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4.2 Status of funding support
Governments around the world have provided a range of different types of funding support to CCS demonstration projects. The discussion in this section refers to all direct financial support, including tax credits, not just allocations such as grants. Government support arrangements for the large-scale demonstration program currently under way were primarily developed and announced in 2008 and 2009. The funding is associated with both a desire to accelerate innovation activities for CCS as a low-carbon technology and the need for economic stimulus activities.
In total, approximately US$23.5bn has been made available to support large-scale CCS demonstration projects (Figure 43). At the end of 2010, approximately 55 per cent of the available funding had been allocated to specific projects. In 2011, this has remained largely unchanged. Canada (including Alberta), the Netherlands and the United States have allocated all grant arrangements to specific projects, with some tax credit arrangements in the United States still to be allocated. Australia, the United Kingdom and the European Commission are working through competitive tendering processes.
Figure 43 Public funding support commitments to CCS demonstrations by country1
1 Projects in China are supported by state-owned enterprise together with support from the international community. Funding arrangements for these projects are not included.
2 The United Kingdom has committed to supporting three additional projects beyond the current demonstration competition process. The funding commitment to support this policy is yet to be announced, but according to estimates made in 2009, the total support required for a program of four demonstration projects could be in the range of £7.2–9.5bn.
3 Includes a Dutch government funding commitment to Air Liquide that is conditional on being selected in the NER300 funding program.
With these remaining tendering processes still being worked through, there has been little change in overall funding arrangements in 2011. In June, the Australian Government selected the Collie Hub project for funding under the AU$1.68bn (US$1.84bn) Carbon Capture and Storage Flagships Program. A provisional AU$333 million (US$365 million) has been provided. This comprises AU$52 million (US$57 million) for funding the first key phase of the project development, the completion of a detailed storage viability study. Should this first phase of the Collie Hub project be successful, the Australian Government anticipates contributing another AU$281 million (US$308 million) in funding with the aim of leveraging over AU$660 million (US$723 million) in industry and state government funding required to complete the project.
In North America, there are mixed outcomes in 2011 in relation to total funding available to projects. In the United States, total funding for demonstration projects was significantly increased in 2009 under the American Recovery and Reinvestment Act (ARRA). Over 90 per cent of the US$3.4bn made available under the ARRA has been allocated to large-scale projects with power (seven projects) or industrial (three projects) applications. The rest of the funding has been directed towards supporting storage site characterisation and research and development in capture technologies.
Should any of these projects not proceed, the funding received under the ARRA is returned to the United States Treasury and used for other purposes. At the moment, the near halt in climate change policy development by the United States legislature is affecting many projects. Since the 2010 Status Report, there have been eight projects put on-hold or cancelled (not all of which receive United States government funding support), with one of the key reasons for this being uncertainty regarding public carbon abatement policies and the lack of a national carbon mandate. Two of these projects, Mountaineer project and Antelope Valley are not going forward, the former being suspended and the latter being cancelled with its funds rescinded and returned to the United States Treasury. In addition to ARRA funding, Mountaineer also received US$188 million under the Clean Coal Power Initiative (CCPI) administered by the Department of Energy. In contrast to ARRA funding, which by statute must be returned to the Treasury if a project is cancelled, the availability of returned funding under CCPI for other CCS projects is decided on a case-by-case basis by the United States’ Office of Management and Budget unless stipulated otherwise by the Congress.
In contrast, projects in Canada continued to move forward with funding arrangements and expanding support during 2011. The Governments of Canada and Alberta are seeking to exploit the abundant oil sand resources within Alberta and are providing support to abate the associated large emissions through using CCS technologies. The governments finalised funding arrangements totalling C$1.7bn (US$1.8bn) for three projects earlier this year. At the same time, the Government of Alberta increased support for all refining or bitumen upgrading projects that capture and store CO2 in geological (non-EOR) storage through changes to the Specified Gas Emitters Regulation. The change effectively doubles the level of support provided through the offset credit mechanism currently available, and also provides opportunities for further support if credit prices in Alberta increase.
In May 2011, 13 CCS projects, together with 65 innovative renewable projects, were identified as meeting the criteria to go forward to the next stage of the NER300 program. The NER300 is a funding instrument where 300 million carbon allowances under the EU Emissions Trading System (ETS) are set aside (or reserved for new entrants also known as the ‘new entrant reserve’). It is expected that these permits will be sold from late 2011 through to late 2012 to provide funding for innovative renewable and CCS projects. For CCS projects, the funds can cover up to 50 per cent of relevant CCS costs which includes the incremental investment costs as well as the net present value of operating costs less revenue streams.
As at August 2011, the price of a December 2012 futures contract for a carbon allowance under the EU ETS is approximately €13. At this price, the total funds raised under NER300 would be approximately €3.9bn (US$5.6bn). This funding is for both CCS and innovative renewable projects. Assuming 75 per cent of the NER300 funds are used for CCS projects, this would provide total funds around €2.9bn (US$4.2bn).
The maximum any project can receive is 15 per cent of the funds raised by NER300, or €585 million (US$840 million) under the above assumptions. If each project were to receive this maximum amount, up to five projects could be funded if they meet the criteria. More projects could be funded if less than the maximum is provided. Some projects being considered received funding under the European Energy Programme for Recovery (EEPR). Total funding from the European Commission cannot exceed 50 per cent for both funds combined, and any allocation from the NER300 fund will be adjusted for any EEPR funding to remain below the 50 per cent limit.
The EIB is currently carrying out financial and technical due diligence of the project proposals and will pass the information on to the European Commission. Together with the Member States, the Commission will ‘rank’ each of the projects, with those ranking highest being those with the lowest cost per tonne of carbon stored. The ranking of the projects will be adjusted to take into consideration the need to demonstrate the different CCS technologies available.
Up to eight of the highest ranked CCS projects can receive funding under the NER300 program. However, as noted above, the final number of projects supported will depend on the total additional cost for each project that has been put forward, and the maximum amount of funding that can be provided to any particular project. Final decisions as to which projects will be funded are expected in the second half of 2012. Overall, the Institute anticipates that the NER300 program will support between four to six CCS projects in Europe.
Funding arrangements by industry, technology and storage
Over 75 per cent of all the funding allocated to CCS activities to date has been allocated to large-scale demonstrations. Of this, US$8.1bn, or 76 per cent, has been allocated to power projects (Figure 44a), with projects in the fertiliser, oil or coal gasification industries accounting for a further 20 per cent.
Pre-combustion technologies are used in both the power industry and for gasification of fossil fuels for a variety of purposes including fertiliser production. Consequently, pre-combustion technologies account for 50 per cent of all funding awarded to large-scale demonstrations (Figure 44b).
Figure 44 Public funding committed to large-scale CCS demonstration projects
However, in considering only the power sector, pre-combustion technologies (that is, IGCC) account for around 40 per cent (Figure 44c). With a stated desire by a number of governments, such as the United States, to switch more recent funding activities towards post-combustion approaches in the power sector, these technologies also account for 40 per cent.
The IPCC has estimated that there is 1700 to 11000Gt of storage potentially available across a variety of storage types with deep saline formations making up more than 90 per cent of suitable geological formations (IPCC 2005). In the distribution of funding to date, projects using deep saline formations account for 41 per cent of funding allocation where a storage type has been identified (Figure 44d). In contrast, projects using EOR in active oil fields accounts for almost 50 per cent of allocated funding to date. The share of funding allocated to projects associated with EOR storage operations may reflect the extent that CO2 EOR is providing an initial ‘facilitator’ role in the demonstration of CCS in regions of EOR potential, as discussed earlier.
Nearly 40 large-scale demonstration projects have received government funding totalling more than US$10bn worldwide. Not all of these projects are considered to be fully integrated CCS projects with storage options. Also, some of these projects have since been cancelled or put on-hold, and some have only received relatively small funding for early stage assessment. However, the bulk of funding allocated to date has been awarded to twenty-one projects receiving US$200 million or more each. In total, these LSIPs have been allocated US$9.6bn, accounting for some 89 per cent of total CCS project funding awarded (Figure 45). FutureGen 2.0 is the largest single project recipient receiving US$1.048bn.
Figure 45 Public funding to large-scale projects1
1 Variable year dollars.
2 The Alberta Carbon Trunk Line, while recipient of the funding from the Canadian and Alberta governments, forms part of two projects – Agrium and the Northwest Upgrader.
3 Funding amounts attributed to the Korean CCS-1 and CCS-2 projects were evenly split based on the total Korean Government funding for demonstration activities, although project-specific allocation decisions are yet to be made.
Capacity development funding arrangements
Over the past three years there has been a concerted effort by several countries and organisations to advance capacity development activities in developing countries. Organisations and countries that have contributed significant funds in this space include the European Union, the Institute, the Norwegian Government, and the United Kingdom Government.
These contributors have provided direct support by financing specific activities as well as contributing to CCS capacity development funding mechanisms. For example, Norway has contributed or allocated over US$200 million to be spent between 2009 and 2014.
Contributions have been made to capacity development funding mechanisms that are managed by the World Bank and the Carbon Sequestration Leadership Forum. In terms of individual projects (amongst others) Norway provides financial support to the IEAGHG international summer school, SACCCS and the UNIDO Global CCS Industrial Roadmap which will provide relevant information on actions and milestones to government and industry decision-makers to facilitate the deployment of CCS in industry.
The Institute has provided over US$25 million to capacity development activities, including the UNIDO roadmap. The Institute has also contributed to the Asian Development Bank, World Bank and CSLF funds. In addition to committing to funding mechanisms and activities managed by others, the Institute also has its own capacity development program.
The Government of the United Kingdom has been particularly active in providing support to capacity development activities in China. Events such as the Local Clean Coal Seminar and the CCS Symposium in South West China have raised CCS awareness with Chinese stakeholders, including generation companies and local and regional government. Activities such as these and the China Low-carbon Energy Action Network have brought together relevant industries and academics to introduce and discuss in detail the issues related to CCS with target audiences. Additionally, the United Kingdom has provided strong support to the CSLF capacity development fund and SACCCS.
Who should pay for demonstration activities?
Firms in the energy supply sector, particularly equipment suppliers undertake strong R&D programs to innovate in both existing as well as new technologies, including CCS technologies. Governments also support the R&D efforts of private firms through tax arrangements, and other funding opportunities as well as funding much of the so-called ‘basic research’ that occurs in universities. The policy rationale for this funding is driven by the existence of ‘spillovers’ from research. These are benefits to society from innovation that cannot be fully captured by those undertaking costly research and development. Investments in innovation generate knowledge that spills over to other firms and users, reducing the returns to innovators and hence the incentives to marshal sufficient resources to fully support innovation in new technologies. This leads to underinvestment in developing new technologies and a slower and less efficient path of innovation.
This provides a rationale for governments to increase the total flow of funds to innovation activities through use of general revenues arising from taxation, or through taxation concessions. A key challenge in designing policies to support innovation is to encourage private investments that would not otherwise occur and that generate total returns, both private and spillover (or societal), that are sufficiently positive to exceed the costs associated with the policy measures.
In the absence of policies that effectively address this market failure, the challenge of addressing the risks of climate change would lead to higher total costs to society than otherwise, particularly if innovation in low-carbon technologies is left solely to the incentives associated with pricing carbon through market measures to reduce greenhouse gas emissions.
Governments, in anticipation of large potential returns for managing climate change risks, have provided the funding to support a large-scale CCS demonstration program across the world. The anticipated benefits relate to achieving commercialisation of CCS technologies earlier than otherwise through cost reductions and performance improvements. These benefits arise from actions to support and exploit the knowledge spillovers through accelerated knowledge sharing requirements associated with the funding support.
In addition to the benefits to society that arise from accelerating innovation for low-carbon technologies, firms that supply inputs for use by low carbon technologies can also benefit from accelerated development of CCS technologies. Any technology innovation along a supply chain that supports or increases demand for a particular set of inputs may convey a benefit to the owners of those inputs. In some cases, the owners of those inputs may have an incentive to support technology innovation. Sometimes such support arrangements may require the coordinating support of governments to manage potential free rider issues.
In a world where there is global or even partial, policy action that constrains CO2 emissions, CCS technologies increase the demand for fossil fuels relative to the absence or reduced availability of the technology. To the extent that the increased demand creates, or increases, any economic surplus associated with the production of fossil fuels, this can create an incentive for owners of fossil fuel resources to also contribute to innovation activities for CCS, including demonstration activities. One example of this is the COAL21 fund established by the Australian Coal Association in 2006. Through a voluntary levy on the production of black coal, the industry aims to raise approximately AU$1bn (US$1.1bn) over ten years. As at December 2010, the levy had raised AU$234 million (US$256 million) with approximately AU$141 million (US$154 million) expended (Australia, Senate Standing Committee on Economics, 2011). In ensuring sufficient resources are directed to support research and demonstration projects, an issue arises over the extent to which coordinating payments from beneficiaries of research or demonstration outcomes can be improved through government involvement, leading to more efficient outcomes overall.
As an extractive resource industry there is also potential to draw on the resource rents generated in the industry without altering either the production or use of fossil coal and gas resources as a potential funding source for innovation activities. At the same time, the changing patterns of resource extraction in anticipation of future changes in consumption patterns due to both climate change policy as well as the developments of competing renewable technologies, presents challenges in identifying whether changes to those arrangements will result in improvements to both the industry and to the community more generally.