational incentive for successful, large-scale sequestration.  The revised bill adds important details, authorizing EPA to allocate emission allowances to eligible operators using a formula that ensures between $50 to $100 dollars in allowance market value for each ton of carbon sequestered.  See Table 1.

Similar to the initial “Discussion Draft,” the revised bill establishes CO₂ performance standards for newly-permitted coal-fueled power plants.  The revised bill also switches from a numerical emissions limitation (800 to 1,100 pounds of CO₂ per megawatt-hour) to a percentage reduction requirement (50 to 65 percent reductions from the facility’s uncontrolled baseline).  This change in methodology could influence the design of future coal-fired facilities, reducing one inherent advantage that Integrated Gasification Combined Cycle (IGCC) facilities and other advanced coal technologies have had over conventional pulverized coal technology.  Newly constructed IGCC facilities tend to have lower uncontrolled emissions than their pulverized coal counterparts, making adherence to a single, numerical emissions standard easier to reach for an IGGC plant than a pulverized coal plant.  Under a percentage-reduction-from-baseline standard, however, the IGCC facility would start with a lower emissions baseline and end with a more stringent post-control reduction requirement.  It is unclear how this single variable would change the net competitiveness of new pulverized coal facility construction relative to an IGCC facility, but it is likely to be an issue of study for advocates for both technologies going forward. 

The revised bill also eliminates the requirement that DOE and related agencies prepare a report to Congress on the technical, legal and regulatory challenges associated with constructing the network of pipelines to transport captured CO₂ from sources to sequestration sites.  While the USGS and Department of Energy have ongoing programs to study aspects of the facility siting and transportation issue, questions remain regarding whether the infrastructure needed to transport CCS from cradle to grave will develop organically in the timeframe needed to support widespread adoption of CCS.  A congressional mandate to address these issues early on would help to ensure that policymakers and investors recognize that how carbon is transported may be just as important as how it is captured or ultimately stored.

An Important Start

On balance, the revised bill would improve the climate for long-term CCS investment.  The additional regulatory authority given to EPA should provide greater regulatory certainty to industry and help all stakeholders assess and manage the risks of CCS facility siting, design, construction, operation, and closure.  The capital and operational funding incentives in the revised bill would build on the funding already in the pipeline, reducing the economic risks and uncertainty with investing in CCS technology.  The stringent performance standards for new coal facilities suggest that even the most advanced pre-combustion, clean-coal technologies would have to adopt CCS.  Perhaps most importantly, the establishment of a cap-and-trade regime would create a market incentive for companies to mitigate their carbon emissions.

While the revised bill would be a step forward, it does not address all of the potential obstacles to commercial scale CCS implementation.  The revised bill does nothing to address issues such as long-term liability; allocation of subsurface property rights; or the regulatory, legal and technical challenges of linking major sources of carbon across the US to viable geologic sequestration sites.  While addressing so many complicated issues at once may be a tall order, policymakers need to consider these issues now if they are going to rely on CCS to play a critical role in US carbon-mitigation strategy. 

In the Senate

The second article in this series will look at recent legislative activity in the Senate and how it could potentially address some of these remaining CCS implementation issues.

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