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Introduction
The decision of the Conference of the Parties (COP) at the Meeting of the Parties (MOP) to the Kyoto Protocol (CMP.7) in Durban to include Carbon Capture and Storage (CCS) in the Clean Development Mechanism (CDM) represents a significant step in the development of an international approach to emissions reductions from fossil fuel sources. View draft decision.
The decision adopts the modalities and procedures for CCS as CDM project activities, establishing a framework for project eligibility, registration and monitoring, reporting and verification (MRV) which will allow project developers to generate Certified Emission Reductions (CERs) from CCS projects. Although there are still administrative and policy preconditions to be met to enable CCS projects to satisfy the requirements of the CDM rules and qualify under the mechanism, the Decision presents potentially significant opportunities for developing countries to generate income whilst achieving emissions reductions and a transition to cleaner energy production.
For an overview of COP 17 generally, see our "Debrief From Durban".
History
The idea of the inclusion of CCS projects under the CDM has a long history. As far back as 2005, the developers of the White Tiger Oil Field CCS project in Vietnam sought approval from the Executive Board of the CDM for the generation of credits.
For many years, Brasil, the Alliance of Small Island States and others had raised concerns about the consistency of CCS projects with the CDM objectives in Article 12 of the Kyoto Protocol. They argued CCS projects, particularly those involving Enhanced Oil Recovery (EOR), do not encourage the reduction of non-renewable sources of energy and fail to encourage the transition from coal-based power sources to renewable energy. In addition, there have been suggestions that the incorporation of CCS under the CDM would flood the carbon market thereby greatly reducing the price of CERs.
In contrast, the EU, Norway, Australia and many Middle East States have supported the technology and suggested a range of solutions to allow inclusion within the CDM, such as limiting the number of projects to a small number of pilot projects and placing a ceiling on the volume of CERs allowed to be issued.
A decision at CMP.6 in Cancun in 2010 provided significant encouragement to the future deployment of CCS technology under the CDM. That decision accepted CCS projects under the CDM provided that issues such as permanence, MRV, environmental impacts, project activity boundaries, international law, leakage liability, the potential for perverse outcomes, safety and insurance were resolved in a satisfactory manner. There was agreement in Cancun that modalities and procedures be developed to address a number of key methodological issues to ensure the safety and environmental integrity of CCS project activities.
With some notable exceptions, most CCS projects to date have been carried out (or been proposed to be carried out) in developed states. The decision in Durban approving of the eligibility of CCS under the CDM (subject to draft modalities and procedures) has the potential to spur further interest (and possible investment) in CCS projects in developing economies.
Decision
The key features of the new draft CDM rules for CCS projects are:
● A requirement that countries hosting projects have regulations for carbon dioxide storage siting and liability: The decision stipulates a set of participation requirements relating to host party governance specifically for CCS technology and related projects. Host parties must have established laws or regulations relating to:
‑ procedures which include provisions for appropriate geological storage sites and project requirements for CCS activities;
‑ the rights of project participants to store CO2;
‑ appropriate access arrangements to storage sites to undertake CCS projects;
‑ redress for any affected entities, individuals and communities for damage related to CCS projects;
‑ remedial measures for unintended seepage, storage and environmental quality issues affected by CCS project activities;
‑ addressing liability arrangements for CO2 storage sites; and
‑ measures for a host party accepting obligations to address net reversal of storage.
● A requirement that project developers put five percent of the carbon credits earned in a reserve: This five percent is only to be awarded after site monitors have proven that no CO2 has leaked from the underground storage site 20 years after the end of the last crediting period for the project. This accounting for "net reversal of storage" through a CDM Registry is an attempt to mitigate concerns about the uncertainty of CCS technologies, particularly in terms of potential CO2 leakage.
● The insolvency of a project participant will trigger liability transfer to the host party: The establishment of a financial provision is an attempt to mitigate the risks of insolvency in accordance with the laws and regulations of the host country. This recognises that there needs to be ongoing monitoring and maintenance of the site.
Outstanding decisions/issues
Whilst the draft decision approves the eligibility of CCS projects under the CDM, it is not entirely conclusive. There are various issues surrounding feasibility of compliance with the modalities and procedures which have been deferred for further consideration and resolution at CMP.8 (in Doha in December 2012) and beyond.
● Deferring the decision regarding ultimate responsibility for carbon dioxide leakage to individual governments: The need for host countries to develop laws and regulations related to issues of liability recognises the impracticality of prescribing a liability regime at an international level. Prescription is difficult given the potential for inconsistency with planned or existing domestic legislation.
● Establishing a periodic review mechanism for the modalities and procedures for CCS in geological formations as CDM project activities, with the first review to be carried out no later than five years after the decision: The review will be conducted on the basis of recommendations made by the Executive Board of the CDM and by the Subsidiary Body for Implementation (SBI) drawing on the technical advice of the Subsidiary Body for Scientific and Technological Recommendations and Advice (SBSTA). However, any revision emerging from the review will not affect previously registered activities.
● Eligibility of CCS activities involving transboundary transport of CO2 and dispute resolution mechanism: The eligibility of projects involving geological storage sites located in other countries still requires further consideration. This raises issues such as defining project boundaries, characterisation of CO2, legitimacy under other international treaties and managing the existence of multiple project participants. Whilst existing CDM modalities and procedures require submission of documentation related to transboundary impacts, the SBSTA is requested to consider, at its thirty-sixth session, provisions relating to transboundary transport, including a possible dispute resolution mechanism to resolve any issues associated with transportation of CO2 across more than one country.
● Establishment of global reserve of CER reduction units for CCS activities (in addition to Reserve Fund): The provisions of the CDM modalities and procedures apply mutatis mutandis to CCS project activities under the CDM, with the CDM registry being used to ensure accurate handling and issuance of CERs from CCS activities under CDM.
Opportunities and Limitations
A number of developing countries have proposed Nationally Appropriate Mitigation Activities (NAMAs). For those countries that have significant fossil fuel energy resources (e.g. coal reserves and oil and gas) and also access to suitable geological storage sites, there may be opportunities to develop CCS projects as CDM projects.
The potential additional income stream from the sale of CERs may go some way to assist project developers with project development.
Inclusion in the CDM will also provide opportunities for technology transfer from developed countries that have already established CCS projects such as Norway, Canada, and the US. It is also an opportunity for countries such as Australia and the EU member states that have well developed legal and regulatory frameworks, to assist with capacity building.
After 2012, however, where the EU insists that only CERs generated from CDM projects in Least Developed Countries (LDCs) will be eligible for use in its Emission Trading Scheme (EU ETS) there is a risk that CCS projects conducted in States not considered to be LDCs (such as, for example, Qatar and the UAE) may lose an important market unless bilateral agreements are in place.
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