Carbon Capture: Part 2

Markets and drivers for CO2 capture technologies

The primary challenge for carbon capture companies today is the lack of markets for these technologies. Current monetary incentives to capture and sequester CO2 don’t cover the costs in most cases, and markets for supplying CO2 are not only difficult to break into, but are orders of magnitude too small relative to global CO2 emissions. What incentives will create a market (and sufficient confidence) for large-scale development and deployment of carbon capture technologies, and on what timescale could this happen?

The two primary use cases for CO2 today are enhanced oil recovery (pumping CO2 into existing oil wells to increase oil production), and the food and beverage industry (freezing, storing and transporting food; carbonated beverages). Unlike the food and beverage industry, the oil & gas sector can reasonably expand CO2 use and sequestration if the economics become favorable.

CO2 Supply and Demand

First, let’s consider where CO2 is currently used. The existing global merchant market for CO2 is roughly 20–23 million metric tonnes (mm mt) of CO2 per year [1]— tiny compared to the 35–40 billion metric tonnes of CO2 emitted globally.

In the US, the total revenue generated by the merchant CO2 market was $723mm in 2019- this implies that the maximum revenue potential for carbon capture companies from these markets (absent incentives) is a few hundred million per year. [2] Of this, 38% from food industries, 25% from beverage producers, and 16% from the oil and gas sector.

Percent revenue by sector within the merchant CO2 market

Prices for CO2 are highest in the food and beverage sector due to strict purity requirements. Across these markets, long-term contracts between larger CO2 consumers (food processors, oil and gas and industrial users) and the largest industrial CO2 suppliers are a major barrier to entry. Often, the cost of delivering CO2 to customers is greater than the cost of producing the gas; existing distribution networks owned by large CO2 suppliers drive profitability.

The CO2 sold in the US is often extracted from natural underground reservoirs of CO2 [3], but may also be collected from ethanol plants, ammonia plants, and other industrial sources that produce fairly pure CO2 gas. Prior to 2018, the total amount of CO2 captured from industrial processes in the US (not extracted from underground CO2 reservoirs) was estimated to be 21 mm mt/yr. Of this, 8mm mt/yr went to the food & beverage industry and other uses that do not create any long term CO2 storage. The remaining 17 mm mt/yr was injected underground for enhanced oil recovery (EOR) and is considered stored; in 2018, the US captured 17 million tonnes of CO2 from industrial processes and stored it underground.

Underground storage of captured CO2 is something we know how to do at the million tonnes a year scale- could it be expanded to a hundred million or billion tonnes of CO2 per year, if there is a “demand” for storage?

In the near term, enhanced oil recovery (EOR) operations are the best option for sequestering additional captured CO2. Over 15mm mt/yr of CO2 is currently captured from industrial processes and used for EOR, mostly in west Texas. EOR operators also used an additional ~50mm mt of CO2, extracted from underground CO2 deposits in the midwest and transported through existing CO2 pipelines (the US has over 3000 miles of dedicated CO2 pipelines). [4,5] Experts estimate that the industry can absorb an additional 300 million mt/yr with operations as usual. To store additional CO2 up to 1 billion mt/yr, a storage fee of $5–15 per mt CO2 would likely be implemented (versus the current situation with EOR facility operators paying for CO2). [6] However, storage in EOR-like geologies is currently economically limited to CO2 capture facilities that are near an oil or natural gas reservoir or existing CO2 pipeline.

If government or private incentives develop, there could be an incentive to store CO2 in other geologic formations that include unmineable coal seams and deep saline reservoirs in addition to oil and gas reservoirs. Currently only a few permits have been issued for drilling operations to store CO2 in saline reservoirs [7], but since this has been demonstrated, this number could quickly increase. One of these operations is ADM’s carbon capture project at their Decatur bioethanol plant, which captures and injects over 1mm mt CO2/yr into a saline reservoir. This could quickly be replicated if clarity around incentives develops.

Government Incentives and Regulatory Pressures

The most effective incentives, policies and regulatory pressures have so far come from state and national governments. Internationally, the United Nations “Framework Convention for Climate Change” (responsible for the Paris Agreement) and the Intergovernmental Panel on Climate Change (IPCC) provide forums for international collaboration and concerted action. The Intergovernmental Panel on Climate Change (IPCC) is a global assembly of scientists that assess the scientific knowledge that exists and makes recommendations accordingly. While these organizations are relevant, they do not have a direct impact on the adoption of carbon capture technologies. Globally, the use of carbon pricing and emissions trading systems is increasing; governments raised approximately US$44 billion in carbon pricing and emissions trading revenues in 2018. [8]

US Government

Reformed 45Q. The reformed 45Q tax credit is the strongest incentive for carbon capture in the US. In 2018, the US expanded and enhanced section 45Q of the US tax code to give a tax credit of $35 per metric tonne of CO2 or CO captured and used to either make useful products or for enhanced oil recovery. [9] The credit amount is $50/mt CO2 if the CO2 is stored in geologic formations (and not used for EOR). To qualify for the credit, power plants must capture at least 500,000 mt/yr and other industrial facilities must capture at least 100,000 mt/yr. New guidance on requirements to receive the credit was released by the IRS in early 2020, but ground must be broken by 2024. One source estimates that $250mm in ethanol production and similar projects are in the pipeline, awaiting clarification on 45Q.

DOE and Other Grant Programs. The US government also directly funds research and development (R&D) of carbon capture technologies through the DOE and ARPA-E. DOE began funding related R&D activities in 1997; over $5B has been invested by the DOE in public and private sector projects related to carbon capture since 2010. [10]

California and other US States

California’s Low Carbon Fuel Standard (LCFS) program also creates incentives for carbon capture, as of a 2018 policy update. The LCFS program assigns lifecycle carbon intensity (CI) targets for all transportation fuels sold in California — fuels that have a lower CI than the target generate credits and fuels with a higher CI incur penalties. In 2018, the LCFS was changed to allow LCFS credit generation from carbon capture projects that a) reduce emissions related to fuel production, or b) directly capture CO2 from the air. As LCFS credits have been trading between $120/mt CO2 and $220/mt CO2 over the past 2 to 3 years, this has generated significant attention from major oil & gas companies who operate in California. There is no minimum volume and the program is managed by the California Air Resources Board (CARB).

State Pledges. California has pledged to reduce greenhouse gas emissions 40% below 1990 levels by 2030, which requires emissions to decrease from the equivalent of 424 million mt CO2/yr in 2017 to below 260mm mt CO2/yr in 2030. [11] Accomplishing this will likely require some level of carbon capture.

State Renewable Portfolio Standards (RPS) could also become a vehicle for carbon capture incentives in the future. In addition to California, twenty-nine US states have RPS targets, which require that a specified percentage of the electricity that utilities sell comes from clean or renewable resources. [12] Under these standards, utilities must obtain renewable energy credits (RECs); the REC structure and cost varies from state to state, with most having cost caps in their RPS policies to limit increases in ratepayers’ bills to a certain percentage.

Corporate Entities

While the motives and extent to which Oil & Gas majors fund carbon capture are frequently questioned, some have a long history of technology development in this area. Equinor (formerly Statoil), Shell, and Chevron have previously built and operated commercial-scale carbon capture facilities. Equinor captures and re-injects CO2 from natural gas production at the Sleipner and Snovit fields in the North Sea. Shell has been involved in two major projects: the “Quest” project at an H2 plant in Alberta and the Boundary Dam project on a coal-fired power plant in Saskatchewan. In Aug 2019, Chevron began CO2 injection at its Gorgon Liquified Natural Gas (LNG) plant in Australia, which can inject 3.5–4mm CO2/yr.

The industry also funds external development of new carbon capture and other emissions-related technologies. A major vehicle for this is the Oil and Gas Climate Initiative (OGCI), a $1B+ investment fund backed by thirteen of the largest oil and gas companies. Outside of this fund, Exxon and Occidental Petroleum recently announced collaborations with startups in the carbon capture space — Exxon with Global Thermostat, Mosaic Materials, and FuelCell Energy, and Occidental Petroleum with Carbon Engineering and Svante. Chevron has also invested in Carbon Engineering and Svante through Chevron Technology Ventures and their Future Energy Investment Fund.

Companies in other sectors have recently announced direct funding, changes to supply chain, or other initiatives that are potentially relevant to carbon capture. Microsoft’s announcement in January 2020 has been the broadest and most detailed; the company has pledged to go carbon negative by 2030, and remove all carbon emissions produced since 1975 by 2050. They simultaneously published their estimated current emissions: currently 16mm mt/yr CO2, including both direct and indirect emissions. Microsoft will start by gradually extending its $15/mt CO2 internal carbon tax on direct emissions to supply chain (Phase 2) and indirect emissions (Phase 3) as well, and create a $1B climate innovation fund (no details yet on what this fund will be used for).

Jeff Bezos has responded by announcing a $10B “Bezos Earth Fund” in February 2020 (no details of what it will fund or how have yet been released). Previously in September 2019, Amazon set a goal of 100% renewable energy by 2030; so far the company has initiated 15 utility-scale wind and solar renewable energy projects that will generate 1.3 GW capacity. Amazon has also announced $100mm for reforestation projects, and pointed to a purchase order for 100,000 E-delivery vehicles from Rivian, which they estimate will avoid 4mm mt CO2/yr.

While there are too many corporate announcements to list here, other prominent examples include:

• Blackrock published a letter stating that they will exit investments that present a high sustainability-related risk, such as thermal coal producers; launch new investment products that screen fossil fuels
• Delta, British Airways, Cathay Pacific and other airlines have committed to becoming carbon neutral in the future. These announcements come on the heels of the International Civilian Aviation Organization (ICAO) enacting a program called CORSIA (the Carbon Offsetting and Reduction Scheme for International Aviation), to prevent increases in total CO2 emissions from international aviation above 2020 levels. Airlines operating within Europe are particularly affected, and will need to buy carbon neutral jet fuel or offsets.
• In August 2019, Tesla has promised to run on 100% renewable energy and assessed it’s current carbon impact (282kt/yr). No specific timelines have been set.

In summary, the US government and California have provided credit-based incentives that may make some carbon capture projects border on economically viable for oil & gas majors, if the regulatory risk is acceptable and the price of oil justifies EOR. Several billion dollars have been committed by other corporate entities, but much of this will likely go to lower cost offsets (planting trees, land use modification, methane capture from landfills) rather than carbon capture technologies. Carbon capture would be enabled at a massive scale would be enabled by reliable subsidies from governments at the $50–$60+ per metric tonne level (which looks, if not likely, increasingly possible),

Alternatively, substantial investment in an emerging technology at initially high costs per tonne CO2 could help reduce the cost of capturing some emissions below $50/mt CO2. The next post discusses the current costs of CO2 capture from different sources, and the impact that a $1B investment might have in different areas.

The third post in this series covers major applications for carbon capture, and key metrics for evaluating carbon capture technologies. The previous post provided an introduction and a look ahead.

Notes

1. This number reflects the merchant market, which does not include CO2 generated and used by the same company, or that is transferred through private off-market agreements. In North America, size of the merchant market for CO2 is about 13mm mt of CO2/yr. Source: “ICIS Market outlook: Europe CO2 shortage highlights critical uses” by Al Greenwood
2. Source: IBISWorld Industry Market Report OD4929, “Carbon Dioxide Production in the US,” April 2019.
3. The major underground sources of CO2 used in the US are the Jackson Dome (MS), the Sheep Mountain and McElmo Dome sites (CO), and the Bravo Dome (NM). Source: NETL report on “Carbon Dioxide Enhanced Oil Recovery” (see page 10)
4. Source: US EPA Greenhouse Gas Reporting Program (GHGRP)
5. Why is this 50 million tonnes of CO2 larger than the size of the merchant market? Many CO2 transactions in the oil and gas industry are effectively internal transfers between Occidental Petroleum, Kinder-Morgan, Denbury, and others who manage both extraction of CO2 from natural deposits and EOR activities, and therefore aren’t listed.
6. Source: Working Document of the National Petroleum Council Study, “Meeting the Dual Challenge: A Roadmap to At-Scale Development of Carbon Capture, Use, and Storage”, Topic Paper #1, December 12, 2019.
7. For contrast, there are over 180,000 UIC Class II oil & gas related injection wells in the US, and 6 Class VI wells for geologic sequestration of CO2. Source: Clean Water Action report on EOR, Aug 2017.
8. The World Bank Group’s June 2019 report, “State and Trends of Carbon Pricing 2019” provides a comprehensive guide to carbon pricing initiatives around the world.
9. Prior to the 2018 reform, section 45Q gave tax credits of $10 and $20 per mt CO2 used for EOR or stored, respectively. The credits were also limited to 75mm mt CO2 cumulatively, which created significant risk that the credits would be unavailable after a project began. This limitation was also removed in the reformed version.
10. Source: Congressional Research Service Report R-44902, April 2018.
11. Source: “Insights from the California Energy Policy Simulator” by Chris Busch and Robbie Orvis, Jan 2020. (see “Summary for Policy Makers”)
12. Source: National Conference of State Legislatures website, Dec 2019.

Last update: 13 March 2020

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